Andrew Berger - Investor Relations Anthony Ambrose - President and Chief Executive Officer Joel Hatlen - Vice President and Chief Financial Officer.

Arthur Winston - Pilot David Kanen - Aegis Capital.

Welcome to the Data I/O second quarter financial results conference call. [Operator Instructions] I would now like to turn the conference over to our host, Vice President and Chief Financial Officer, Joel Hatlen. Please go ahead..

Andrew, we'll have you start off with an introduction here..

This is Andrew Berger and I'll read the Safe Harbor. Thank you and welcome to the Data I/O Corporation second quarter 2015 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation; and Joel Hatlen, Vice President and Chief Finance 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 statements 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 by time-to-time in the company's fillings on Form's 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 forward-looking statements. At this time, I'll turn the call over to Anthony Ambrose for his remarks.

Anthony?.

Thank you, Andrew. Welcome, everyone. I'd first like to comment on the second quarter of 2015 and the overall market, before I turn the call over to Joel Hatlen for some more detail on our numbers. Q2 2015 was another profitable quarter for Data I/O. Revenues were approximately $5 million and bookings were approximately $5.1 million.

Net income was about $100,000 and gross margins were nearly 55%. Our new products continue to lead us with continued strength in automotive markets. Nearly one-half of the sales for Data I/O in the first half of the year were to the automotive segment, up sharply from our results in 2014.

As we've mentioned on earlier calls, there is a very strong secular trend in the automotive electronics market that demand significantly more programming capacity than is currently installed. The PSV7000 continues to win deals and gain market share with customers in the automotive market.

As I mentioned on previous calls, we won eight of the top nine automotive electronics customers with the PSV7000. I can now report that five leading automotive electronic suppliers have ordered multiple PSV7000 systems. In Q2, we also introduced the PSV5000 programming system.

The edition of the PSV5000 replaces our PS388 line automated handler and completes our product lineup for the offline automated market. We continue to enhance the PSV family overall and Data I/O now has the strongest product line of automated programming systems in the entire industry, and we're well-positioned to gain market share.

We're making progress, winning new business for the PSV5000, as we sold and delivered multiple units in the quarter. In addition to the automotive wins, we're also very excited about a Tier 1 Internet of Things win in Asia in the second quarter.

Our balance sheet at June 30, 2015, remains strong with $9.1 million of cash, no debt and excellent liquidity, with good inventory and cash management as well in the quarter. Strength of the U.S. dollar continues to negatively impact our results. We estimated about a $300,000 impact to revenue and margins in the second quarter.

As previously disclosed in an 8-K last month, we signed a new lease that will save us about $1.5 million in cash over the next five-and-a-half years and provides better facilities for us here in Redmond, Washington. In July, we completed a very successful move and are in full production at our new location.

I would also like remind listeners, who are in the Bay area, that will be attending the Flash Memory Summit in August. Our Chief Technology Officer, Rajiv Gulati will be discussing major new developments in programming architecture and technology, which will significantly impact the automotive and wireless marketplace.

I encourage anyone attending the Flash Memory Summit to attend Rajiv's talk. We will also be attending the NEPCON Shenzhen tradeshow next month and showcasing our latest products. And finally, we updated our investor presentation earlier this month, and I encourage all of you to review it. It's downloadable from our Investor Relations website.

With that, let me turn it over to Joel Hatlen, our Chief Financial Officer for more detailed review of our numbers.

Joel?.

Thank you, Anthony. Good day to everyone. Revenue for the second quarter of 2015 were $5 million compared with $5.6 million for the second quarter of 2014. International sales represented 80% of total sales for the second quarter of 2015 compared to 89% in the second quarter of 2014.

On a regional basis, revenue increased in Asia 25% and declined in the Americas 4% and in Europe 39% compared with the second quarter of 2014, with the decline in Europe relating approximately one-third to the unfavorable currency translation rates and two-thirds to lower unit mix sales volume.

On a products basis, revenue increased in the second quarter of 2015 compared to the second quarter of 2014 for Data I/O's automated PSV family, including the PSV7000, PSV3000 and our new PSV5000. Sales were particularly strong to the automotive markets, as Anthony mentioned.

Order bookings were $5.1 million in the second quarter of 2015 compared to $6.3 million in the same period in 2014. The variation in revenue amounts versus order amounts relate to the changes in deferred revenues, backlog and currency translation.

Backlog at the end of the second quarter was $1.9 million compared to $2.7 million on June 30, 2014, and $1.7 million on March 31, 2015.

For the second quarter of 2015, gross margin as a percentage of sales was 54.9% compared to 54% in the second quarter of 2014, with the increase primarily due to a favorable product mix as well as more favorable overhead variances, offset in part by the impact of currency translation.

Operating expenses in the second quarter of 2015 were $2.66 million compared to $2.63 million in the second quarter of 2014, reflecting higher development spending offset in part by both the impact of foreign currency exchange rates and spending controls. In accordance with U.S.

General Accepted Accounting Principles, GAAP, net income in the second quarter of 2015 was $100,000 or $0.01 per share compared with net income of $447,000 or $0.06 per share in the second quarter of 2014.

EBITDA, earning before interest, taxes, depreciation and amortization, was $197,000 in the second quarter of 2015 compared to $562,000 in the second quarter of 2014. Equity compensation expense, a non-cash item in the second quarter of 2015 and second quarter of 2014 was $148,000 and $125,000, respectively.

Adjusted EBITDA, including equity compensation, was $345,000 in the second quarter of 2015 compared to $687,000 in the second quarter of 2014. Please see our press release for a discussion and reconciliation of these non-GAAP financial measures.

We have net operating loss, NOL, carryforwards of approximately $19 million as well as other credit carryforwards in the United States that are available to continue to offset our future U.S. net income, and we will continue to analyze and manage our taxes to take advantage of these tax attributes.

The company's cash position at June 30 was $9.1 million with $3.7 million in the United States and the balance in foreign subsidiaries. The company remains debt free and has 7,929,000 shares outstanding at June 30.

Looking forward for the third quarter, we anticipate seasonally lower operating expense, including the savings from the lower rent and the extra one-time costs of our July relocation move. At this point, I will turn the discussion back to Anthony..

Thank you, Joel. At this point, operator, I'd like to open up the call to questions from our attendees..

[Operator Instructions] Our first question comes from the line of Arthur Winston with Pilot..

I was wondering if you could think out loud without numbers, but be specific, and explain how in your mind Data I/O can grow its sales over the next 18 to 24 months, specifically as you're able to address the question, but I don't expect any number, so it makes it easier..

If you look at what we talked about in the release, our recent update, the two growth areas that we see primarily are Automotive and Internet of Things. Automotive is something that's in front of us. We're obviously getting traction on that. We have fantastic product line for that. And I think it will just get better for automotive.

Internet of Things is again something that we're beginning to see as well. It's a little more nebulous. It's something we see a little bit downstream, because of the manufacturing strategy in those markets. But those would be the two big areas that I would expect to see growth for Data I/O in the short and medium term..

Could you say, in other words, do you think the automobile business sales will be bigger than they are now, which products and which areas of the world will they be buying and which machines are you thinking about for the automotive?.

Primarily the PSV7000 is our flagship product and that's ideally suited for the automotive space, not just because of its performance, but because of offers and number features with respect to quality, managed and secured programming, capacity, performance, 3D inspection, post processing, integrated laser, things like that that are necessary to compete in the automotive space.

We also could sell additional products in the automotive space. I think the PSV5000 in some of the smaller locations or maybe some of the emerging entrance into automotive would also be a fine choice..

You think that the unit sales of the 7000 including, and plus the 5000, unit sales are going to be bigger in the future than in the past, that's what you said you were thinking?.

Yes, I mean, and if you look at it, our business is sharply stronger in automotive overall. As I mentioned, nearly half of the orders we have in the first half came from the automotive segment. It's really encouraging for us in the automotive space. We've clearly got the right product.

And if you look at the investor presentation I updated, there's substantially more commentary and color on why automotive is strong, what's in there, what's driving it and how we participate. We're extremely bullish on that segment..

One last question is that one sale Internet of Things.

Can you give some idea what their revenue from that one sale is? And could you say what kind of a customer you made the sell to?.

Yes, the customer bought multiple systems. And the application was, it's a Tier 1 name. You'd know it in a heartbeat. We don't have unfortunately the permission to use their name..

But it's not an automotive?.

No, it's not an automotive. It's a completely different application. We sold it actually to their EMS partner. But again, the end application is one of the very strong emerging Internet of Things applications..

Our next question comes from the line of David Kanen from Aegis Capital..

Couple of questions. The improvement in gross margin up to 54.9% versus, I think you're in the upper-48% level last quarter.

Is that sustainable? And as we move into the stronger seasonal part of the year, if revenues were higher, can that number continue to drive above 55%?.

I think the answer to your question is, yes, it's sustainable. We saw a very significant improvement in the direct material margin that came out with regard to particularly selling our newer products that have generally better material margins associated with them.

This time, we had some very favorable factory variances that you can never actually predict that they will be there favorable or unfavorable, but we operate the business tending to say that they're going to be zero, but they never are. So especially, with growth, growth and volume really do help our margins quite a bit. And they are relatively fixed..

And then, Joel, compare Q1 to Q2, you'd say, Q1 probably had some negative currency effects in there and Q2 had some positive currency effects..

From a percentage standpoint, the currency doesn't make any difference, because the percentages are the same in Europe for the business there. It's just they makeup a different percentage of the mix. So from that standpoint, we had some variances in fact that really were the ones that got influenced by currency this last time..

And then in regards to the new lease moving to a lower cost base, can you quantify that? Is that about, I'm guessing around $100,000 per quarter, said about right?.

On the cash basis, it's about $75,000 to $77,000 per quarter. Because that includes some leasing centers and things like that they get spread out over the period. On a pure expense basis, it's just under $60,000 some place.

And as I've said before that that's going to be somewhat offset by the one-time move costs and relocation costs this quarter, but still I except that our overall operating expenses, including those items, will be down compared to the second quarter spend..

Dave, let me just add one thing there. I want to thank Joel and our negotiating team on this. They were able to get some very, very good terms in a pretty hot market here in the Puget Sound area. And so I just want to congratulate them on getting us at 5.5 year extension with the move..

Last question is what percentage were adaptors or if you could just give me revenue number for adaptors, that would be helpful?.

Revenue for adaptors were, it's about $1.3 million for the overall revenue piece for this quarter.

There are no current questions at this time. End of Q&A.

Thank you, operator. Since there are no further questions at this point, I'd like to close the call. And thank everyone for your participation. And if you have any further questions, please get a hold of Andrew Berger or Joel or myself, and we'd be happy to clarify them for you. Thanks again..

Ladies and gentlemen, this does conclude our conference call. Thank you for your participation using AT&T Executive Teleconference. You may now disconnect..