Data I/O Corp (DAIO) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the fourth quarter and 2011 financial results conference call.

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

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Fred Hume, President and CEO.

Please go ahead, sir.

Thank you, Kathy, and welcome to the Data I/O Corporation fourth quarter and 2011 financial results conference call.

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

I will provide an overview of the quarter and some thoughts on the year.

Joel will provide additional information on the financial 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 levels of orders, ability to record revenues based on 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.

As previously announced, revenues for the fourth quarter of 2011 were $5.7 million compared to $6.9 million in the fourth quarter of 2010.

Revenue for the full year was $26.7 million compared with $26.4 million for the previous year.

Net income in the fourth quarter was $3,000.

Net income for the full year was $1,063,000, or $0.11 per share.

The decline in net income is attributed primarily to higher development expenses associated with development issues, including new products that were released during the year and other products that will be released in 2012 and beyond.

Gross margin for the fourth quarter was 54.5% for the quarter compared to 56.4% in the fourth quarter of 2010.

The lower gross margin was due primarily to the lower volume of business.

Cash at the end of the year was $18.1 million, down from $18.9 million at the end of 2010, primarily attributable to the Azido technology purchase and the share repurchases.

Joel will provide additional information regarding the fourth quarter and the year's financial results in a few minutes.

During our earnings call on October 20, I commented that Walter Custer, a leading electronics manufacturing analyst, had just reported that the electronics end market expansion had lost steam and that electronics production in Asia had fallen rapidly in September, a time when the typical fall seasonal upturn would normally occur.

At the time of the call, our order funnels remained strong and did not appear to have been impacted by global economic woes, and actual orders during the first half of October were up from the levels of the same period a year earlier.

Unfortunately, the industry weakness spread across all regions much faster than we could have imagined.

November was a particularly weak month, and December's orders fell further, to end the fourth quarter of 2011 with orders at $5.1 million compared with orders of $7.1 million in the third quarter.

The weakness in capital spending was spread across all regions.

Orders from customers in Asia were down 23% from the third quarter as customers, primarily those outside of China, reduced capital expenditures.

Despite the fourth quarter weakness, Asia actually had a record year, with orders up 19% over 2010, to the highest level yet.

Until the fourth quarter decline, the strength in Asia was spread across all product lines and across all Asian regions.

Orders from customers in the Americas were down 50% from the third quarter as customers delayed their purchases.

We expect many of the delayed orders to be purchased in 2012.

Orders from the Americas region outside of the US, such as Mexico, were down most significantly.

Orders from customers in Europe were down 7% from the third quarter, and the typical year-end spending [volumes] we usually see in Europe did not occur.

Orders for consumables were down 20% in the fourth quarter, reflecting the lower levels of equipment utilization during the quarter.

Looking at our customer segments, orders from automotive customers were down 36% from the fourth quarter of 2010, primarily due to a weaker Europe.

Orders from programming centers, a barometer of industry activity, were down 81% from the fourth quarter of 2010, reflecting the very low level of overall programming capacity utilization that prevailed during the quarter.

However, orders from consumer electronics and wireless customers in the fourth quarter were up 23% from the fourth quarter of 2010, a particularly bright spot, reflecting our success in growing this important customer segment, more than enough to offset the decline in business with RIM, historically one of our largest customers.

Despite the overall weakness in the fourth quarter, orders for our RoadRunner product line were up 43% from the third quarter, driven by the sales momentum resulting from the introduction of the RoadRunner 3 and the Factory Integration Software.

RoadRunner provides a very lean, just-in-time programming process, and with the new introductions, raises process control and quality to a new level.

RoadRunner and FIS are process sales that take considerable time.

In some cases, we are just now seeing evaluation requests for requirements that were generated shortly after the introductions last August.

Unlike the earlier versions, RoadRunner 3 can be used with several different brands of SMP machines.

As a result, we have customers that previously considered RoadRunners but didn't adopt that are now coming back to reconsider their earlier decision.

RoadRunner business identified in our sales funnels is up 40% over the same period last year.

We expect automotive electronics accounts to be the key accounts for the RoadRunner 3 and FIS software in 2012.

Today we are introducing the FLX HD, a new product for duplicating embedded Flash media such as eMMC devices, at the APEX Trade Show in San Diego.

eMMC is now the fastest-growing memory technology used in smartphones and other handheld devices.

Our leading edge eMMC support on FlashCORE III was a significant contributor to our record sales in Asia in 2011, and we expect to maintain our lead in eMMC in the future.

Industry experts believe that approximately 70% of smartphones will use eMMC compared with roughly 35% in 2011.

Combined with the growth in the smartphone market, eMMC usage will be up 2.5 times in 2012.

The FLX HD incorporates new programming technology beyond FlashCORE III and provides 40 duplication sites compared to 16 in the standard FLX.

In addition to providing 2.5 times the capacity, the new architecture of the FLX HD optimizes changeover time and eliminates the time required to download large data files.

Taken together, these features provide a very substantial increase in the productivity for our customers.

The initial sales demonstration units began shipping earlier this month, and a major smartphone manufacturer began evaluation of a unit last week.

As mentioned on previous calls, in 2011 we increased investment in engineering and marketing to accelerate new product introductions.

With a considerable amount of this work completed, in the fourth quarter we reduced spending on new product initiatives by approximately $175,000 compared to the third quarter, consistent with our announced plans.

Spending in several other categories also came down as consulting and contracting work was completed.

For more than 10 years, FlashCORE, the principal programming technology used in our major products, has been a source of significant competitive advantage.

Any technology platform such as FlashCORE has a finite life, however, and at some point must be replaced if the firm is to remain competitive.

In the past year, we completed the definition of the next-generation programming architecture and purchased the Azido technology that is being used in its implementation.

Later this year, we plan to introduce new programming products based on this architecture.

The new architecture will provide many customer benefits and support many new devices not feasible with FlashCORE.

We believe it will substantially reduce our expense on algorithm development and sustaining engineering.

Meanwhile, we have continued to distribute Azido to universities and research institutions.

One major university will be conducting a two-week intensive course, from July 17 through July 26, on high-performance computing incorporating Azido.

It is important to have a strong educational foundation in place before we introduce Azido as a commercial product.

I would also like to thank Dr.

Paul Gary, our Chairman, for his many years of service to Data I/O.

Paul recently announced his plans to retire in May.

Throughout his tenure, Paul has been thoroughly engaged in the Company's service, and I speak for the entire management team when I say that he will be missed.

We had begun a search for his replacement on the Board.

As previously announced, Doug Brown will assume the Chairman position on April 1.

I'm also pleased to report that the Company has repurchased over $2 million of its common stock under the share repurchase programs from the fourth quarter, combined with the new expanded program announced last month.

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

Thank you, Fred.

Good day to everyone.

Revenues for the fourth quarter of 2011 were $5.7 million, down 17.6% compared to $6.9 million in the fourth quarter of 2010 and down 18.9% sequentially, compared to $7.1 million in the third quarter of 2011.

International sales represented 88% of total revenue for the quarter.

All regions had a decline in revenue, with Americas down 27%, Europe down 20%, and Asia down 5% compared to the fourth quarter of 2010.

On a product basis, the sales decrease was primarily in Data I/O's automated PS family, which were down 31% year over year, while non-automated systems were down 15% compared to the fourth quarter of 2010.

As Fred discussed, orders decreased 22% to $5.1 million in the fourth quarter of 2011 compared to the same period in 2010, with Asia flat, Europe down 32%, and the Americas down 25%.

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

Backlog at the end of the quarter was $800,000, down from $1.3 million at the start of the quarter and from $1.6 million on December 31, 2010.

Deferred revenue at the end of the quarter was $1.5 million, up from $1.4 million at the start of the quarter, but down from $1.6 million at December 31, 2010.

Gross margin as a percentage of sales in the fourth quarter of 2011 was 54.5% compared with 56.4% in the fourth quarter of 2010 and 55.9% in the third quarter of 2011.

This gross margin decrease, compared to the fourth quarter of 2010 and the third quarter of 2011, was primarily due to the impact of decreased sales volume relative to fixed operating costs.

Additionally, service costs for the fourth quarter were up $126,000 from the fourth quarter of 2010 due to higher personnel costs, but the same as in the third quarter of 2011.

