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

Robert Anderson - Penbrook Management LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Data I/O Second Quarter 2017 Conference Call. [Operator Instructions] As a reminder, the conference is being recorded. I'll now turn the meeting over to our host Jordan Darrow. Please go ahead, sir..

Thanks, operator and welcome to Data I/O Corporation's second quarter 2017 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation and Joel Hatlen, Chief Operating and 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 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 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 now like to turn the call over to Anthony Ambrose, President and CEO of Data I/O..

Thank you very much, Jordan. As usual, I'd like to comment briefly on the current quarter's results, our outlook on the market and then I'll turn it over to Joel for detail on the specific number. 2017 Q2 financial results highlights year-over-year as noted in our release. Our sales of $9.1 million were 17-year high.

Also a 17-year high were our bookings of $10.1 million. And these two together generated net income of $1.2 million or $0.14 a share and that's up sharply from the same period last year with just an outstanding Q2 and to admit our growth here. It's important to note, really we're focused on two things for the company.

The first is operational excellence and the second is innovation for our future. On the operational excellence side, basically we had a fantastic quarter led by our operations team. We hit on all cylinders in Q2, the bookings and revenue were extremely strong and above our internal forecasts.

The systems shipped, adapter shipped were all up and our operations team is substantially increased our automated systems capacity to support our customers ramp while maintaining on time delivery performance and our quality targets.

Overall this strong performance was driven largely by the PSV family of programming systems including LumenX and FlashCore [ph] programming technology which continues to set new standards in performance, technical innovation and the total cost of ownership.

We're happy to announce we built and shipped over 150 total PSV family systems since they were introduced less than four years ago. Looking at our markets, the long-term market trends we've talked about for several quarters now remain intact in our opinion.

Automotive, electronics, the Internet of Things and factory automation are driving adoption of Data I/O products worldwide. Six quarters ago, we talked about how we thought the total available market for our products and capabilities would double from 2016 to 2020 and we still believe that forecast.

Automotive market is booming due to a sustained secured growth in electronics per car and semiconductor content per car. This includes automotive infotainment, instrument cluster applications, advanced driver assist systems, increased use of electric and hybrid engines and power trains and the overall connected car initiatives.

This has led to our installed base growing. That installed base growth, strong system sales and new customer projects also leads to increase sales of our adaptors and consumable products.

In Q2, our adapter revenues were at $2.1 million up sharply from $1.6 million in the first quarter and $1.2 million a year ago while we continue to experience high demand and interest in our products. Our second quarter bookings of $10.1 million were unusually strong.

Second quarter bookings are likely to be the peak level of bookings for the year due to this unprecedented demand in the first half and our normal seasonal sales funnel. The second key thing that we look at besides operational excellence would be innovation for our future.

And as many of you know, we've talked about the turnaround in the company to begin over four years ago, that's largely complete. Will of course always have continuous improvement activities associated with the core business.

But we're focused now as a growth company on our opportunities and automotive and securing the Internet of Things with our R&D initiatives. The IoT markets are growing but face a fundamental challenge with very poor security. The semiconductor industry is responding with a new generation of security solutions.

Authentication devices, other secure elements and secure microcontrollers have been introduced by all the leading suppliers and are expected to gain share over the next several years.

These trends in silicon technology and OEM demands to create a much more secure platform, give us a tremendous opportunity in what we call managed and secure programming.

We're investing to lead the industry in this category that has the potential market of 4 billion units of secured microcontrollers and secured elements in 2021 based on estimates from AVI Research. Our goal simply is to democratize security for the Internet of Things.

This means that we're taking proven technologies that previously were only available to the highest volume customers, that enjoyed special relationships with semiconductor companies and making these security capabilities much more broadly available.

Provisioning keys and certificates, wafer level can be achieved for high volume applications but up until now could not scale down to high mix, mid-sized or smaller players that don't have the volumes, lead times or stability of demand necessary to directly engage semiconductor companies on their security needs.

As a global leader in firmware provisioning we're partnering with the leading suppliers of secure elements and secure microcontrollers as well as industry experts to develop our high volume cost effective security provisioning solutions. In Q1, we previously announced key partnerships with Renesas, Infineon, EBV and Secure Thingz.

In Q2 we contracted to support another secure elements suppliers architecture we can't announce the name publicly at this time but stay tuned. We plan to support additional devices and release the production SentriX platforms to support our management secure programming later this year.

To support this, we've increased our R&D spending on the SentriX platform and other development efforts in management secured programming. As we've discussed before, we view the next nine to 12 months as the market development phase to establish key design wins, relationships in the industry with meaningful revenue to follow later on.

Ultimately, our goal is to get a much larger share of the 4 billion unit market that we have in the current microcontroller market. Q2 has some other important events. Due to the increase in our market value from our four consecutive years of revenue growth, we're pleased that in June the Data I/O shares were included in the Russell Microcap Index.

Membership in the Russell Microcap Index is based on market capitalization that means automatic inclusion in the appropriate growth and value style indices. Approximately $8.5 trillion are in assets benchmarked against the Russell US Index indices.

We believe that this will help enhance investor awareness in Data I/O as the leading global provider of management secured programming technology to the automotive and Internet of Things markets. Our company has also been recognized locally.

Data I/O is ranked among the fastest growing publicly traded technology companies in Washington State and in a survey published by the Puget Sound Business Journal. This marks our third consecutive year we've been named in the list and solidifies our place among the many exciting high growth technology companies in our region.

Data I/O's rapid growth and size and recognition locally and worldwide would not have been achieved without our incredible team. So I'd like to personally thank all of our employees worldwide and credit them for their outstanding efforts and just an outstanding impressive level of execution over the past several quarters.

In light of our anticipated continued growth and formal introduction of a new and potentially game changing solution in our management secure programming platform, we announce several organizational changes in June to strengthen our management team and position us for growth.

Sean Riley has joined the company as Vice President of Marketing and Business Development to focus primarily on driving our managed and secured programming initiatives into the global marketplace. Sean has a wealth of experience in strategy and market development and we're very excited to have him on the team.

Joel Hatlen who's been with Data I/O for over 25 years is serving most recently as Vice President of Operations and Finance, Chief Financial Officer, Secretary and Treasurer. Was appointed to the newly created position of Chief Operating Officer and will continue to serve as our CFO.

These changes create the structure and capability to better support our programming business and our core business and accelerate the growth in MSP. That concludes my remarks and I'll pass the call over to Joel now to talk about our specific results. Joel..

Thank you, Anthony. Good day to everyone. Net sales in the second quarter of 2017 were $9.1 million compared with $5.8 million last year and $7.2 million in the first quarter of 2017.

As Anthony noted, automotive electronics and the Internet of Things demand for both OEM's and programming centers drove increased revenues primarily related to our PSV family of automated programming systems. Revenues from adaptors and consumable were up 72% year-over-year.

Total capital equipment sales were $6.5 million or 71% of total revenue and adaptors were $2.1 million or 23% of consolidated revenue. International sales represented approximately 90% of total sales for both the second quarter of 2017 and 2016. Demand in all regions was robust. Order bookings were $10.1 million in the second quarter of 2017.

The 17-year high compared to $5.7 million in the second quarter of 2016 a growth of 77%. The variation in revenue percentages versus order percentages relate to the change in backlog, deferred revenues and currency translation.

Backlog at the end of the quarter was $4.7 million compared to $4.9 million at the end of the first quarter and $3.2 million at December 31, 2016. Deferred revenue at the end of second quarter was $2.8 million which included three systems that were not able to be recognized until after the end of the quarter.

For the second quarter of 2017, gross margin as a percentage of sales was 56.9% compared to 53.2% in the second quarter of 2016. The increase was primarily due to the sales volume resulting in better fixed factory cost utilization and a favorable product mix.

I too would like to complement our manufacturing team in both Redmond and China for our operational excellence in execution and a virtually investment free delivery of a significant increase in capacity during the quarter. Operating expenses were $3.9 million in the second quarter of 2017 compared to $2.7 million in the same period of 2016.

The increase was primarily due to additional engineering and R&D spending of approximately $600,000 associated with our new managed and secure programming platform and other automotive related technology innovations as well as variable incentives, sales and commission compensation along with additional trade show and marketing activity.

As we mentioned during the first quarter conference call, the higher level of R&D and engineering expense will continue and increase as we add engineering resources in the second half of 2017 in preparation for product launch and revenue generation for the new MSP platform in 2018.

However, our growth from current business lines has more than offset the increased spending on generation development and other group initiatives. Looking forward total operating expenses for Q3 are expected to be similar to Q2.

In accordance with US Generally Accepted Accounting Principles, GAAP net income in the second quarter of 2017 was $1.2 million or $0.14 per diluted share compared with net income of $444,000 or $0.06 per diluted share in the second quarter of 2016.

EBITDA earnings before interest taxes depreciation and amortization was approximately $1.5 million in the second quarter of 2017 compared to EBITDA of $584,000 in the second quarter of 2016. Equity compensation expense a non-cash item in the second quarter of 2017 and 2016 was $270,000 and $205,000 respectively.

Adjusted EBITDA excluding equity compensation was approximately $1.7 million in the second quarter of 2017 compared to $789,000 in the second quarter of 2016. Please see our press release for discussion and reconciliation of these non-GAAP financial measures.

We have Net Operating Loss, NOL trade forwards of approximately $17 million in United States as well as other credit carried forwards that are available to continue to offset our future US net income and we will continue to analyze and manage taxes to take advantage to these tax attributes.

