Anthony Ambrose – President and Chief Executive Officer Joel S. Hatlen – Vice President and Chief Financial Officer.

David Cannon – Aegis Capital Arthur M. Winston – Pilot Advisors, L.P..

Ladies and gentlemen thank you for standing by. And welcome to the Third Quarter 2014 Financial Results Call. At this time, all lines are in a listen-only mode. And later, we will conduct a question-and-answer session with instructions being given at that time. (Operator Instructions) And as a reminder, today’s conference will be recorded.

I would now like to turn the conference over to our host, Mr. Anthony Ambrose. Please go ahead sir..

Thank you and welcome to the Data I/O Corporation third quarter 2014 financial results conference call. With me today is Joel Hatlen, Vice President and Chief Financial Officer of Data I/O.

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 maybe 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 fillings on Forms 10-K and 10-Q with the Securities and Exchange Commission, press release 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. Before I turn the call over to Joel to discuss the numbers in more detail, I'll add a few comments.

Q3 had excellent profitability for us with the strongest revenue and earnings in three-years. This shows the continuing progress we’ve made in our turnaround plan focusing on core product development, cost controls and gaining market share. Q3 was solid for bookings as well led by the PSV7000 automated programming system.

Bookings were led by automotive, industrial and EMS customers. We are very pleased with a couple of trends we are seeing in the market. First we won two top-tier automotive customers in China. These were highly competitive situations where the PSV7000 was evaluated extensively versus North American and Asian competition.

The merits for the PSV7000 were clear in each case, better small parts handling, better overall performance and superior total costs of ownership. Second, we saw repeat orders from customers for the PSV7000 as they added capacity, this is very encouraging.

Third, we are seeing industrial customers add capacity to support their growth in the Internet of Things. And finally, we continue to see customers moving from manual to automated purchases. The trends in total cost for automated are now favorable nearly everywhere in the world.

I’d also like to follow-up on the PSV3000, we shipped the first system last quarter for evaluation and are in several evaluations right now. I like our sales funnel and our approach. The systems are performing well in meeting our objectives, we are in a very competitive space and expect our first orders for that system in the fourth quarter.

As we look to Q4 2014 and beyond, we just completed our strategic planning cycle. This process includes an external scan on markets, customers and technologies. And there are a couple of key findings I would like to share.

First, our total available market is increasing nicely, this is based upon semiconductor growth forecast for 2015 through 2017 as well as code size growth per application. Market research from IC Insights are forecasting 40% growth in 32-bit Microcontroller units and 20% to 50% growth in Flash Memory units over the next three years.

This is an improvement upon the past three-years. Unit demand increases fuel our growth for capacity purchases of programming equipment and are an important indicator for our industry. At the same time, we see memory capacity in code size per unit increasing, one large mobile customer tells us their code size is increasing 20% to 25% per year.

A 32-bit Microcontroller typically has two to eight size the code size of previous generation 8-bit and 16-bit Microcontrollers expanding the programming times and our demand accordingly. Second, we are continuing to see the move to automation replacing manual programming in most global markets. This is due to labor cost increases and quality demands.

The move to automation favors Data I/O as we are much stronger in automated handlers than we are in manual systems. Automated systems require knowledge of programming, handling and systems integration as well as a global support operation. We have all of these and many of our competitors do not.

Third, we see physical part dimensions decreasing, requiring better small parts handling capability. Many wins for the PSV7000 are due to its superior small parts handling capability.

Small parts also require more sophisticated fiber laser marking and the state-of-the-art 3D co-planarity inspection, which we also have in the PSV7000 and our capabilities lead the industry. Finally, customers are increasingly concerned about security and tractability.

Automotive customers have demanded these features for years and we are seeing increased attention to security in the industrial market as the Internet of Things grows. Security concern is one of the top barriers to adoption for the Internet of Things and it all starts with programming.

Data I/O programming engines, systems software and application software for serialization, security, tractability and management are the gold standard for reliability and security in the industry and represent a proven choice for our industrial cost customers as they digitize their products.

Finally, I would like to invite anyone who is in the Los Angeles area to come hear Data I/O at the LD MICRO Conference in first week of December I believe 2nd to 4th Joel in Los Angeles. We will have further information posted on our website shortly. With that let me turn it over to Joel Hatlen our CFO, for a more detailed review of the numbers..