Operating expenses decreased by $76,000, from $3.2 million in the fourth quarter of 2011 compared to $3.3 million in the same period in 2010, and decreased sequentially by $408,000 compared to $3.6 million in the third quarter of 2011.

Compared to the fourth quarter of 2010, the operating expense change consisted of reduced incentive compensation plan expense of $234,000 due to the financial results, offset in part by $89,000 of other higher selling and general and administrative expense, primarily due to the Productronica Trade Show in November, increased marketing personnel costs, and an increase in research and development of $69,000, primarily associated with the Azido initiative.

The operating expense decrease from the third quarter of 2011 was primarily due to reducing the use of outside contractors and consultants associated with projects and initiatives, as well as the lower incentive compensation.

In accordance with US Generally Accepted Accounting Principles -- GAAP -- net income in the fourth quarter of 2011 was $3,000, or $0.00 per diluted share, compared with net income of $611,000, or $0.07 per share, in the fourth quarter of 2010.

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

We had an income tax provision for the quarter due to taxable profits in foreign locations, as well as certain states and the Federal Alternative Minimum Tax.

We have a net operating loss -- NOL -- carry-forward of $15 million, as well as other credit carry-forwards in the US that are available to continue to offset our future US net income.

And we will continue to analyze and manage taxes to take advantage of these tax attributes.

Earnings before interest, taxes, depreciation, and amortization -- EBITDA -- for the fourth quarter of 2011 was $258,000.

The depreciation and amortization in that calculation was $318,000, which included $111,000 related to the Azido software technology acquisition.

For the year 2011, EBITDA was $2.4 million, with depreciation and amortization of $1.2 million in that calculation.

For the year ended December 31, 2011, revenue increased 1% to $26.7 million from $26.4 million for 2010.

International sales were 90% of total revenue.

For the year 2011, net income was $1.1 million, or $0.11 per diluted share, compared to $3 million, or $0.33 per diluted share, for 2010.

For the year 2011, gross margin as a percentage of sales was 57.1% compared with 58.1% in 2010.

The change in gross margin percentage was primarily due to higher service expense of $285,000, product mix-related higher material costs of $184,000, and increased factory variances of $148,000, offset in part by lower engineering costs associated with software development contracts compared to 2010.

Operating expenses in 2011 were $2 million higher than in 2010, primarily related to the costs associated with the accelerating product development initiatives, costs associated with Azido in particular, with amortization of $295,000, higher personnel costs, and the costs associated with outside contractors and consultants, offset in part by $422,000 of lower incentive compensation due to the financial results.

The Company's cash position at December 31, 2011, decreased $260,000 during the quarter to $18.1 million, primarily due to Data I/O's share repurchases, compared to the cash of $18.9 million at December 31, 2010.

The Azido technology purchase in April was the other major use of $1 million of cash.

Accounts receivable decreased to $4.4 million at December 31, 2011, compared to $5 million at December 31, 2010, primarily due to the decrease in sales volume during the fourth quarter.

Inventories were at $4 million at December 31, 2011, up from $3.6 million at December 31, 2010, and from $3.8 million at the end of the third quarter of 2011, due to new product inventory and purchases for an expected higher level of sales during the fourth quarter.

Our $1 million share repurchase plan announced in October of 2011 resulted in $250,000 of stock buybacks during the fourth quarter.

This program was canceled in February of 2012 after the new, expanded $6 million share repurchase program announced in January went into effect.

Share repurchases for an additional $1.8 million have been made year to date in 2012.

Total share repurchases under these repurchase programs equals $2,050,000 currently.

The programs were made under 10b5-1 plans that allow purchases to take place at any time.

We expect this to be a continued significant use of cash.

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

Thank you, Joel.

At this point, the electronics industry experts are cautious in their expectations for 2012.

In his assessment released on February 18, Walter Custer said that, quote, Electronic industry growth slowed in the final quarter of 2011, but there are already signs of improvement, end quote.

He now believes the global electronics industry business cycle has passed its low point and that 2012 should be a year of gradual improvement.

On an equally positive note, both KPMG's Global Semiconductor Industry Survey and Ed Henderson's Electronics Markets Forecast, released earlier this month, point to wireless handsets, mobile technology, tablet computers, and particularly smartphones as the markets that are most likely to grow.

These are markets where Data I/O is very well positioned, particularly due to our leadership in eMMC technology.

We believe that the new FLX HD will build on last year's success with consumer electronics and wireless accounts.

We also have new products like the RoadRunner 3 and FIS software that deliver solid financial benefits for customers, regardless of the economy.

At this time, we will take your questions.

(Operator Instructions.) Robert Anderson, Penbrook Management.

I was wondering if you could comment on what's going on with your competitors, such as they are, and how they may have been affected by this order situation.

Bob, that's a good question.

And I think there are some things we know, other things we don't totally know.

But I can tell you what we've experienced and what we know, which is some of our competitors are much more dependent upon the programming centers for their revenue than we are.

And so we've seen them responding to that, trying to compete more effectively with us in the OEM accounts because of the loss of their business with programming centers.

So we're seeing increased intensity of their competitive action.

We believe that our technology is superior and that, as a result, we've been able to withstand their increased activity, Bob, in these areas.

In Asia particularly, we have a much different competitive situation, where there are many, many small companies, very small companies with revenue in the range of $1 million or $2 million.

And they continue to be able to pick off small regional accounts and do pretty well with those accounts.

But they're not very effective in competing with us at the major accounts, particularly the global multinational accounts that are manufacturing in Asia.

So as I said, we had a record year last year in Asia.

Even though we saw some weakness in the fourth quarter, we see continuing signs of improvement there, and we think that 2012 is going to be a good year for us in Asia, particularly with the new FLX HD, which is significantly less expensive than competitive products.

It takes up much less floor space, and it has much higher throughput.

So we think we're positioned well there.

So we find that there's always competition, that we always worry about competition, but it's not a condition where we are suddenly losing a lot of business to competitors.

Okay.

And a second question on the order situation.

Obviously, you saw a drop-off in orders during the fourth quarter.

When do you anticipate a revival in orders?

The sense I get from the phone call is probably in the second half of the year, but not the first half of the year.

Actually, Bob, we think that we're going to begin to see improvements this quarter.

Certainly, the Chinese New Year occurred early this year.

We've seen some improvements in February compared to January, and I think that momentum is going to continue throughout the quarter and into the second quarter.

Okay, thank you.

I'll drop out of the queue.

(Operator Instructions.) Tom McGuire, Private Investor.

First, I just want to compliment you on being able to break even when your sales fall below what you budgeted as such, so you do a really good job on cost containment, I think.

My question is Azido.

When that was first announced, a number of shareholders, analysts, whatever, were scratching their head concerning why are you doing this.

And this has been under your belt for some time now, and you've had some academic people, institutions, look at it already, and you've got the pilot program with this other one going.

Can you just tell me what you've learned from it, and are you more optimistic or still figuring out the market for this and all that?

Just give us a little more detail on what you see now.

Sure.

Well, Tom, there were two driving issues in our mind.

One was we wanted to create some new market space for Data I/O.

So that was certainly one factor.

But we also had a very serious internal problem, and I think I mentioned to you earlier that we're using the Azido technology in our next-generation programming engine.

And to put this in perspective, what I'd like to do is explain a little bit about the notion of algorithm development.

For every new semiconductor device that comes out, before our customers can use our equipment to program that device, we have to write an algorithm.

And that algorithm takes a specification the semiconductor company creates and adapts that specification to a piece of software, which we run on our equipment to actually program the device.

And we spend, if you think about the total amount of our R&D money that we spend on algorithm development and sustaining that basic architecture of the algorithm process, we spend nearly half of our R&D money on that.

And so what we've noticed over the last, if I go back 10 years, is we've seen very little change in improvement in productivity.

So we needed a major leap forward in productivity improvement to be able to stay up with the latest devices and gain a competitive advantage in the marketplace compared to competitors, particularly in Asia, small companies that were able to respond to a specific customer's request for a new device support more quickly.

So we needed a new way to do that.

And one of the problems that we had with our old FlashCORE architecture -- and I use "old" carefully, because we have been renewing it and regenerating it -- is the fact that the way the algorithms and the software were architected, the hardware and the algorithms, our programming hardware and the algorithms we wrote, were inextricably linked.

There was no way to make fundamental improvements in the hardware without going back and making changes to the algorithm base.

And even every time we rolled out a new FPGA code, we had literally thousands and thousands of man-hours in testing that was involved in making sure that the new hardware would run all of the old algorithms.