The company's cash position at June 30 was $12 million with $7.9 million in the United States in the balancing foreign subsidiaries. The cash balance increased by $1.5 million from the end of the first quarter 2017. Working capital increased to $16.9 million at the end of the second quarter from $15.5 million at the end of the first quarter.

The company remains debt free and had 8,172,000 shares outstanding at June 30, 2017. At this point, I'll turn the call back to Anthony..

Thank you very much, Joel. At this point I'd like to turn it over to Jordan and operator, excuse me, will open it up for Q&A..

[Operator Instructions] and also it has been requested that you limit yourself to one question and one follow-up question for any additional [indiscernible] you'll need to queue up again. And our first question is from Robert Anderson with Penbrook. Please go ahead..

My question relates to the second part of your talking Anthony and that was about innovation for the future.

And I'm wanting to understand a little bit better the timing on this, when will this research reach the point that you'll be shipping products that have all these security features I suspect you started to, but I don't know that for sure, so maybe you could summarize when this research and development will be completed and you'll start shipping these very secure features..

Yes, Bob. Thank you for the comment. As we talked about in the prepared remarks, we'll be shipping the products in the second half of this year.

As you know I don't like to be too specific on these earnings calls about new products, but we said that clearly it'll start in the second half and will begin with the products that we've announced relationships with and then we'll have an expanded list with again more to stay, when we're ready to announce the products specifically..

And as you look at the market going forward over the next multiple years, do you believe that the various security features that we've talked about will almost be a basic requirement for automotive and Internet of Things?.

The short answer Bob is yes and the longer answer is, if you look at the news, we've talked to OEM's they're all looking for a way to update and enhance the security for their automotive and Internet of Things devices.

Certainly in automotive it's an absolute basic requirement to be shipping products and with Internet of Things you just keep hearing about devices that are not secured causing all sorts of trouble for themselves and also for the basic internet infrastructure.

The good news is the semiconductor companies have all responded, the ones that are in the microcontroller business, the ones that are in the secured elements business.

They have an excellent selection of products, target at multiple different markets to provide for the capability to secure the supply chain and also manage firmware integrity through the lifecycle of the product. And those two key attributes can be satisfied by our approach in management secure programming.

So as we bring the products into the market, we have to work with customers, we have to get qualified, we have to work through their design cycles and that's why we said consistently it's going to take 2017 as a market development years and we'll begin to see meaningful revenue in the nine to 12 months horizon.

But we expect that this becomes the way people do products going forward..

All right. Well thank you very much..

And our next question from David Cannon with Kieran [ph] Wealth Management. Your line is open..

If I could take the liberty to break the rules slightly and maybe ask two questions and then one follow-up would that be okay..

All right, just this one time, Dave..

Thank you.

As far as the growth in the quarter based on the intel you have, how much do you think was market share gain versus just overall growth in the market?.

I think because we don't get the data from our top competitors it's always challenging to look at market share especially on a narrow time horizon, but we did mention specifically that we got an order from a large multinational automotive company, those were all competitive situations where we prevailed.

We don't prevail 100% of the time obviously but we like the fact that, this customer showed the trust in us, when they clearly evaluated multiple different systems. So I think, it's very clear to me that there is growth in the automotive segment. I think we're extremely well positioned in the automotive segment because our product is just better.

We've talked about it before, everybody thinks their product is better but we have the data from a very thorough evaluation that was publicly disclosed last year with Bosch. Where they flat out made it clear that our product was better. So that's - to answer your question there.

I believe we're gaining share partly because automotive is on a very rapid growth cycle and we have, I would say a much higher market share in automotive than we have in the general market. And automotive includes the sales directly to automotive electronics OEMs as well as the programming center partners for the automotive industry..

Okay and then you pointed out in the press release that there was a certain amount of investment for your managed and secured programming technology for which we have yet to receive revenue. Can you quantify how much we sacrificed for the quarter for the future? And then you referred to generating meaningful revenue in nine to 12 months.

Can you just qualify that a little bit better? I'm assuming that means seven figure type of contribution, but any detail you can give there would be appreciated..

Sure as we mentioned in the prepared remarks, the increase in our R&D was about $600,000 year-over-year and that was predominantly to support the management secured programming. There were some other automotive initiatives in there as well, but most of that goes to MSP.

And again, those investments are going to capture what we consider to be a very meaningful opportunity. I haven't quantified it specifically for you in dollar terms, but I used the term meaningful deliberately..

Okay, I'll let you off the hook. Congratulations. Great job..

Thank you..

Thank you. [Operator Instructions] and we'll go back to Robert Anderson with Penbrook. Your line is open..

You had a sentence which was while we continue experience high demand and interest in our product pipeline to second order bookings of $10.1 million [indiscernible] usually strong. And then you suggest that bookings going forward will probably be less.

