Good afternoon and welcome to the Data I/O Second Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome to the Data I/O Corporation's Second Quarter 2023 Financial Results Conference Call. With me today are the company’s President and CEO, Anthony Ambrose, and Joel Hatlen, Chief Operating Officer and Chief Financial Officer, as well as Gerry Ng, Vice President of Finance. Before we begin, I'd like to remind you that statements made in this conference call concerning COVID-19, future revenues, results from operations, financial position, markets, economic conditions, silicon chip shortages, supply chain expectations, estimated impacts of tax and other regulatory reform, product releases, new industry partnerships 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 the impact from COVID-19, including the 2022 outbreaks in China, the Russian war with Ukraine, including any related international trade restrictions, along with continued reopening and recovery efforts within the relevant global supply chains and among our customer base, levels of orders for the company and the activity level of the automotive and semiconductor industry overall, the ability to record revenues based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part shortages, 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. And now I would like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.

Thank you very much, Jordan. I’ll begin my formal remarks by addressing our 2023 Second Quarter Financial and Operational performance, and then I’ll turn the call over to Joel Hatlen for a more detailed look at our numbers. With us today on this earnings call for the first time is Gerry Ng, who joined the company as our Vice President of Finance on July 1. Effective August 16, 2023, he will become our CFO succeeding Joel Hatlen, who as we previously disclosed is retiring after over 30 years with the company. Until that time, Joel will be handling the full second quarter reporting cycle and driving a smooth transition, including starting in an advisory capacity after the end of the second quarter reporting cycle. On a personal note, I would like to thank Joel for his many years of service to the company and its shareholders and to acknowledge his professionalism, expertise, and unparalleled character. He has played a pivotal role in defining who we are today and setting us up for our future course. Our staff, customers, partners, and shareholders hold him in the highest regard, and on behalf of everyone, we wish him well in retirement. As for our incoming CFO, Gerry Ng has really hit the ground running, and we look forward to his contributions moving forward. With that, Gerry, would you like to introduce yourself?

Thank you, Anthony, for the introduction. I am very pleased to be joining the Data I/O team and contributing to the company’s continued growth and operational success. The finance team has been tremendously supportive, which I believe is a testament to the tone set by management, and we have a comprehensive plan to assure a seamless transition. I look forward to speaking with all of you in the future. With that, I will pass it back to Anthony.

Thanks very much, Gerry. Now, let’s take a look at our numbers here. The second quarter was very strong, which builds on the momentum from our first quarter. Similarly, we maintained our long-term outlook that benefits from secular growth catalysts in automotive, industrial automation, and the Internet of Things. I’ll start with our SentriX platform where we continue to see strong and increasing recurring revenues. Numbers were strong in Q2 as customers are going into production or increasing production levels as demands for security-enabled IoT devices continue. We also received a repeat order on our SentriX platform in the quarter. We’re also benefitting from solid demand in the industrial sector. This market is being driven by robotics, tractor automation advancements, and increased demand for security. We also see strength in automotive electronics, which is the market where we generate the majority of our revenues, and it's clear we’re fully benefitting from demand for automotive electronics. This is a long-term continuing growth opportunity where analysts forecast semiconductor growth at 10% to 15% compounded annual growth rate through at least the end of the decade. The midpoint of that growth, about 12% a year, triples the size of our market. On top of this, we believe everything will need to be secured as IoT grows, creating SentriX’s opportunities for us in both markets. Our business model delivers strong operating leverage of about 40% to the bottom line for every dollar of revenue. For the markets we serve, we’re the definitive leader and continue to strengthen our position at the top through new customer wins and investments in our products. Let’s take a look at some of the key numbers contributing to our Q2 results. Bookings were $7.6 million, growing by about 32% from the first quarter and 19% from the second quarter of last year. We added five new customers in the second quarter, which now brings us to 15 new customers in the first half alone. This is on top of at least 20 new customers in each of the last two years. Witnessing Q2 included a global OEM leader for electric vehicles. We're benefiting from very strong demand, excellent products, and an improved supply chain for the automotive industry. Our financial performance for the past four quarters shows the progressive recovery from supply chain and COVID-related challenges in prior years. Q2 is an easy comparison to one year ago when we were locked down in China for much of the quarter. You'll recall that we estimated this shift was between about $1 million to $1.5 million of revenue from Q2 to Q3 of last year. Even including that adjustment, we’re up substantially year-over-year in revenue, bookings, and gross margin. Regionally, we're continuing to see strong reshoring effects to North America, and we also saw strength in EMEA, as indicated in our first quarter call. China has been slow in the first half, and we're expecting better results in the second half there. It's important to reiterate that demand for Data I/O products and services in automotive electronics is primarily driven by the semiconductor content per vehicle and the associated long-term growth. Having said this, strong unit momentum for vehicle growth in North America complements the secular growth in semiconductor consumption for autos and is contributing to our strength. Third-party sources confirm strong automotive silicon demand and strong OEM demand overall within the automotive market. We've heard interesting results from Ford today. We also saw an interesting report published by the Wall Street Journal a couple of weeks ago where it estimated that new car sales are up 13% during the first half of the year, exceeding industry forecasts. Strong unit growth has been complementing double-digit secular growth in silicon consumption per car, and this combined creates a very encouraging environment for our business, as over 63% of Data I/O sales are in the automotive electronics industry. In addition to Ford, many automotive OEMs reported strong demand in the quarter. Toyota North America unit was up 7%. GM was up nearly 19% including strong EV growth. Mercedes said its battery electric car sales more than doubled in Q2. And all of these companies reported an improved silicon supply chain. In looking at other key players in our world, Teradyne, a semiconductor test equipment provider, reported strong sales to automotive customers in their Q2 results. SD Micro reported strong Q2 results, again highlighting the growth driven by automotive and industrial markets. While the automotive and industrial markets are strong, we're paying particular attention to EV developments as there are significant growth catalysts for us all. Higher demand is based on consumer sentiment, regulatory stimulus, and new models being added almost daily by automotive manufacturers to their portfolios. In addition to EV, we're also seeing some changes under the hood, so to speak, in automotive electronics. We're seeing the early days of the software-defined vehicle, which includes a fundamental structural change to more compute power in fewer domains within the automotive electronics market. This gives us a great opportunity as the programming leader to continue to expand our business in this area, as all of these changes require programming at increased speeds with greater amounts of code and data. Data I/O is the gold standard for flash programming to address this demand in the auto industry. The smart vehicle architecture with domain controllers is an exciting growth opportunity for us all. With that, I'll turn it over to Joel Hatlen for a more detailed look at the numbers.

Thank you, Anthony, and good day to everyone. I'll start with the balance sheet and then move to the income statement. However, in my commentary today and to set the stage for Gerry in the third quarter, we'll focus on specific points of interest and allow you to review our press release for earnings for the comprehensive review of the second quarter financials. Data I/O’s financial condition remained strong in the second quarter with $11.9 million in cash, still up $400,000 from $11.5 million on December 31. Cash and working capital at $18 million were approximately the same as on March 31. Receivables and inventory both declined from the end of the first quarter, while inventory had been elevated in 2022 to address potential shortage risks. We no longer see the same exposure, so we are managing operations to reduce inventory levels going forward during 2023. Days sales outstanding or DSO, a receivables collection measure, was at 42 days as of June 30, 2023. This is better than our target range. As Anthony mentioned, our bookings for the quarter were quite strong and were at the highest quarter level in two years. For the first half of 2023, bookings were $13.3 million, up from $12.6 million in the first half of 2022. Our backlog on June 30, 2023, was $3.8 million, up from $3.2 million on March 31, 2023. As we have noted in the release, a larger share of the backlog is scheduled for Q4 delivery than is typical. Automotive electronic orders represented 63% of year-to-date bookings and continue to be our primary addressable market; for comparison, 61% of our bookings were derived from the automotive sector during the year 2022. On a geographic basis, international sales represented approximately 86.3% of revenue for the second quarter of 2023 compared to 89.2% for the second quarter of 2022. Gross margins at 59.1% in the second quarter of 2023 were up from 57.8% in the second quarter of 2022, with margins improved by higher sales volumes on relatively fixed costs. Product mix, including a recognition of previously deferred rental income as a purchasing credit, and our channel mix offset in part by less favorable factory variances. For our channel mix, with direct sales from the Americas and parts of Europe being stronger in the second quarter of 2023 and where we can account for selling commissions in our operating expenses, we show a higher level of gross margin as a percentage of sales. Some of the other factors that came into play in our second quarter impacted expenses compared to our first quarter run rate. These include about $80,000 in additional R&D expenses as compared to the prior quarter as we encourage spending on outside services in support of our product lines. Selling expenses in SG&A were about $60,000 higher due to a higher mix of direct sales as discussed earlier. We had additional one-time IT project and support spend as well as hiring resulting in $110,000 of additional SG&A. We had a non-cash expense of $60,000 for annual stock-based compensation relating to original grant estimates of forfeitures. Other factors in the second quarter, which were significant relative to the second quarter of 2022, our second quarter net interest income was up $47,000 compared to the second quarter of 2022 due to higher interest rates applied to our higher invested cash balances. Incentive compensation was $100,000 compared to none in the 2022 period due to that period's loss. Income tax on the profits of foreign subsidiaries, which are not shielded by our U.S. corporate NOLs, resulted in second quarter income tax expense of $109,000 versus $35,000 in the first quarter and $61,000 in the second quarter of 2022. Currency gains based on the following U.S. dollar were about $196,000 in the second quarter of 2023 as compared with a loss of $74,000 in the first quarter of 2023, and on a strengthening U.S. dollar $130,000 in the second quarter of 2022. Expenses ran a little hotter in the second quarter and we have an eye on it. Adjusted EBITDA earnings of $869,000 in the second quarter of 2023 compares with adjusted EBITDA earnings of $502,000 in the first quarter of 2023 and negative adjusted EBITDA of $65,000 in the second quarter of 2022, so the year-over-year differential was over $930,000. We had 918,875 shares outstanding on June 30, 2023. No NOL's on June 30, 2023, stood at over $22 million. Overall, we remain very strong financially, and continue to have no debt. Looking forward, with the high level of activity in our sales funnel and fundamental growth catalysts, as Anthony discussed in his remarks, we continue to plan for double-digit revenue growth in 2023. Gross margins are expected to continue to be in the range of mid to high 50s throughout the year. Operating expenses for the year are now expected to be modestly elevated given some of the inputs from the second quarter along with higher sales commissions, incentive compensation, and the impact of currency changes. That concludes my remarks for the second quarter of 2023, but before we open up the call for questions, I'd like to comment on my retirement. I am very happy that we've appointed Gerry Ng to replace me and I'm confident that he and the team will go forward to great success. While I look forward to spending more time with family, I must say that I truly enjoyed the people and the passion shared by the Data I/O team for the past 32 years. We absolutely changed the face of programming, first in the early 2000s with the mobile phone industry and more recently and into the future for the automotive electronics and the IoT security markets. It's been both challenging and rewarding as we endeavor to create value for customers and shareholders alike. I am grateful for the experiences and will miss all of you, including you, the members of our community. I thank you and wish you all well. With that said, operator, will you please start the Q&A process?

We will now begin the question and answer session. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Kevin Garrigan with WestPark Capital. You may now go ahead.

Yes, hi, good afternoon, guys. Congrats on the strong results. Gerry, congrats on joining the Data I/O team and all the best for retirement, Joel.

Thank you.

Yes, absolutely. Just to start off, Anthony, I think in the past you had noted that SentriX had about 20 customers. Can you kind of give us a sense of that number today and the five new customer wins, does that include any new SentriX customers?

Yes, Kevin, thanks very much for the comments. On the SentriX, I mentioned earlier that we got our repeat order in the quarter, so that's to add to it. I also focused on the fact that the units that we're seeing through some of our partners are up pretty sharply. So those are the encouraging things on SentriX for the quarter. I also want to comment to clarify Joel's comments. We talked about the double-digit growth and margins and expenses. I just want to make sure it was clear he's referring to the full year with those comments.

Okay, got it. That makes sense. And then the global vehicle OEM that you guys won as a customer, how long were you engaged with that customer before they decided to actually become a customer, and what would you say was the draw?

Well, we've been engaged with the OEM customer that we referred to for quite some time. I think the reason that we won the business with them is the same reason we win the business with the Tier 1s and with EMS companies going into automotive. We're the global leader in automotive. We understand the needs of the automotive industry from not only high-quality programming systems, but the ability to deploy those systems through a resilient supply chain to five continents around the world. The ability to service those systems, the ability to add new components to the systems, and to respond if there's an issue because it's very costly for the automotive supply chain to have any kind of issue that lingers. So the same reasons why we have 18 of the top 20 Tier 1s are the reason we were able to add this automotive OEM. We don't have permission to use their name, but you would certainly know who they are through our list of customers.

Okay, yes. Now, that makes total sense. One for Gerry if I can, and then I'll hop back in the queue. Gerry, congratulations again on joining the team. Just what were the top two or three things that attracted you to Data I/O?

Yes, thank you. First and foremost, as Anthony indicated, Data I/O is the industry leader in this particular market and with the high growth potential of the automotive industry, it was an easy decision for me to join the team and continue to contribute to its growth and operational excellence.

Our next question will come from David Marsh with Singular Research. You may now go ahead.

Hi guys, congratulations on the quarter and just to echo the previous callers' comments, Gerry, welcome and Joel, congratulations.

Thank you.

Thanks, David.

So I wanted to start, Anthony, your commentary in your prepared remarks as well as the press release just talking about China and the first half being a slower recovery. But it sounds like your expectations for the second half are for demand to pick up over there. Could you put a little bit more color and perhaps some numbers around that in terms of maybe percentage of revenue or just anything of that nature that would help us understand how slow it has been in the first half and how much you're expecting it to pick up in the second half?

Sure. David, I probably won't go into the level of detail you want on the call, but I think what we saw was what you probably heard from a number of other companies. There's sort of an expectation, you know, okay Q1 is going to be tough and then it'll sort of snap back. We haven't really seen it snap back. Now, having said that, we expect Q2 to be better than Q1, and we expect Q3 to be better than Q2, but I think it will be more steady and measured as opposed to a V-shaped recovery. Having said that, China is the world's largest automotive market and the world's largest market for electric vehicle sales, so think about three out of every five electric vehicles getting sold in China. So it's a huge contributor, and from our standpoint, just think of what the numbers could look like when China is firing on all cylinders, if you can use that analogy for an EV car, which we expect will happen over time.

Yes, that's pretty helpful. I certainly appreciate that you can't get too granular. And then just the other question I had is gross margins in the first half really knocking it out of the park, up above 59% in both quarters. I'm guessing that that's somewhat driven by mix. I was hoping maybe you could comment a little bit on that, and I noticed the very subtle change in your guidance for the full year where you had previously been guiding mid-50s for the full year, now mid to upper 50s. Should we start thinking in that direction that the rest of the year could in fact look like the first half towards the upper 50s and could just give us some clarity around what drives that gross margin?

Yes, I think, David, we basically saw that our guidance has stayed in the mid to upper 50s, and that's really what it's been all year long. But we have benefited from a number of situations this year where the mix of both customers and channels has been relatively favorable for gross margins. By that I discussed how the Americas and parts of Europe that we sell to directly contribute a better gross margin, having a little bit more operating expenses for selling commissions instead of distributor discounts. So that's a margin benefit. We had some product mix, particularly a deferred revenue from a lease purchase option that we recognized during the quarter that helped, and I'd say the last piece was really, just pure sales volume as opposed to a year ago, where the sales volume relative to fixed factory costs was another benefit in comparison.

Our next question will come from Matt Winthrop with Equitable. You may now go ahead.

Hello, how are you, Anthony?

Great, Matt. Thank you.

Fantastic. I was curious in your recent release and listening to your comments. Data I/O sales to the marketplace regarding automotive is it more on volume output or when a car line introduces a new vehicle? Ford has a new electric vehicle. Is a new vehicle or a new introduction to the marketplace more favorable to you than more volume of just sales?

That's a really good question, and let me answer it this way. The overriding factor is that a model that you introduce this year has more silicon in it than last year's model, which has more silicon in it than the prior year model. Every time the auto companies refresh their product line, the car will have more silicon in it, and that will mean there's more total demand for programming. So, it is this long-term secular growth of 10% to 15% a year that McKinsey has published. A lot of the automotive semiconductor companies have published, that's their target for the silicon growth. And that's really the fundamental driver for the growth in our business. We're extremely well positioned inside the automotive electronics industry, you know with the numbers I mentioned earlier on 18 of the top 20 Tier 1s, increasingly automotive EMS companies, and we're going to be focusing more on some of the OEMs going forward as they get more focused on their own silicon. So it's really just that simple. There's more stuff; there's more silicon going into the car and every month there’s another model out there that’s replacing a model, and the new model has more silicon and more programming, and we get a piece of that most likely.

That's a good thing, and that's why I asked you the question. I'm going to sort of back up on this in the SentriX world because you and I have talked about this. I noticed in your prepared remarks you didn't mention AI at all, you didn't mention anything regarding that, but I know that there is a connection there. Is there anything that you can add in color that all of what's going on is going to benefit you guys indirectly or directly?

Sure. I may be the only person in the past quarter who didn't mention AI during their earnings call. However, our approach to AI is clear. To effectively work with AI, it's crucial to have a strong training base, especially in machine learning environments. The data structures used for training AI and developing algorithms must be well-understood, secure, and tamper-proof. Security is particularly vital in the AI space. We have clients in this domain utilizing SentriX to safeguard their systems, ensuring protection not just for algorithms but also for the data streams coming in and out. As AI adoption grows, awareness of security issues will also increase. In a typical scenario, bad data leads to poor outcomes, and in the AI realm, if incorrect data is used for training, the consequences can be severe.

Our next question will come from Chris Lukowski, a Private Investor. You may now go ahead.

Hello, congratulations on great results.

Thank you.

I want to ask about China. It seems that even though the Chinese economy is well-publicized to be sort of slowing down, electric car sales are doing quite well. So how are they programming those cars? Are they using kind of like older legacy programmers?

Well, I think what we've seen in China is we have a tremendous presence in China in the automotive industry through Tier 1s and in some cases OEMs. So, I think we're pretty happy with our penetration in China, and we think that as that market continues to grow, we'll participate in it. I think you'll recall we said last quarter that there was some shifting going on in some models; there were new emission standards coming into effect in July, and we think that had some impact in the manufacturing process. Dealers wanted to get some of the older cars off their lots because they would not be able to sell them once the new emission standards came in.

Okay. So probably maybe they're just not selling the new models as much. All right, and you do expect China to improve in the near future?

Yes, we believe China will be better in the second half than the first half.

All right. And in general, I want to ask whether you view yourselves mostly dependent on the number of memory chips in cars or the overall memory in cars? In other words, as software in cars gets more complex and they need more gigabytes of flash to store it, would that help you?

Yes, Chris, you've raised an important point. When discussing the overall semiconductor content, I'm usually referring to the dollar value, but I could also mention the number of bits that need programming. We operate in several markets within automotive electronics. Infotainment has likely experienced the most significant growth in total bits, with more and more data requirements reaching 30, 40, and 60 gigabytes. This is not only due to the increasing size but also the shift from EMMC to UFS technology. We can expect to see larger memory chips, particularly in software-defined architectures or domain controllers. There's also considerable demand for microcontrollers, especially as companies incorporate more active safety features into their vehicles. Therefore, we're looking at a mix of factors: a greater memory footprint, more bits, an increase in systems overall, and added security measures.

There are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you very much, operator. I'd like to thank everyone for joining the call today. And again, thank you, Joel, and welcome aboard, Gerry. With that, this call is now closed.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.