And we have a base of thousands of algorithms that we support around the world with our customers.

So one of the benefits of Azido is it makes the software portable.

And National Instruments, in their recent Automated Test Equipment Outlook for 2012, Part 5, talk about this notion of portability of algorithms as being a fundamental way you have to move into the future.

And that's really what the Azido technology gives us.

It gives us this independence of the software architecture and the hardware so that we can roll our hardware forward without having to redo the algorithms to stay up with the new hardware changes.

So that was a fundamental thing that we wanted to do internally and was driving, obviously, a key element of the acquisition of the Azido technology.

Now, we also saw a lot of opportunities to use Azido technology to reach out beyond the traditional Data I/O marketplace, because we in a way, ourselves, because we do so many things that are FPGA based, we're a perfect test bed for other customers, other companies like ourselves that are building product that incorporate FPGAs.

And the Azido technology is, it has the feature set that allows you to do a design on very complex FPGA systems without all of the use of arcane tools that are very hardware-specific.

It makes it easier, and that's one of the things that Virginia Tech will be demonstrating this summer during their course from July 17 through July 26.

They'll be demonstrating this notion of algorithm portability, this notion of how you can design very complex electronic systems very simply using Azido technology.

So we hope to exploit that, but to do that, we have to get the educational institutions in place, get them engaged, because Data I/O, obviously, isn't in a position to train the industry.

We have to really empower the universities to do that.

So that's the first step in the process of rolling it out.

So we have a clear vision of how we plan to monetize it, but we can't monetize it until the institutions are in place to be able to train on this software effectively.

Okay, thanks, Fred.

Getting back to the fourth quarter, would you characterize the fourth quarter slowdown as an anomaly?

I mean, is it something that came out, that you didn't see going into the quarter?

We saw a warning sign, Tom, in September.

We saw a very marked slowdown in September, a well over 50% decline in orders in September.

But at the same time, our business funnels remained strong, and we really had a hard time interpreting that.

And then when, in the first part of October when business began to bounce back pretty quickly, we thought that the September results were really an anomaly.

And we were surprised, then, in November how quickly the weakness spread to other areas of the geography and also to other parts of the industry.

So it transitioned very fast, and we were very surprised by it.

Okay.

A question was asked earlier about orders, et cetera, and you expect them to improve through the year, beginning with this quarter.

How about sales funnels?

You mentioned they were full for RoadRunner 3 products.

But how about for other products?

Are they filling up, or are they just not going through the funnel fast enough or what?

I would say that the overall funnel level is about the same as it was, in terms of absolute magnitude, about the same, within 5% of where it was at the same period last year, Tom.

I think the other point, though, that you mentioned is very valid, which is that during weaker economic times, orders tend to move through the funnel at a slower pace than they do when things are going very well.

And we've seen that, particularly in the areas outside of the smartphone area, outside of the consumer and wireless sector, where things have just slowed down.

The orders haven't gone away.

They're still there.

Customers still plan to spend money, but companies are just sitting on their capital funds until they have more confidence in how things are improving.

So I'm encouraged that just in the last week, we've seen a number of new activities, things moving forward, so that's a good sign.

But we'll have to see how it rolls out here over the next few weeks.

But certainly, we've seen just a significant increase in the number of RoadRunner 3's that are in the funnel.

RoadRunner 3, unlike the previous version of RoadRunner, if you bought a RoadRunner 3, for example, for a Fuji machine, Fuji placement machine, you really couldn't use it on a Siemens placement machine.

With RoadRunner 3, you can buy a RoadRunner 3 and you can use it on, or adapt it very easily, with very little expense, to use it on virtually any SMP machine.

So it takes away one of the major hurdles that customers had to adopting RoadRunner technology in the past.

And I think that's a significant one.

And then couple that with the FIS software, which really integrates it into the manufacturing operation, those provide quality improvements and process control improvements that companies can realize the economic benefit of that, almost regardless of where they are in the economic cycle.

So we think that's why the funnel is filling up so much with these opportunities.

Okay, thanks, Fred.

And then one last question.

With your new product flow, the FIS, the RoadRunner 3 and the two new products you mentioned, the eMMC and FLX HD, whatever, what's the probability or possibility that you can gain new customers that may be doing programming themselves or using programming centers?

It seems to me that you're separating yourself quite a ways from some of the other competitors.

So is it possible to pick up new, bigger accounts, et cetera, with the new technology you're introducing?

Tom, we think so.

With the FLX HD, we've really hit a new price point.

If you think about the fact that it has 40 duplication sites in it, and the price that it's at, it really drives down the customer's effective cost per site.

So as we point out, essentially the customer gets a 2.5 times improvement in productivity.

So customers that have in the past been using manual processes are going to find that the FLX HD is at a price point which makes it very attractive for them, if they've been doing programming manually, to step up to automation.

So that was really one of our goals with this product, and I think we've hit that.

And clearly, the feedback we've gotten from customers, from the sales channels, has been very positive.

The APEX Trade Show started today, and within the first hour and a half today, we got 20 leads and a lot of interest in the new FLX HD.

Today's the first day of real public showing of that product.

So we're very excited about that.

The other thing that's happening, that's beginning to play in our favor, is that we've been talking for some time about this issue of growing file sizes.

And during our sales call -- we have a Monday morning sales call every Monday morning with the sales directors from the three regional areas -- and we get on the phone, and we spend about a half an hour looking over the sales plans and talking about major accounts and what's happening.

And the head of our sales operations in Europe reported that a particular automotive company in Europe, automotive electronics company that had standardized on onboard programming and has been using onboard programming now for close to 10 years exclusively, came to us this past week and reopened the issue of buying some of our automated equipment, because they got to the place where they're reaching this increasing file size limit where onboard programming is no longer a good solution.

And they have to go to some other form that allows them to support what we call the attack time of their production line, the rate at which products come off the production line every few seconds.

And so that's a very encouraging sign that customers are coming back that maybe have abandoned us in the past or abandoned our technology in the past that are now having to come back to us because of the fundamental shift in the technology of the devices and their data file size.

So we think there are a lot of things going on that are going to play to our advantage during 2012.

Okay, thanks a lot, Fred.

(Operator Instructions.).

Robert Anderson, Penbrook Management.

Fred, how about some general comments about the automotive market, which I guess in your case tends to be fairly European, fairly German?

Yes.

That's traditionally, Bob, been our strongest region.

It's clearly an important region for us.

We have a direct sales operation in Germany and in Eastern Europe.

We have a very experienced team there, so they've been very effective in selling into those accounts.

The automotive electronics business in Europe is pretty sophisticated.

About 75% of the automotive electronics R&D for the world is done in Germany.

So there's a lot of it that's just basically rooted there.

So we have our own direct device support people, device support engineers, in Germany that support our European customers.

They tend to use more sophisticated devices.

If you look at the actual programmable devices they're using -- the microcontrollers, for example -- they have many more pins than microcontrollers that are used often in Asia, which are less capable devices.

The electronic systems that are designed in Europe tend to be the more sophisticated ones.

The customers there are very much more concerned about quality, process improvement.

So it's not surprising that they're the first customers to come to us for RoadRunner 3 and the Factor Integration Software.

And in fact, our very first installation of FIS was in Europe.

So that's really an important area.

And the encouraging thing, Bob, is that even though there was weakness in Europe in the fourth quarter, we see a lot of opportunity with the automotive accounts.

The business in the funnel hasn't gone away, and we think we're going to have a good year in Europe with the automotive accounts.

Okay, thank you very much.

David Kanen, WFG Advisors.

I apologize.

I tuned in a little bit late, so you may be repeating some things for me.

First question is I noticed gross profit was about $3.1 million, and then in the press release, I think the percentage was 54.5%.

It didn't quite add up for me.

Can you just explain to me how you guys were essentially breakeven and had $3.1 million in gross profit on $5.7 million in revenue?

I'm not sure I understood your question, Dave.

This is Joel.

Could you repeat it?

Okay.

When I read the income statement, it looked like gross profit was $3.1 million, and gross profit percentage was, it said in the press release, was 54.5%, and your revenues were $5.7 million.

The numbers don't add up.

It should have been less than the $3.1 million.

Where did that extra gross profit come from?

I'm thinking that the number does add up.

Does it?

Okay, so my math is wrong.

Okay, I looked at it quickly.

I'm not sure if you're talking about gross margin or gross profit.

And when you were talking about profit, what I was wondering about, is are you talking about the operating profit, which actually was a loss for the quarter of $64,000.

But that loss was offset by non-operating income and some tax benefits that actually had us going slightly above breakeven at a $3,000 net income.

Okay.

I'll circle back and maybe give you a call tomorrow.

Maybe you covered this earlier in the call, but I see OpEx came down, close to like $3.1 million for the quarter.

Did you give any direction for 2012 as to where you see OpEx?

Because I know last year you had this transition for the new products and so forth and outside third-party contractors.

Where do we stand for 2012?

We haven't given guidance with regard to 2012 in general.

We have basically been saying that we were seeing our operating expenses as probably being somewhere around where they currently have been.

So not back at the early 2011 rates, but more at this Q4 level of spending.

We'd like to see them come down quicker, Dave, but as you know, we have public company costs in the first quarter that make the first quarter tending to be a little bit more expensive quarter.

But we're still on our plan to basically accomplish what we set out to do, which was to bring the expense level back down from the high levels that we had during the peak investment during 2011.

Is it reasonable in Q2 and beyond to get back to $3 million a quarter in OpEx, or that's a little bit aggressive?

I don't think we've actually got to a point yet where we're ready to really commit on that, Dave.

It depends a little bit in terms of what we do with the Azido rollout, because I think, as you know, once we start selling that, we're going to be moving some of the amortization cost out of expense.

And so we have timing issues we have to work out before we're in a position to actually comment specifically on the exact time.

Okay.

And so are you implying now that you expect to generate in 2012 some revenue from Azido, that you will have it productized and start selling to customers?

We're going to know a lot more as we see what actual experience the universities have in rolling out the training and enabling people to actually use Azido effectively to design sophisticated electronic systems.

And we're still in the early stages of that, and I think it's just a little bit early yet for us to be able to comment.

Until we get the results back from the actual experience -- we've got Azido now out there in the hands of close to 100 users in the university and research community.

And so we're accumulating experience, we're getting a tremendous amount of interest, and we're getting a lot of validation.

But we really have to rely heavily on them to do something which we can't do.

We're just not prepared, as a company like Data I/O, to train the industry.

We have to really rely on universities and research institutions to do that.

And we have to look and see how effective they are before we can really nail down a timeframe.

Okay.

And let me ask you another question.

Nokia, in Barcelona, announced some new products, and you know that right now Microsoft is devoting a lot of their efforts and resources to being successful in mobility.

Are you pursuing those opportunities?

Are you positioned to benefit from that, should Nokia and Microsoft be successful in their partnership?

Yes, we are aggressive in that, and I can tell you we've already quoted FLX HDs related to Microsoft.

Okay.

What did you end the quarter with in backlog?

$800,000 in backlog.

Okay.

And orders for the quarter were what, $5.1 million?

That's correct.

Okay, and have you seen an improvement in orders, two-thirds of the way through Q1, or are you running essentially at the same levels as Q4?

We haven't commented on that, Dave.

What I can tell you is that January was weak, February is coming in stronger than January, and we think that March is going to be stronger than February.

But as you know, in this business, basically the capital equipment business, that a lot depends on what happens the last couple of weeks of the quarter.

So it's just still early for us in the quarter, even though it seems like we're two-thirds through it.

Okay.

And Joel, if you back out any amortization for Azido in the quarter, what was EBITDA?

Where were you on a cash flow basis for the quarter, or EBITDA?

From an EBITDA standpoint, we were at $258,000, I believe, is the right number.

Let me just -- yes, $258,000 for the quarter, with depreciation and amortization being $318,000.

And of that $318,000, $111,000 was Azido.

Okay.

And then what was cash flow from operations for the quarter, including changes in working capital?

I know you spent a nice chunk of cash on buying back stock, which I'm very happy about.

But what kind of cash did you generate with the changes in receivables and so forth?

I don't actually have the exact cash flow piece, but really, we went down during the quarter by $260,000, $250,000 of which is the share buyback program.

And the rest of the things were basically cash neutral -- lots of ups and downs, but not a lot of movement.

I see.

Okay, all right.

I'm good for now.

Thanks for the comments.

Tom Rath, Davidson Investment Advisors.

You called out in your press release, Mexico and Canada a weakness.

And you mentioned, it said in the release also, wireless business.

Can you give us a little more detail on what's going on there and what is the near-term outlook?

Sure.

The weakness really related to Mexico and Canada, where one of our largest wireless customers was in a major spending mode back in 2010, both in software and systems as well as their EMS contract manufacturing partners.

They went, not into an expansion mode during 2011, and particularly in the fourth quarter.

And so what you saw was Mexico and Canada being relatively down from an order standpoint.

And we also saw that a lot of companies weren't increasing their projects in Mexico.

There's been all throughout 2011 a slowdown where there just haven't been a lot of new projects going into Mexico.

The Americas actually was a pretty decent amount of activity and the like.

But when you look at the Americas as a whole, they were the ones that funked the quarter for that.

You know, Fred mentioned from a wireless standpoint, Asia was a great year for wireless and consumer products in 2011.

And that looks like that will be leading us out of the downturn that we have experienced in the last quarter during 2012.

Okay, thanks.

Is the tough comp, then, in Mexico and Canada, has that passed now, or is there still another quarter to go there?

It really has passed, because we pretty much wrapped up almost all of the things on that big project at the end of last year, 2010.

So it's the comparables that have been bad all year long this year.

I was just going to say, Tom, that what's interesting is that we're seeing opportunities in other areas in the Americas now emerge, particularly Brazil and Argentina, which appear to be on the rise again.

And we expect those regions to offset some of the weakness that has been plaguing us in Mexico.

Okay.

Great.

And then to follow on to the earlier questions on automotive, it sounds like you're pretty constructive on that.

Are your comments prospective or are you seeing current improvement from the automotive vertical?

We're seeing current improvement from the automotive area in terms, now, of projects moving forward, projects that maybe might have been stalled in the last few months, moving forward.

And we had a major automotive customer in Europe that made a decision to move forward with a new evaluation of a RoadRunner 3.

That's a customer that had considered one of our earlier versions of RoadRunner in the past, and they decided not to adopt it then.

But they're seeing enough opportunity now with RoadRunner 3 and the FIS software that they really want to move ahead, and they're very encouraged by the new features and capability that we put in it.

So we're seeing projects like that move forward, where we hadn't seen anything like that, let's say, looking back two or three months ago.

Probably the one spot where we aren't seeing any improvement is in the programming centers for automotive.

And in Europe, that's one of the bigger partners for automotive, is they do a lot more programming center outsource business.

But as Fred mentioned, we are seeing in-house automotive programming initiatives moving forward from a quotation and funnel standpoint.

Okay, great.

And then also, what was your mix in the fourth quarter of RoadRunner and FLX versus the parts that were not growing?

I would say that generally speaking, Tom, all of our product lines were down except RoadRunner and the FLX.

We saw growth in those areas.

But everything else basically was down.

And the weakness was pretty well spread across all product lines and all geographies with, again, 48% growth in the RoadRunner compared to the third quarter, which really was the result of the RoadRunner 3 and the FIS software.

Yes, I'm just trying to get -- it seems like your mix to the RoadRunner family should have shifted fairly significantly.

Are you willing to tell us approximately what that is in your revenue base?

We don't really break down the individual product lines other than to explain a little bit about the automated family as a whole.

And our automated family as a whole, which consists of RoadRunner, the FLX, the PS series and so forth, that was down about 30% from the fourth quarter of 2010.

And so you can see, when we tell you that the RoadRunner product line itself was up substantially, you can see that the other pieces of the business were really, in the automated family, were really way off.

But a lot of the products, like the PS family, are very attractive to programming centers.

And when our business with programming centers was down 81%, it's consistent with what I'm telling you about the product lines.

Okay.

And then one final detail.

Can you give us CapEx, either for the quarter or for the year?

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

However, it wasn't a real significant piece, because we went up about $280,000, which is pretty close to what our depreciation was.

So on a gross basis, we went up $280,000 in terms of capital equipment spending.

All right.

That's it for me.

Thank you very much.

There are no further questions.

I'd like to turn the conference over to management for closing remarks.

Thank you very much for joining us this afternoon, and we look forward to the second quarter earnings call.

Thank you very much.

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