Thank you, Anthony and good day to everyone. Net sales in the third quarter of 2014 were $6.2 million, up 16% compared with $5.4 million in the third quarter of 2013 and sequentially up 16% compared with $5.6 million in the second quarter of 2014.

Net income in the third quarter of 2014 was $646,000 or $0.08 per share, compared with net loss of $146,000 or $0.02 per share in the third quarter of 2013 and sequentially up 45% compared with net income of $447,000 or $0.06 per share in the second quarter of 2014.

International sales for the third quarter of 2014 and 2013 were 93% and 85% respectively. Sales for the third quarter of 2014 compared to the third quarter of 2013 were unfavorably impacted by $131,000 due to change in the foreign currency translation rates related to the strengthening of the dollar compared to the Euro.

On a regional basis, net sales increased 84% in the Americas and 19% in Europe, while declining 30% in Asia compared to the third quarter of 2013. Remember that last year in the third quarter we had the large consumer product sale in Asia.

A sales breakdown by type for the third quarter of 2014 was 68% equipment, 22% adapters and 10% software and maintenance. Orders for the third quarter of 2014 were $5.4 million up 25% compared with $4.3 million in the third quarter of 2013.

As Anthony noted, we had strong bookings of our new PSV7000 automated programming system during the quarter as well as RoadRunner systems. Backlog was $2 million at the end of September 30, 2014 compared to $1.3 million at September 30, 2013 and $2.7 million at June 30, 2014.

Deferred revenue was $1.8 million at September 30, 2014 compared with $1.3 million at September 30, 2013 and $2.1 million at June 30, 2014. With our backlog in deferred revenue at the end of the quarter we're well positioned for a good start to the fourth quarter.

Gross margin as a percentage of sales in the third quarter of 2014 was 54.6% compared with 47.7% in the third quarter of 2013. The gross margin increase as a percentage of sales for the third quarter was primarily due to a more favorable product and channel mix as well as volume as well as less unfavorable labor and overhead variances.

Operating expense in the third quarter of 2014 was $2.7 million compared to $2.5 million in the third quarter of 2013 and we’re up primarily due to higher sales related selling commissions and incentive compensation offset in part by savings from our 2013 restructure actions as well as cost control actions.

EBITDA that is earnings before interest, taxes, depreciation and amortization was $728,000 in the third quarter of 2014 compared to $228,000 in third quarter of 2013. Equity compensation expense a non-cash item in the third quarter of 2014 and 2013 was $90,000 and $102,000 respectively.

Adjusted EBITDA excluding equity compensation was $818,000 in the third quarter of 2014, compared to $330,000 in the third quarter of 2013. Please see our press release for a discussion and reconciliation of these non-GAAP financial measures.

During the third quarter of 2014, our working capital increased by $1.1 million, primarily made up of a cash increase of $1.2 million and an accounts receivable decrease of $700,000. The company remains debt free, as of September 30, 2014 the company had 7.8 million outstanding. At this time I’ll turn the call back to Anthony..

Thank you, very much Joel. At this time I would like to open up the call to questions from people on the bridge..

Congratulations guys, good quarter..

Thanks, David..

You are welcome. First question in regard to your comment that there this transition going on now from manual to automated, can you just flush that out a little bit, give us some a little bit more color on this dynamic that’s going in the marketplace.

And what product are you going to address that with and what do you think the market opportunity as for you?.

Okay, so Dave you know we have been talking this transition for a while and I think we are just seeing increase evidence that due to primarily a couple of factors the labor cost increase in most of Asia along with increased quality demands as parts gets smaller, its becoming increasingly more cost effective to deploy an automated handler instead of multiple manual handlers for volume production.

And this happening primarily as new demands are introduced into the market, what you see is with the introduction of the PSV3000 we’re going to see more of these deals, because that hits a price point in our Asia markets that we've not been able to achieve before.

So I think that we've been addressing this market with current products the PS388 is a good example, the FLX500 where customers what automation at a good price.

And I would expect that trend to continue, there is no drop-off in the projected trends of labor cost increases and places like China, when you add in not only the cash cost, but the equivalent of taxes social security, et cetera like that.

You can build a very effective case that an automated handler is a more cost effective solution than multiple manual handlers for current types of jobs..

So can you quantify to the best of your ability the size of that opportunity in terms of transition from manual to automated? The amount that you think will ultimately be transitioned in the next 12-months to 24-months..

I think Dave, we’ve talked earlier about the market opportunity around the introduction of the PSV3000, which I would say includes this manual automated opportunity as well as market share gains. We've quantified that at roughly $10 million of opportunity that we’re exposed to now that we've not been exposed to in the past.

We still think we feel pretty comfortable with that number..

Thank you and now to line of Arthur Winston from Pilot. Please go ahead..

Thank you, hi Tony does that mean – is that another way of saying that the potential market for the 3000 is $10 million, is that what you are suggesting or did I have it wrong?.

Arth what we try to say is when we introduced the PSV3000 it allowed us to get into places where we've not been actively considered before. And we modeled that to a best of our ability at about $10 million as we talked about it.

There is no external market service out there that you cite that goes around and counts how many of these things are out there. We base that upon our deal flow, our deal analysis, one loss ratio, discussions with our distributors, discussions with partners, discussions with suppliers in the industry and that’s how we come up with that number.

There is always an error bar in a number like that but we think that’s roughly right..

Okay.

And how many 3000s has been order so far?.

As I indicated earlier, we don’t have a booking yet for the PSV3000, we have several evaluations, we’re expecting our first bookings in the fourth quarter..

Thank you. (Operator Instructions) And again to the line of Arthur Winston from Pilot. Please go ahead..

One of the fact is it’s actually is on somebody’s facility being tested right now is what’s happening?.

That’s correct Arth; we actually have several out right now at customers..

Several, okay. Okay..

Thank you. And now it’s line of David Cannon from Aegis Capital. Please go ahead..

A follow-up on in the prepared remarks about the internet of things, can you give me some elaboration on what products in particular and what these opportunities are that perhaps didn’t exist in the past and the size of that opportunity for your business..

Yes, Dave that’s a good question. The particular applications where we’ve sold into were industrial applications where customers were adding capacity and support for new generations of products. When you talk to the customer they tell you about what they are doing in their new generation of industrial products.

And what happens is across a broad spectrum of products, you’ve find people have taken devices and are adding three things to them in response to the so called internet of things. They add intelligence, they add connectivity and they add security.

And what happens is you can think about a light switch or you can think about your watch or you can think about a thermostat. What happens is if you add intelligence and connectivity and security to those types of things, you see a disproportionate increase in the code size, it needs to be programmed.

And you also have a disproportionate increase in the security needs for those types of products. I’ll give you an example. An isolated light switch is not very interesting to hacker, what are they going to do if they get control the light, turn it on and turn it off maybe.

When you have something that’s connected to your home where you’re talking about lights and heating and potentially other sources of energy. It requires a lot more security in thinking if that set of controls is going to be connected to an internet or other application.

And so what you find is people need to have a much more sophisticated programming experience to manage the introduction of those new types of products. Okay, so it’s a broad range of devices, there are some very good reading sources out there, Business Intelligence or bi.com.

Accenture has some good wording on this, they can give you an idea of the magnitude of the market, qualitatively it’s divided up into the devices that we talk about and also the Cloud application and services layer that people like Accenture and big computing companies get very interested in.

So that’s how we define the internet of things opportunity, it’s getting more quantifiable for us and that’s something we continue to pursue.

And when you talk about internet of things again, intelligence, connectivity and security that plays to our strengths, small parts handling, rapid programming time, the value added layers of programming for security, traceability management, all those things are beneficial, because we do better when those requirements are in a customers decision..

Okay, a question for Joel, it looked like you collected or generated about $1.1 million in cash for the quarter. Joel, do you know how much of that cash was U.S.

versus foreign?.

The exact number is not off the top of my head, but the vast majority of it was U.S. based..

All right. Thank you. (Operator Instructions) And we have no one in queue at this time..

Okay operator if there are no further questions. I would like to close the call at this time. And remind everyone again will be up for replay here shortly..

All right, thank you. Again this conference will be available for replay after 5.00 P.M. Pacific Time today through midnight November 6, 2014. You may access the AT&T replay system at any time by dialing 1-800-476-6701 and entering the access code of 339917, international participants may dial 320-365-3844.

Again those numbers are 1-800-476-6701 and 320-365-3844 with the access code of 339917. And that does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect..