Data I/O Corp (DAIO) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Data I/O Corporation's second-quarter 2012 financial results.

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 the time.

(Operator Instructions).

As a reminder, this call is being recorded.

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

Please go ahead.

Thank you, and welcome to Data I/O Corporation's second-quarter 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, some thoughts on the balance of the year, and 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 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 second quarter of 2012 were $5.4 million, down 22% compared with $6.8 million in the second quarter of 2011; but up 46% compared with revenues of $3.7 million in the first quarter of 2012.

The operating loss for the second quarter was $482,000.

We received tax and interest refunds from German tax authorities of $425,000; so the second-quarter net loss was $57,000, compared with a net income of $398,000 in the second quarter of 2011, but substantially less than the $1.7 million loss in the first quarter of 2012.

Gross margin for the second quarter was $2,941,000, or 54.9% of sales.

The gross margin was down from 58.5% of sales recorded in the second quarter of last year, but was up from 52.8% of sales in the first quarter of 2012.

The decline in gross margin, compared with last year, was primarily due to the lower revenue.

Operating expense for the quarter was $3.4 million.

Cash at the end of the second quarter was $11 million, down from $12.3 million at the end of the first quarter, primarily due to an increase in receivables.

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

We were pleased to see a rebound in business during the second quarter.

Orders were $5.2 million; and while not back to the pre-downturn level of $7.3 million recorded in the second quarter of last year, they were up 22% from the $4.2 million recorded in the first quarter of this year.

Orders in the second quarter from customers in Europe and the Americas bounced back sharply from the very weak first quarter, with orders up 31% and 54%, respectively.

Unfortunately, orders from customers in Asia continued to contract, and were actually down 19% from the first quarter.

Compared to the second quarter of 2011, orders from customers in Asia were down 63%.

Europe's orders were down 21%; with America's orders up 19%.

2011 was a record year for orders in Asia.

And orders from customers in Asia were 39% of our total orders in the second quarter of last year.

They were less than 20% of our total orders in the second quarter of this year.

We believe the decline in sales performance in Asia is due primarily to the lower level of electronics production there, compared with the level last year.

Orders for our automated programming solutions were down 18% from the second quarter of last year; but, encouragingly, were up 48% from the first quarter of this year.

Orders for RoadRunner product line, including our factory integration software, in the second quarter of this year were up 54% compared with the second quarter of last year.

Orders for adapters, a consumable item, were down 23% from the second quarter of last year, and down another 6% from the first quarter of this year.

We believe the weakness of the adapter business represents the lower level of capacity utilization of the installed base of programming equipment, particularly in Asia.

Among the highlights of the second quarter was the success of the sales channels we added in South America late last year in winning business at new accounts.

Together with the growing strength of our other channels in the Americas and their ability to win competitive business this quarter, orders from customers in this region were up 19% from the second quarter of last year, and up 54% from the first quarter of this year, as stated above.

In the past few weeks, we've seen a resumption of business with programming centers, a likely sign that capacity utilization may be recovering.

At the same time, we know of programming centers that normally operate 21 shifts per week that are operating at 18 shifts per week or below.

So we remain cautious on the outlook for capacity-driven orders.

At the same time, we are pleased with our new products, particularly those that deliver substantial customer benefits and improved quality and process control.

We believe that our ever-expanding new product portfolio positions the Company to perform very well as the electronics industry recovers.

In the second quarter, we recorded our first revenue related to training of the Azido technology we purchased last year.

We also participated with Dr. Peter Athanas of Virginia Tech in training 16 life sciences researchers at the Virginia BioInformatics Institute on the use of Azido, to design high-performance computing fabrics, with funding from the National Science Foundation.

The goal of this work is to develop an automated pipeline for identifying novel, genetic variants in the next-generation sequenced human genome data.

The work involves symbolic comparisons of large data sets -- 3 billion bytes.

Traditional processor architectures are too slow for the task.

As one researcher stated at the start of the training, people are dying because we can't sequence this data fast enough.

The Azido technology is also being incorporated in the design of Data I/O's very high-speed programming products.

I'm also pleased to report that Brian Crowley, the Chief Executive Officer of Bsquare Corporation, has joined Data I/O's Board of Directors.

Brian's management experience and his knowledge of the software industry, supplemented with relevant technical skills, make him an extremely valuable addition to our Board.

Brian, together with Ken Myer, the other recent addition, will strengthen the Board's engagement in the firm's strategic direction.

The Company has also made progress on that the CEO search, and has been actively involved in interviewing prospective candidates.

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

Joel?

Thank you, Fred.

Good day to everyone.

As Fred said, revenues for the second quarter of 2012 were $5.4 million, down 22% compared to $6.8 million in the second quarter of 2011; but up 46% sequentially compared to $3.7 million in the first quarter of 2012.

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

Revenue by region changed, with Asia down 59% and Europe down 4%.

However, revenues increased in the Americas 13% compared to the second quarter of 2011.

Data I/O believes the decline in revenues relate primarily to the reduced capital spending resulting from a downturn in Asian-based electronics manufacturing, and the economic uncertainty related to European sovereign debt situation.

Our revenues were affected by the change in the euro translation rate compared to one year ago, where the euro devaluation resulted in $291,000 less revenue, and increased the net operating loss by $210,000.

On a product basis, the revenue decrease was primarily Data I/O's automated PS and FLX families; as well as FlashPAK, which was the most impacted by the drop in Asian demand, compared to the second quarter of 2011.

As Fred discussed, orders decreased 28% to $5.2 million in the second quarter of 2012, compared to $7.3 million in the same period in 2011.

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

Backlog at the end of the quarter was $1.1 million, down from $1.6 million at the start of the quarter; and from $1.1 million on June 30, 2011.

Deferred revenue at the end of the quarter was $1.4 million, up from $1.2 million at the start of the quarter; and the same as $1.4 million on June 30, 2011.

Gross margin as a percentage of sales in the second quarter of 2012 was 54.9%, compared with 58.5% in the second quarter of 2011; and 52.8% for the first quarter of 2011.

This gross margin decrease, compared with the second quarter of 2011 and first quarter of [2011] was primarily due to the impact of decreased sales volume relative to fixed manufacturing costs.

Factory variances were $131,000 lower, and were partially offset by labor and overhead costs that were $71,000 higher than in the second quarter of 2011; with the labor and overhead change being due primarily to changes in the amount and composition of inventories.

Sequentially, the gross margin percentage improved two percentage points from 52.8% in the first quarter of 2012, primarily due to the sales volume increase during the second quarter.

Operating expenses decreased by $68,000 in the second quarter of 2012 compared to the same period in 2011.

Research and development increased by $152,000 in the second quarter of 2012, compared to the same period in 2011 due to costs related to the Azido initiative, $121,000, which reflects a full quarter versus two months last year; less engineering charged to operations by $73,000; and a higher patent-related costs by $52,000, offset in part by a $150,000 reduction in the use of consultants and contractor expenses.

Selling, general and administrative expense declined $219,000, primarily attributable to lower professional fees by $150,000; lower incentive compensation by $76,000; offset by $42,000 of higher sales commissions, primarily resulting from a sales channel mix.

The CEO search firm fees, including in SG&A in the second quarter, were $38,000.

And there will be no further fees to expense.

Income taxes for the quarter reflected tax refunds totaling $318,000 that were received from Germany as the Company prevailed in tax issues from the 1995 to 1998 periods, relating to an acquisition.

These refunds resulted in associated interest income of $107,000, and are now completely settled.

In accordance with US generally accepted accounting principles, GAAP, net loss for the second quarter of 2012 was $57,000, or $0.01 per share, compared with net income of $398,000, or $0.04 per diluted share, in the second quarter of 2011.

Earnings per share included the impact of equity compensation expense of $150,000 for the second quarter of 2012; and $123,000 for the second quarter of 2011.

We have net operating loss, NOL, carryforwards of approximately $17 million, as well as other credit carryforwards in the United States 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 second quarter of 2012 was a loss of $192,000.

The depreciation and amortization in that calculation was $335,000, including $111,000 related to the Azido Technology acquisition.

Net capital spending was $225,000 during the quarter.

The Company's cash position at June 30, 2012, decreased during the second quarter to $11 million.

The use of cash was primarily attributed to funding a $1.7 million increase in accounts receivable to $3.6 million at June 30, 2012.

Inventories were at $4.6 million at June 30, 2012, up from $4.5 million at March 31, 2012.

Deferred revenue was $1.4 million at June 30, 2012, compared to $1.2 million at March 31, 2012.

This increase was primarily due to a PS system that was shipped but not yet recognizable as revenue.

The Company remains debt-free.

At June 30, 2012, the Company had 7.7 million shares outstanding.

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

Thank you, Joel.

The third quarter is normally the strongest quarter of the year, and there are signs that the business in Asia will pick up.

At the same time, the electronics industry faces pressure from general and macroeconomic malaise and the uncertain impact of two high-profile product introductions, specifically the iPhone 5 and Microsoft Windows 8.

The full impact of forces on Data I/O's business in the third quarter is not clear.

But we are encouraged by the upturn in the second quarter and the growing sales funnels.

At this time, we'll be happy to take your questions.

(Operator Instructions).

Tom McGuire, private investor.

Good morning, or good afternoon, Joel and Fred.

You've talked about a V-shaped recovery.

And that would seem, to me, to be that you should expect to see growing sales in the third and fourth quarter.

Has something changed since you've been talking about the V-shaped recovery earlier this year?

Tom, I would say yes.

We saw business bounce back, in March and April, very much to what we would consider to be a more normal monthly run rate.

And we saw weakening in May, and we expected -- we thought that that might just be a short-term blip.

But the weakness that we saw in May continue in June.

So, that's pretty much the pattern as we've seen it.

Okay.

Next question is, it seems to me that one of the unintended consequences of your stock buyback program has been a significant decrease in volume since that program was completed.

Does management or the Board, do you have any plans on how you could get a more liquid security in the marketplace?

Well, that's a real tough question, because you are having the fewer shares out there, so that does reduce the float.

At the present time, there is no plans for any further additional stock buybacks.

So it's really the market that needs to be driving this; and in our particular situation, I think that when the economy is down there's just a little bit less movement in the stock.

Yes, you just have to get sales and earnings growing again.

Let's see, next question.

It wasn't too long ago, a little over a year ago, that management was real excited about the new product flow, and software especially; and the ability that your new products and software, along with new devices coming to the market and bigger file sizes on devices, et cetera.

All this could have transformed Data I/O into, let me say, more predictable, less cyclical, maybe a better-margin company.

And of course we've seen the delay with the downturn in the industry.

But has anything changed, do you think, in terms of what your new product flow, your software, and the new devices and bigger file sizes, can do if the economy cooperates for Data I/O?

No, Tom, I don't think our view has changed on that at all.

As you know, we had significant revenue increases and the RoadRunner and factory integration software area, driven by those new product introductions last year.

And that becomes -- and even compared to the second quarter of last year, it's up very substantially.

And that's really been the bright spot in the Company.

It's unfortunate that the weakness of the industry overall and the lack of demand for capacity masks, really, what a success that that new product initiative really has been.

And so, we continue to get good success with that.

We just had another major automotive company come back and give us an order for an additional Road Runner product and the factory integration software.

And this firm, now, has committed to driving that implementation across their different divisions as a standard for the company.

So we're very pleased with that.

And it's just unfortunate that the success there is being masked by the severe weakness; particularly in Asia, where manual programming is still the adopted method for doing it.

And that's really been reflected in our numbers, for products like FlashPAKs.

Okay.

Thanks, Fred.

And then, one last question.

Joel, you mentioned that there will be no further fees to expense, in regards to the CEO search.

Does that mean that we're close to making an announcement as to a new CEO?

Or am I inferring too much here?

I think you are in inferring more than that said.

What I really was saying is that we are done paying the search firm, and there are no further fees to have expensed.

That was a fixed-fee search.

And so I wanted to make it clear that extra professional fee spending there wasn't going to be ongoing.

Okay.

Thank you very much.

Robert Anderson, Penbrook.

Yes, good afternoon, Fred and Joel.

I was wondering if you could review the business opportunities going forward, in terms of revenues and earnings, for this Azido project?

Well, Bob, we don't really talk specifically about financial numbers for products before they are introduced.

And we have not yet introduced Azido as a commercial product.

We've shipped hundreds, now, of copies of the Azido software, but it goes with a license that says that the user cannot use the technology for any commercial application.

And so, that's a very clear prohibition in the current structure, in terms of rolling it out to the research community, getting researchers behind it and supporting it and understanding it.

And it's going to be later this year before we have the plans in place, in terms of when we are going to actually change that license structure, which will allow people to do commercial things with it, at which time we can start recognizing some form of revenue.

Okay.

Now, given the fact that the business outlook looks modest, do you have any plans to rationalize your costs?

Well, we are continuing to look closely at cost.

We're continually looking and examining areas in which we can reduce the expenses.

Some of the expenses are pretty easy to control; others are a little more difficult to control.

And, for example, in some quarters -- this most recent quarter, we had significant additional cost related to the way the sales occurred through more paying of commissions, which increased the selling expense over what we would have normally expected.

And then, of course, we've have been impacted by the currency exchange in Europe, as Joel pointed out, to the tune of almost $300,000 in lower revenue as a result of the change in exchange rates between the dollar and the euro.

And so, those effects kind of mask other savings that we are trying to eke out of the organization.

And so, I think it's going to be ongoing activity throughout the rest of the year.

I would make one further comment, that -- I think the easy stuff, like reducing all the contractors, consultants and the like, we've pretty much done us those.

And when you talk about the comparisons in R&D and SG&A, you see the amount of savings that we have with regard to those types of activities.

And then we're just, obviously, really being very careful about where we spend money, and allow cash to go out.

Okay.

I'm all set for now, thank you.

David Kanen, WFG Advisors.

Good afternoon, gentlemen.

My questions actually have been answered, so I'm going to step back for a little while.

Thank you.

Dennis Van Zelfden, Brazos Research.

Good afternoon, Fred and Joel.

Fred, about 12 to 18 months ago, when you introduced the FIS software, you and we -- and when I say we, Wall Street -- talked about the ability to sell or retrofit this FIS software to your already large installed base.

Which, we -- again, Wall Street -- viewed as a pretty big revenue potential.

Has that materialized?

The answer is yes.

We have experienced substantial revenue from sales of the factory integration software to existing accounts.

We introduced it, actually, in August of last year -- 1st of August of 2011, Dennis -- and it takes time, in many cases, for these accounts -- I'm thinking particularly of an automotive account that has 27 plants around the world.

And they coordinate their processes, their methods across these plants.

And as you can imagine, in many cases they want -- they'll get together; they have an advisory committee that gets together and tries to standardize on these methods and the equipments and processes -- and they often want special little tweaks to things like the factory integration software.

So sometimes it takes us a process of actually going in and making some modifications, customization, to make meet their particular need.

And then they go through a period of validating it.

And then they, ultimately, accept it, and then slowly drive that out through their divisions.

It's one of these things where you'll never get 27 orders all at one time.

But what we see is, we see the plants one at a time as they have new projects, new initiatives, adopting that standard that has been basically adopted by the company and proceeding forward.

So I think we're very confident that this is going to continue to be a successful initiative and it's going to move forward.

I'm just reflecting on other products we had, the FlashPAK product that we introduced back in the early-2000 period, 2002 actually.

And it's one of those products that -- we looked at it at six months, and we were kind of discouraged.

We thought, is this thing going to make it or not?

And then we looked at it at a year, and we still had some concerns.

And now we look back at it, after 10 years; and, oh my goodness, what a major impact it had on the Company's earnings stream during that 10-year period of time.

And I would say that, in the case of the factory integration software so forth, that we're actually much more encouraged than we were with the FlashPAK.

Completely different experience, in terms of adoption, and none of the obstacles that we faced before.

Not every company has a need for the factory integration software.

The EMS companies, for example, are much less likely to buy it than OEMs.

But when the OEMs understand what value it brings to them, it's a pretty easy sale.

Okay, well, approximately how much revenue have you booked over the year, just from a retrofit type of a sale?

Just a ballpark.

I just want to get a frame of reference here.

You know, Dennis, unfortunately, I can't tell you that.

We don't report revenue on new products, specifically, because we just can't allow the competitors to get into a position where they can track our revenue by product; and, particularly, during early startup phases.

And it's not that we're trying to hold anything back.

It's just for competitive reasons, we just can't do it.

Then can you tell me approximately what the revenue per machine would be when you do sell something?

Well, golly.

The list price of a license, essentially, is about $13,000.

And that's included in either the RoadRunner 3 or an option for the Road Runner product line.

And then it's a little bit different pricing structure, and almost never a separate sale on a PS system.

As you talked about retrofitting the software, it is now on all three of those products.

So what I can tell you, Dennis, is that when you look at orders for our RoadRunner product line, including the factory integration software that we introduced in August of last year, the orders for that product line were up 54% in the second quarter of this year compared to the second quarter of last year.

Okay.

One last question.

Joel, how much of the cash that you're showing, the $11 million or whatever it is, is in the US?

It's about -- $9 million is overseas, so almost $6 million in China; a couple million in Germany; about $1 million in Canada, a little less.

And the rest of it is in the United States.

Okay.

Thanks, guys.

Michael Potter, Monarch Capital.

Hey, guys.

Just a quick question.

Fred, you mentioned, at the beginning of the call, the adapter sales were down 6% in Q2 versus Q1; and down how much Q2, versus Q2 of 2011? .

Just a moment here and I'll find it for you.

Orders for adapters, a consumable item, were down 23% from the second quarter of last year, and down another 6% from the first quarter of this year.

Okay.

Again, I missed a portion of the first question with regards to the V-shaped recovery.

We were seeing normalized revenue March, April and May.

And then what has occurred in June and July?

Well, I would say, Mike, what my comment was, was that really we had a fairly strong March.

I would say a March that was very normal for what we would think of it as a normal March month; and we had a very strong, again, April.

We saw softening in May.

But, as you know, with our business, it's so lumpy, with -- we get orders that are $500,000 for one of our big machines.

It's very difficult to look at one month; and from one month, whether than one month is up or down, to detect a trend.

But May was weak.

And we couldn't tell, when May was weak, whether that indicated anything other than just timing of specific orders.

But we didn't see the same level of bounce-back in June that we normally would have expected.

So I would say that June and May were both weaker than we expected them to be, based on what we had seen as results in March and April.

And what have you seen so far with July?

Has it continued that trend that we saw in May and June?

How do we handle that, Joel?

I guess I would say that we certainly expect that it's better than what we saw in May.

But I don't think it's back to the same level that we saw in April.

Yes.

I think the encouraging thing that I would say, Mike, is that in the last few weeks we've seen some orders from programming centers, and we haven't seen those in a long time.

And they just don't buy unless they have capacity demands.

So that's an encouraging sign.

Joel, can you back us into an adjusted EBITDA number?

What was the depreciation and amortization for the quarter; and stock-based compensation?

Yes.

For the quarter, you'd take your loss of $57,000.

You would add back the interest of $174,000 -- actually, it's a reduction, because it's income.

You back out the income tax, the $295,000 of benefit there.

And the depreciation and amortization for the quarter was $335,000, for an EBITDA of $192,000; and that's a loss.

So, I'm sorry, G&A was $335,000?

And was there any stock-based compensation?

Yes, stock-based compensation for the quarter was $150,000.

$150,000.

And that was compared to, for example, $123,000 last quarter.

Okay.

Thanks, guys.

(Operator Instructions).

Robert Anderson, Penbrook.

Yes, Fred and Joel, any comments on Germany in particular, where, as I recall, the automotive industry is of some considerable importance for the Company?

Yes, well, I would say this, Bob, that we were very pleased to see the business in Europe bounce back, up 31%, from the first-quarter level.

That was encouraging.

And we have a number of automotive accounts, as you mentioned, in Europe.

And we saw business with those accounts -- many of those accounts -- in the second quarter.

And I am encouraged by the business there.

At the same time, I mean, I have to be honest and say we have automotive accounts where their managers tell us that they are sort of in a holding pattern; that their companies are waiting to see how the economic crisis in Europe gets resolved before they move forward with some of their expansion plans that they have in works.

So my expectation is that we're going to continue to see ongoing business in Europe.

We're not going to see any big further significant erosion.

But it isn't going to be robust, either, until we see some resolution of the economic situation over there.

Okay, thank you.

And I have no further questions in queue.

Please continue.

Well, thank you very much for being with us this afternoon.

And we look forward to talking with you again.

Goodbye.

And ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation, and for using AT&T executive teleconference service.

You may now disconnect.