Should we be anticipating substantial drop off in booking based on that sentence or just kind of levelling bookings..

I think it's more of the latter, Bob. We put that in there because we wanted to make sure investors didn't just do a straight line extrapolation over the last several quarters and perhaps concluding their own models, a very unrealistic scenario for the future. We think that $10.1 million was far ahead of our internal forecast for the quarter.

It was a result of some of the activities I talked about in automotive, some business that maybe we thought would happen in Q3 that came into Q2. So I just wanted to calibrate people at this point, what we think is going to happen in the third quarter..

Right and do you have any way of measuring take automotive for example as to the degree of utilization of your equipment at the automotive companies I mean just for example, if they were using the machines at 50% of capacity that might mean one thing. Yet if they were using the machines at 90% of capacity that would mean something else.

Do you have any feel or is it just too early in the game to know utilization rates on your equipment?.

The short answer there is, no. it's very difficult for us to get precise utilization indicators. The best indicator that I can give you about the automotive growth is continuing a trend we saw in the first quarter, where automotive customers are coming in well within their normal forecast time period and requesting delivery of systems.

I think they're struggling a little bit with their own forecast methodology and models, which normally are extremely precise. And I've seen this happened before in other industries where the - a large technological transformation tends to disrupt factory planning models and it takes them a while to figure out the new way of thinking about things.

And we think that's happened in the infotainment systems. Customers come in, they have a planning model and then they get a new software drop perhaps that significantly increases the code size, someone thought it would be a great idea to put a whole bunch of new features in.

and suddenly their capacity which looked adequate today, looks inadequate tomorrow..

Sure..

I think that's probably the biggest driver we see, we're in a secular trend in automotive in our opinion. We think there is a lot of room to run and our customers continue to through Q2 surprise us on the upside..

Yes, a good example would be the self-driving car. I'm a little sceptical about that but maybe at some point that will be coming. I mean that would have just tonnes of code and therefore would be good for you. Correct..

Exactly. Bob and I think we may have talked about it in the call here last quarter. But when you look at all the systems that go into a self-driving car. The advanced driver assist systems, the [indiscernible], the radar, the cameras, the sensors, the computers to manage all of that. Those systems have to be in place before they'll go fully autonomous.

So whether or not you actually get to full autonomy or you just park or let you do cruise control on the freeway, so it's sort of limited autonomy. All of the hardware and therefore a lot of the programming demand already has to be in place there. So again we think that's favorable for us and our customers..

I mean wouldn't you presume that at least maybe with high end cars, the self-parking feature it may become fairly popular and a fairly standard feature in top end cars..

Yes, based on the way I see people parallel park all the time. I think it will become quite popular feature..

Yes, absolutely.

Full dents in the car, right?.

Exactly..

All right. Thank you..

And we have a follow-up question from David Cannon [ph] with Cannon [ph] Wealth Management. Your line is open..

Question is, if we analogize to baseball and I've asked this question before.

If as far as IoT and automotive electronics, what innings of the game would you say we're in? And then, do you believe overtime meaning through the five years from now your MSP initiatives could be similar in size to the core business?.

Yes, David you asked me these innings questions. We haven't changed the innings too much, through I think the last quarter. I still think on the automotive analogy we've hit a lot of the high end cars in some of the western markets. I think we still have growth in the mid-sized cars.

The latest forecast I've seen for 30% or so increase in the semiconductor content in cars over the next several years. So I don't - we're certainly not in the late innings on that one. On IoT again we quantify it, we're going after $4 billion market unit.

We believe that methodology for securing systems has to get adopted otherwise the IoT business model doesn't work and I'm not just talking about securing devices. I'm talking about all the people that want to monetize data.

So I think it's a significant business opportunity for us and we wouldn't be investing the way we are, if we didn't think it was a very big opportunity..

Okay and then the other part of it. I'm going to take you off speaker. The other part of it was, do you believe that your MSP initiative overtime can be equal to or greater in your core business right now? Three to five years down the road..

Yes, I haven't given a quantitative estimate and I'll be doing so in an upcoming call. so I'm going to hold that one for now, but I'll just say that it's extremely meaningful for us..

Okay, thanks again and congratulations..

And I'll turn it back to our speakers for any closing remarks..

Thank you, operator if we're done with questions. I'd just like to maybe remind people that we will be participating at the Dorothy and Company Institutional Investor Conference in Minneapolis on September 19 and will also be exhibiting and presenting and Shenzhen NEPCON Trade Show in China.

For those of you in the Shenzhen area will be happy to host through the Data I/O booth and I'll be highlighting some of our current products and systems initiatives. With that I'd like to close this call and thank you everyone for participating..

Thank you, ladies and gentlemen. This will conclude our teleconference for today. Thank you for your participation. You may now disconnect..