Jordan Darrow - Investor Relations Anthony Ambrose - President and Chief Executive Officer Joel Hatlen - Vice President and Chief Financial Officer.

Ladies and gentlemen, thank you for standing by. Welcome to the Data I/O Fourth Quarter 2016 Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to Jordan Darrow. Please go ahead, sir..

Thanks, Valeria and welcome again, everyone. This is the Data I/O Corporation’s fourth quarter and year end 2016 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 would 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 constitute 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 installation, 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. I would like to turn the call over to Anthony Ambrose, President and CEO of Data I/O..

Thank you very much, Jordan. Good afternoon, everyone. I would like to comment on our 2016 fourth quarter and full year results as well as our overall outlook on the market. And then I will turn it over to Joel Hatlen for some more detail on our specific numbers.

2016 fourth quarter highlights include very strong overall orders with $7.4 million in bookings, which represents a 9-year high for us in the fourth quarter. Revenues were $6.4 million, a 6-year high for us in the fourth quarter. We saw continued strength in automotive and programming centers with additional orders from industrial and IoT customers.

We received orders from the Bosch agreement in Q4. Our operations delivered a very strong performance supporting backlog and new orders as well as collecting on our receivables. We ended the year with $11.6 million in cash. And finally, net income increased over 120% for the year, looking at – for the quarter rather.

Looking at 2016 as a whole, I am very pleased with our progress in several important areas, particularly the strong financial performance. These are the results of our multiyear plan and the very hard work of all of Data I/O’s employees worldwide. For the full year, we had revenues of $23.4 million, our highest level in 5 years.

This also represents our fourth consecutive year of revenue growth. We had $26.9 million in annual bookings, that’s the highest bookings total we have had in 8 years. Automotive bookings were up 55% year-over-year and now represent 47% of our orders. During the year, we had a signature win at Bosch Car Multimedia. We talked about this previously.

This was a very important win for us, top to bottom on their car multimedia products and validated our entire development strategy around automotive and multimedia for the past several years. 2016 was also a very strong year for Data I/O in programming centers.

We had about 25% of our orders or the programming centers and that was the largest dollar volume of orders we have had in at least 10 years. I’d like to remind everyone that 8 of the top 9 automotive electronics companies and 5 of the top 5 automotive programming centers are using Data I/O equipment.

The superiority of our products for automotive and small parts applications as well as difficulties with some of our traditional competitors clearly helped us here. During the year, we also had growth in our new products. We ramped these new products very successfully in 2016.

And as we have told you over the past 3 years, we have completely overhauled the automated handler product line to provide better, faster systems at lower cost. We shipped over 100 of the PSV family automated programming systems through 2016 and sold our LumenX programming engine to over a dozen customers worldwide.

We also had very strong Asia and EMEA bookings. Those regions set multiyear highs for bookings in 2016. Our operating model also performed very well. Our gross margins for the year were 55%, growing almost 4 points over the last 4 years. And this is especially good news despite a 27% increase in the U.S.

dollar on a trade weighted basis over that time period. And finally, our net income for the year increased 79% to $1.7 million from $927 million a year ago. During this call, I would like to look back on the year and also give you our impressions for what’s going to happen in 2017.

What we said we are going to do last year in 2016 was achieve double-digit growth in bookings. We actually exceeded our plan as bookings were up 33%. Last year, we told you on this call that we would increase our margins and the actual margins were up 2.6 points. We also said we have seen increase in spending, which we did.

So, I think from our overall view of the market, we did what we said we are going to do in 2016 and a little bit better. Looking forward to 2017, Data I/O will continue to be focused on growing revenue and seizing new market opportunities in our core business.

We will be enhancing and extending our platforms in programming technologies, marketing and selling our products globally, managing our total cost structure, enhancing shareholder value and being ready to explore strategic acquisitions and other partnerships to accelerate our growth.

Last year, we reviewed our long-term market forecast showing the doubling of the available market for Data I/O over the next 5 years. We discussed how this was driven by automotive electronics growth, growth in the Internet of Things and a global move towards automotive and smart factories.

Our strong growth and market share in automotive electronics reinforced our belief that we are in the wave of new and exciting electronics content, including automotive infotainment, instrument clusters, Advanced Driver Assist Systems and other systems that support the move towards autonomous driving vehicles.

Beyond the automotive sector, our wins in the IoT chip-scale package and wearable devices confirm the market opportunity for us in IoT. We are now seeing a grounds flow of demand for a more secured Internet of Things.

A new generation of security solutions with authentication devices, other secure elements and secure microcontrollers are expected to gain share in the IoT market.

These trends in silicon technology and OEM demands create a new opportunity in managed and secured programming and we are investing to lead the industry in a potential market of 4 billion units by 2021. This is according to ABI Research and our company estimates.

As the global leader in firmware positioning, we are partnering with the leading suppliers of secured elements and secured microcontrollers as well as industry security experts to develop high volume, cost effective security provisioning solutions.

We have significantly increased our R&D to support security programming and we will be announcing our first products in this area later in 2017. We view 2017 as a market development year for us to establish key design wins and relationships with meaningful revenue in later years.

We plan to demonstrate some of the capabilities we are developing at upcoming events, including the embedded world event in Germany next month. We are continuing to see automation replacing manual programming in most global markets. Cost and quality considerations continue to drive this change.

Our PSV3000 and PSV5000 systems directly address this opportunity. Automated systems represented over 78% of Data I/O revenues in 2016 and we expect this number to keep increasing.

We are investing in software and systems integration capabilities to accelerate the move to automation and support major global initiatives, such as Industry 4.0 and China Smart Factory. Last week at the IPC APEX EXPO in San Diego, we showcased our New ConneX Smart Programming Software for the PSV systems.

With heightening demand for extensive traceability, process monitoring and predictive analytics, particularly within automotive electronics, Connex software integrates Data I/O’s PSV automated programming systems into customer’s manufacturing control systems.

Extracted information is seamlessly and easily integrated into the existing factory management systems and delivers real-time comprehensive traceability and process monitoring for the smart factories of today and tomorrow. This is very important for the automotive and IoT markets.

On the business side, in the sharp contrast of 2016, we started the year with $3.2 million in backlog, which is up more than 300% from last year. We also have additional systems in our deferred revenue. We anticipate the systems in backlog and deferred will become revenue in 2017.

Our current sales funnel is strong and we have planned revenue growth for the year. Turning to our margin and cost expectations, we expect gross margins to be roughly flat in our model of mix. By far the largest factors in gross margins are product mix and factory utilization. We are now forecasting euro and a dollar for U.S.

and Chinese yuan at $0.15 in our financial forecasts for the year. We are forecasting an increase of about 9% in our overall spending, primarily in R&D to support our growing markets and the managed and secured programming initiatives. At the same time, we remain vigilant in looking ways to reduce our ongoing operating costs.

In 2014, we targeted $1 million of non-headcount savings by the end of 2017 and we are on track to that goal. We are also planning additional sales of non-core assets. In the late 1980s, the company was allocated a series of IP addresses.

In the fourth quarter of 2016, we have recognized about $140,000 in net income benefit from sales of excess IP addresses. We intend to monetize most of the remaining excess IP addresses into 2017 from which we may derive approximately another $150,000 in cash.

Finally, under our prearranged 10b5-1 share buyback plan, no shares were repurchased during the fourth quarter of 2016. Our current share buyback plan expires at the end of March. Since the start of the plan, we purchased $191,000 and 80,345 shares at an average price of $2.38.

And I have seen daily trading volumes increase substantially and share price nearly double. In light of the improved trading metrics and significant areas of potential growth, we are deploying our capital where it may have the highest returns. If the market conditions for our common stock change, we may institute another buyback program.

At this point, let me turn the call over to Joel Hatlen for more detailed look at the numbers..

Thank you, Anthony. Good day to everyone. Revenues for the fourth quarter of 2016 were up to $6.4 million, 28% increase compared to $5 million in the fourth quarter of 2015.

As Anthony noted, automotive electronics and the Internet of Things demand from both OEMs and programming centers drove increased revenues, primarily related to our PSV family of automated programming systems. Revenues from adapters and consumables were up 8% for the year.

International sales represented approximately 86.7% of total sales for the fourth quarter of 2016 and compared to 92.3% in 2015. On a regional basis, revenues increased in Europe 95% and in the Americas 15% while declining in Asia 9% compared to the fourth quarter of 2015.

Order bookings were $7.4 million in the fourth quarter, again a 9-year high compared to $4.1 million in the same period in 2015. The variation in revenue percentages versus order percentages relate to the change in deferred revenues and currency translation.

Backlog at the end of the quarter was $3.2 million on December 31, 2016 compared to $700,000 on December 31, 2015. Deferred revenue at the end of the quarter was $1.9 million on December 31, 2016 compared to $1 million December 31, 2015.

For the fourth quarter of 2016, gross margin as a percentage of sales was 56.3% compared to 55.9% in the fourth quarter of 2015 with the increase primarily due to sales volumes resulting in better fixed factory cost utilization and a favorable product mix partially offset by increased factory variances.

Operating expenses were $3 million in the fourth quarter of 2016 compared to $2.6 million in the fourth quarter of 2015. The increase was primarily due to additional engineering, incentive, consultant and commission compensation as well as costs associated with new hires.

Looking forward, the higher level of R&D expense incurred during the fourth quarter will continue in 2017. In accordance with U.S. generally accepted accounting principles, net income in the fourth quarter of 2016 was $755,000 or $0.09 per diluted share compared with net income of $338,000 or $0.04 per diluted share in the fourth quarter of 2015.

Included in non-operating income were gains of $140,000 from the sales of non-core Internet domain assets that Anthony just mentioned. For the year 2016, net income was $1.7 million or $0.20 per diluted share compared to $927 million or $0.12 per diluted share in 2015.

EBITDA, earnings before interest, taxes, depreciation and amortization, was $962,000 in the fourth quarter of 2016 compared to $434,000 in the fourth quarter of 2015. Equity compensation, an non-cash item in the fourth quarter of 2016 and 2015 was $111,000 and $105,000, respectively.

Adjusted EBITDA, excluding equity compensation was $1.1 million in the fourth quarter of 2016 compared to $539,000 in the fourth quarter of 2015. Please see our press release for a discussion and reconciliation of these non-GAAP financial measures.

For the year ended December 31, 2016, net sales were $23.4 million, increasing 6.3% compared with $22 million in 2015. International sales were approximately 87.5% of total revenue for 2016 compared with 89.9% in 2015. For the year 2016, bookings were $26.9 million compared to $20.3 million in 2015.

These increases are due to the same factors discussed previously for the fourth quarter and in Anthony’s discussion. Other figures for the year of 2016 and 2015 financial results are included in the press release.

We have net operating loss carry forwards of approximately $19 million 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 taxes to take advantage of these tax attributes.

The company’s cash position at December 31, 2016, was up to $11.6 million with $5.9 million in the United States and the balance in foreign subsidiaries. Working capital increased to $14.6 million at the end of 2016. The company remains debt free and has 80.016 million shares outstanding at December 31, 2016.

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

Thank you very much, Joel. At this point, operator, I would like to open up to questions for the call..

[Operator Instructions] We will go to the line of Fernando Kandel [ph]. Please go ahead..

Yes. Thank you very much. Congratulations on a very nice quarter.

Is there an explanation as to why there was no revenue growth from the third quarter to the fourth quarter of this year?.

So the question on revenue growth from Q3 to Q4, they are both at very high levels for the quarter. Probably the biggest reason was that we had a couple of big systems that had acceptance process and were deferred until we get final test by the customer that is taking place here in January and February. So that’s the biggest single difference.

Otherwise, with the bookings, there was significant bookings growth again..

Right.

So then we can expect much better first quarter for this year then?.

Well, we don’t give guidance on the specific quarter. And we have just never given guidance. But what I would encourage you to do is build your own models looking at what we have discussed on previous revenues, bookings, the backlog that comes into the quarter and also deferred revenue.

And then I think you will be able to build up your model accordingly..

Okay. Well, thank you very much and again congratulations on a very good quarter..

Thank you very much..

[Operator Instructions] We will go to the line of John Fanning. Please go ahead. John Fanning with Coast [ph] Capital, please go ahead..

Yes, good afternoon.

Can you hear me now?.

Yes..

Very good. Gentlemen, congratulations on a great end to what turned to be a very strong year for you..

Thank you..

I just wanted to dig in if I could a little bit on your New ConneX Smart Programming Software, so I can get a better understanding on the potential market size that you believe this has for Data I/O?.

Certainly. We think this complements the products that serve the markets we have already talked about.

What we are seeing John is, as more and more customers especially automotive space and those moving to automation, they want to make their factory smarter and that means they need to get more information, more high-quality information and more information in real-time out of all of their systems, including the programmers.

So, the ConneX software that we have announced supports those automotive and IoT initiatives we have talked about. Looking forward, ConneX is also a foundational element in our managed and secured programming strategy and we will have more to say about that throughout the rest of the year..

Great, thank you. And if I could just touch on a couple of numbers, I want to make sure I heard this correctly. You had a nice gross margin expansion last year.

Did I hear that you at the moment projecting gross margin to be flattish year-over-year?.

That’s correct. And that’s based around the assumptions we have shared on the currency, with factors going to margin are currency, factor utilization and product mix..

Got it. Got it.

And just quickly once again what was that NOL number that you provided?.

We have about $19 million in NOLs. And if you look in our financial statements we value those, but have them fully reserved. So, in essence, they are unvalued on the balance sheet of about $9 million in total tax attributes..

Excellent. Gentlemen, again, congratulations..

And we will go to the line of Mark Stiegel with [indiscernible] Capital. Please go ahead..

Quick questions. Joel, the NOLs and the overseas income, if we get the tax package that, let’s say, repatriate the overseas income 10% or overseas cash at 10%.

Would you be able to essentially pay that tax sort of out of pocket and then just use the NOLs for the higher tax domestic income or do you have to apply it like first come first served?.

That’s something that’s a little bit complicated to calculate actually. So you have got the withholding taxes from overseas and then they can offset your U.S. taxes, but you will be in the alternative minimum taxes usually, because you can only offset regular taxable income with 90% of your NOLs..

So, the answer is really it depends since we are speculating on federal tax. So, Mark, it depends..

Okay, fair enough.

And then the second one just to clarify the sale of those IP addresses, that was a Q4 item?.

We sold somewhere close to half of them in Q4 and throughout 2017 we expect to try and do a similar amount of sales..

Right.

So, what was the dollar amount in Q4? Did you say $140,000?.

Our gain after commissions and brokerage things was $140,000..

Okay, very good. Thank you very much..

There are no additional questions. Please continue..

Okay. Well, operator, if there are no additional questions, I would like to thank everyone for joining the call and we look forward to talking to you on our Q1 earnings call near the end of April, early May. Thank you very much..

And ladies and gentleman, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect..