Stanley Berger - IR Anthony Ambrose - President & CEO Joel Hatlen - VP & CFO.

David Kanen - Aegis Capital Arthur Winston - Pilot Advisors.

Welcome Data I/O Third Quarter 2015 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to our host Stanley Berger. Please go ahead..

Thank you Don, and welcome to the Data I/O Corporation third 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 Financial Officer of Data I/O.

Before we begin, I'd like to remind you that statements made in this conference call concerning future results, revenues from operations, financial position, economic conditions, product releases and any other statements 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 condition and market demand, pricing and other activities by competitors and other risks including those described from time-to-time in the company's fillings or 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 these forward-looking statements. And now I would like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.

Anthony?.

Thank you very much, Stan. Good afternoon everybody. I'll comment a little bit on Q3 2015 in the overall market and then I'll turn it over as usual to Joel Hatlen for some more detail specific numbers.

2015 third quarter was another profitable quarter for Data IO our sixth consecutive profitable quarter demonstrating the success of our initiatives to improve our cost structure and operating leverage while we grow the company. Revenues were $6.2 million and bookings were at $5.9 million.

Net income was 439,000 with a gross margin at nearly 52% while we continue to concentrate and optimize our cost structure and improving efficiencies for Data IO to be successful our business strategy must be focused on growth and winning in a competitive, fragmented and often commoditized marketplace.

Our strategy is to create industry leading products at the right cost and sell them globally. We started with the PSV7000 our flagship model of a new and differentiated line of automated offline programming systems. Since then we've announced two additional PSV automated programming systems, the PSV3000 and the 5000.

To complement this in the third quarter we announced a revolutionary programming technology called LumenX that combined with the PSV7000 is upto five times faster than competing forms of programming and duplicating technologies and significantly reduces customers total cost of programming.

Data I/O has the strongest family of automated programming systems in the industry and we're well positioned to gain share in this global market. Several highlights from the third quarter of how we are expanding our market and market share in the programming world include new and repeat shipments of our PSV7000 to automotive customers.

This includes our first shipment of a PSV7000 with LumenX technology to a leading European automotive electronics manufacturer. Multiple shipments of our PSV3000 to a Top 10 Chinese wireless company. We want a manual to automate it transition at this company versus intense Asia based competition.

We also had shipments of our PSV7000 to Asia based programming center customers representing some exciting new opportunities for us. And finally we had an additional PSV5000 win at a global EMS supplier. I'm very encouraged with our financial and competitive performance for the third quarter and the first nine months of 2015.

We've been able to grow over the past two years despite severe headwinds from unfavorable currency exchange rates and exchange rate driven lower demand specifically from Latin America. We've been able to overcome these challenges to revamp a product line that includes a full offering of market leading programming systems and technologies.

Looking towards our markets, over the past two years you've heard me talk a lot about growth in the automotive electronics market.

We continue to see strong demand from this market segment and believe this is in a multi-year cycle of expansion driven by larger more sophisticated program requirements for automotive instrument clusters and infotainment systems using very large amounts of flash memory as well as substantial increases in the total electronics content primarily with microcontrollers and Data I/O in a good position to benefit from the increased demand in both of these portions of the automotive market.

The PSV7000 with LumenX technology is specifically targeting automotive customers. Instrument clusters and infotainment systems require very large amounts of high performance eMMC flash memory which demands very high performance programming in manufacturing.

The PSV7000 with LumenX is uniquely positioned to handle these very large flash files and as we said earlier is up to five times faster than competing forms of programming and duplicating technology. With these products we're able to reduce customer's total cost of programming by up to 73# versus competing technologies.

We are also able to offer customers superior small parts handling, traceability and large capacity, all within a managed and secure programming environment. These great products are why we've won eight of the top nine auto electronics customers on the PSV7000 systems since its introduction just two years ago.

We've also seen the use of microcontrollers in automotive and internet of things applications accelerating. We've had an opportunity to update our forecasts of what the total available market would look like and according to IC Insights, a market research firm.

The number of microcontroller units is forecasted to increase almost 50% in the next two years. And this produces a corresponding increase in the programming demand for us.

Our PSV family and RoadRunner family of programming systems are well positioned to compete in this market and we've been experiencing success displacing other methods and other competitors in the programming to band for these markets.

Finally we look forward to speaking additionally with investors about our views of the market and the company and we will be at the. LDmicro Conference in Los Angeles in early December. I encourage people to go to the LDmicro website or talk to Stan for further information on Data I/O's participation there.

Now with some more specifics on the numbers I'd like to turn the call over to Joel Hatlen, CFO of Data I/O Corporation.

Joel?.

Thank you, Anthony. Good day to everyone. Revenues for the third quarter of 2015 were 6.2 million compared with 6.2 million for the third quarter of 2014. Our increased PSV sales have been able to offset the foreign currency headwinds we have faced this year.

International sales represented approximately 93% of total sales for the third quarter of both 2015 and 2014. On a regional basis, revenue increased in Asia 79% and Europe 18% and declined in the Americas 62% compared to the third quarter of 2014.

With the decline in the Americas relating primarily to Latin America and resulting from the effects of the changes in foreign currency exchange rates. On a product basis revenue increased in the third quarter of 2015 compared to the third quarter of 2014 for Data I/O's automated PSV family including the PSV7000, PSV3000 and our new PSV5000.

Sales were again strong in automotive markets as Anthony laid out. Order bookings were 5.9 million in the third quarter of 2015 compared to 5.4 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 September 30, 2015 was 1.6 million compared to 2 million at September 30, 2014 and 1.9 million at June 30, 2015.

For the third quarter of 2015 gross margin as a percentage of sales was 51.5% compared to 54.6% in the third quarter of 2014 with the decrease primarily due to the effect of currency translation of a weaker euro than a year ago as well as a shift in our channel mix.

Operating expenses in the third quarter of 2015 were 2.690 million compared to 2.660 million in the third quarter of 2014 primarily reflecting the onetime expense of our Redmond headquarters move of approximately 90,000 that was completed in July and has savings of 50,000 per quarter compared to our previous lease. In accordance with U.S.

Generally Accepted Accounting Principles GAAP, net income in the third quarter of 2015 was 439,000 or $0.05 per diluted share compared with net income of 646,000 or $0.08 per diluted share in the third quarter of 2014.

EBITDA, earnings per before interest, taxes, depreciation and amortization was 552,000 in the third quarter of 2015 compared to 728,000 in the third quarter of 2014.

Equity compensation expense, a non-cash item in the third quarter of 2015 and '14 was 93,000 and 90,000 respectively adjusted EBITDA excluding equity compensation was 645,000 in the third quarter of 2015 compared with 818,000 in the third 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 carry forwards of approximately 18 million as well as well as other credit carry forwards 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 September 30, 2015 was 9 million with approximately 3.9 million in the United States and the balance in the foreign subsidiaries.

The third quarter accounts receivable build and inventory reduction relates to large end of the quarter sales. The company remains debt free and has 7.931 million shares outstanding at September 30, 2015. At this point I will turn the discussion back to Anthony..

Thanks very much Joel. At this time I'd like to turn it back over to the operator for questions from our audience..

[Operator Instructions]. And we're going to the line of David Kanen. Please go ahead..

First question is in regards to internet of things/industrial.

This is the first time we're really hearing of winning business there, if you can give me the analogy to the baseball game was inning are we in and what seems to be the system of choice for those customers and can you give us an idea of the applications they're using for it?.

Yes, certainly Dave. I think we're in the second inning, maybe the first inning of the preseason games on Internet of Things, what we're seeing is a gradual pick up in opportunity of things that had never been considered programmable content before now having programmable content. A great example I can point to is a fitness band.

I've used this analogy before where if you look at what a great watch was 10 years ago, people point to something that was made in Switzerland, they probably had no programming content. Bunch of gears looked good, cost a lot of money but had no programming content. Now you fast forward and.

I think the Wall Street Journal had something on this a couple of days ago how even Apple alone is having an impact on the Swiss watch market. And you look at what's happening in fitness bands or watches or other personal wearable devices. That's a significant increase of growth in the Internet of Things market.

And that's one application of about fifteen different segments including things like manufacturing, home, intelligent homes, intelligent lighting in office buildings power management things like that.

There's a whole host of applications that will need programming and we participate in this largely the way we participate in a lot of businesses either through EMS partners, programming centers and other areas but I think it's very, very early in the Internet of Things opportunity and I think it's going to pick up and be a consistent demand generator for a long time..

And then what systems are you seeing for these applications?.

I think for Internet of Things you're primarily going to see I'll call it the PSV5000 is the work horse unless there's a very -- unless there is a need for very specific small parts handling capability from the PSV7000..

And this is first mention of the LumenX programming engine and it seems as though you sold your first systems in the quarter.

What is the time frame of ramp and can you give us any indication as to what is the size of that opportunity? You know should we perceive this as something that can generate overall growth to the company's revenue?.

So Dave I think what you're going to see with LumenX is we're targeting the automotive market. And we're targeting customers that have large eMMC arrays right now. Over time we will expand the device support capability for LumenX and that will expand the opportunity.

I would look at LumenX as something that, we change programming engine architectures once every 15 years. So there will be a ramp up period for LumenX. The good news is we've already had some customers that have purchased from us, again all the big automotive companies except one our customers are already on the PSV7000.

So some of them are saying, hey let's evaluate LumenX for our next buy, we may wish to buy a LumenX based system. Even if they have an install base of our current generation of programming technology. So those evaluations are ongoing. And I would expect to see that we would see some of those pick up over time.

But also gives us a great opportunity to talk to people in other markets like wireless, the other big eMMC markets where we have to come in with a very competitive offering and for LumenX the numbers are compelling on eMMC programming right now.

As far as your financial models I would assume the LumenX for the balance of this year is a net positive for us. I don't think it's going to blow away your financial models immediately because things like automotive run a fairly long selling cycle. And we already have a lot of those customers as install base.

But I think it gives us another way to grow short term on eMMC on then long term as we add in the rest of the device support families for that technology. It's really just one more significant differentiation attribute for our PSV line..

Joel, what were total revenues for maintenance software and adapters and then I want to understand the real estate savings going forward. I know and correct me if I'm wrong, there was about 90,000 in onetime expenses related to the move.

And then you said you're okay -- and you said we’re going to save 50,000 a quarter so does that mean if I took last Q3's total OpEx and I deducted 145,000 would I be close to the kind of the go forward run rate?.

No our move took place in July so this had 2.5 months of the savings built in it. So you know of 50,000 we saved, we will only save 10 additional in next quarter plus the 90..

And then maintenance software adapters, what was that for the quarter?.

So I don't have that number right in front of me but it's approximately 9% of revenues for the quarter. .

That would not include adapters..

The adapters themselves for the quarter were a 1.560..

Okay. And then one final question I promise I'll go back in the queue. You seem pretty optimistic, the trends that you're seeing are they continuing like your indication so far in bookings for October. Are you seeing similar activity to Q3 because usually there's a seasonal drop off..

I think right now Dave, I don’t have any additional guidance for you in Q4, other than we would expect the normal seasonal trends. I would encourage you to look at some of the comments made by [indiscernible] yesterday on how they felt about the long term market.

They had some interesting things in their call about automotive and Internet of Things and you know just a quote here that significant growth in applications in automotive industrial and consumer, but I kind of like the way they talked about the long term market.

As you know we don't give guidance quarter on quarter and Q3 is typically a strong quarter for us. We go into normal seasonality between Thanksgiving and Chinese New Year..

And next we go into the line of Arthur Winston, Pilot Advisors. Please go ahead..

Two questions, in the past you've given us some sense of how big certain markets are, total available market, I was wondering if LumenX had changes the signs - it must change it's size of the available market and to what extent that you would comment upon?.

Yes so Art I think a couple things going on there. I'll have a lot more to say on the total available market when we talk no later than February because we will complete our planning process by then but I will say a couple of comments just on total markets from the semiconductor side.

You know we're seeing I'll call it normal growth in the big flash market. Smartphones are doing what they always do. The big exception are the growth opportunity market expansion opportunity for us with LumenX is in the automotive infotainment and instrument clusters.

As those technologies move from what I'll call the old style needles, you know an odometer with a needle moving or a spinometer with a needle moving to the new style of instrument cluster you might find on an on a 2015 Audi TT or a Tesla, that essentially looked like video games or notebook computers or smartphone architectures with the form factor designed to fit in the car, that is highly disruptive because the architectural change plays very well for us because people need to use the technology that we program especially well.

So that has significantly expanded the market in the sense that depending on the forecast you look at you've gone from something like 10 million to 20 million units of this new style of instrument cluster. And that market will become over 100 million units a year by 2020 according to some of the market forecasts in automotive.

And I'll share that with you more again in February. So that's a big increase in market for us.

Company IC Insights that we follow has done some work on the microcontroller market and they've sharply increased their microcontroller unit growth forecast and I want to encourage you to look at the unit growth not the total market size in dollars because it's easy to get confused there because average selling prices for microcontrollers have come down.

So you need to look at the unit growth to get an understanding of what the total programming unit demand will be and that's what drives ultimately purchases of capital equipment. So those are the big growth drivers for us no pun intended. In automotive and Internet of Things..

In prior calls, you talked about the potential for opportunities in telecommunications and wireless internationally.

Did I hear right that you've gotten orders there that you talked about earlier in this call?.

Exactly. That’s not so much a TAM [ph] increase Art, that's a deal that we won.

We're are very excited about that deal in China with the Top 10 smartphone company, that was a win for us as they were moving from manual to automated programming and we were able to convince them to go with our value based systems and it was very nice win for us in our China team this quarter.

But again that's more of a market share play than a TAM growth play for us..

Just one last thing, did you’ve any major automotive customers where they had they were in the backlog and something went wrong with them that it could affect?.

No..

And we have a follow-up from David Kanen. Please go ahead..

Guys, gross margin was a little lower than I would have expected and I understand you don't control the currency markets.

Are you guys doing anything internally to drive gross margins higher?.

Yes Dave, we’re always working on gross margins.

And you're correct in that currency was probably the biggest single item, but the other [indiscernible] this quarter was the fact that we didn't have a lot of sales in Latin America meant that we didn't get the sales price uplift of those rep sales which have a corresponding higher sales commission expense so that's one of the factors that’s good on the operating expense this quarter compared to a year ago but you know I think you know things like the move is having less of our factory space, getting allocated rent, we're having.

a whole bunch of new products that we're able to get rid of the old products and clean and streamline our factory so you know it's I think it's just a lot of the efficiencies that we’re working through on those types of things and then we're just constantly after how do we improve our bombs [ph], how do we actually get the cost down on these things so that we can compete as the low price producer for most of our products here and compete in these markets with everyone and gain market share..

So there are initiatives underway but nothing specific?.

So Dave. Let me just add to this. There are always initiatives on improving the cost position. This is something I've learned in over 30 years of technology businesses. You're never done with cost control initiatives. .

Okay. And then just one final follow up, Joel, you went through sales on a geographic basis. I missed that. Can you just repeat that please..

Sure. Revenue increased in Asia by 79% and Europe 18% and declined in the Americas, 62% compared to the third quarter of 2014 with the decline in Americas relating primarily to the Latin America and the effects of the foreign currency exchange rates..

And next we go on to the line of [indiscernible]. Please go ahead..

A quick maybe a small question here on the IoT and the industrial side, do those tend to -- I imagine those tend, the manufacturing tends to get outsourced either to a programming center or to an EMS and given sort of that, I think you’re quite strong with the EMS but not so much with programming centers.

Are you well positioned for that IoT work?.

So I think George that's a question that builds on what we talked about earlier. I think the answer on the EMS side is it depends. There's some EMS's where we're quite strong and others where frankly we're not. So that choice would clearly have an ability for us to win the deal.

At programming centers it's also it kind of depends on where it is, regionally we're extremely strong programming centers in Europe. We had a good programming center wins in Asia, this quarter and we had some wins from places where we hadn't done business in quite some time which was very exciting for us.

And that's largely driven by the product capability that we were able to bring to the table. In one case we were able to do small parts, much better than our competitors and that resulted in a specific win related to a very, very high volume part.

So for us I think step one is make sure that we can provide the lowest total cost of programming for these internet of things opportunities.

But I think there's also some challenges that we're looking at internally and how we can even expand our differentiation further beyond having the best programming system because I think you're right there's a lot more going on there than just having the best product. And that's what we're working on as well..

And there are no question in queue at this time..

All right operator I'd like to a close the call at this point and thank everyone for joining us here on the Data I/O third quarter earnings conference call. Thank you very much..

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..