Good afternoon everyone and welcome to the Data I/O Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. At this time, I would now like to turn the floor over to Jordan Darrow, Investor Relations. Please go ahead.

Thank you, operator, and welcome to the Data I/O Corporation third quarter 2023 financial results conference call. With me today are the company’s President and CEO, Anthony Ambrose, and Chief Financial Officer, Gerry Ng. Before we begin, I'd like to remind you that statements made in this conference call concerning future revenues, results from operations, financial position, markets, economic conditions, supply chain expectations, estimated impact 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 global and geopolitical events, international trade regulations, order levels for the company, and the activity level of the automotive and semiconductor industry overall, 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'd begin my formal remarks by addressing our 2023 third quarter financial and operational performance and then I’ll turn it over to Gerry Ng for a more detailed look at our numbers. We have a strong year-over-year revenue growth of 25% through the first three quarters of the year with more recent challenging business conditions in Q3. As I mentioned in the release, the third quarter was mixed. We won some very exciting deals and saw strength in adapter bookings, but system bookings were soft as customers deferred capital purchasing decisions into the fourth quarter. We also saw customers move delivery dates from Q3 to early Q4, which we do not normally see. For whatever reason, whether it be the strike in North America, interest rates, or people coming back from vacation, it appeared that customers wanted to take another look at their capital purchase decisions and did so by pushing from September into Q4. Now, what's interesting is Q4 is starting out extremely well as we booked five systems already in October. Several of these systems originally were planned for Q3 bookings but actually had the bookings occur in October. I was also happy this morning to see the news that Ford and UAW have reached a tentative agreement likely ending their strike. This will remove some uncertainty in the North American market. When we look at Q4, given all the puts and takes, we have a strong sales funnel that supports much stronger bookings than we saw in Q3 and operations that support stronger revenue than we saw in Q3, provided we get the orders in time to ship this year. Despite the short-term gyrations, the driving forces and long-term growth thesis for Data I/O remain intact. Advanced semiconductors and microcontrollers are finding their way into more products and impacting virtually every business in measurable ways. Programming is becoming more complex and the amount of code is continuously increasing. Our plan is to grow revenues in growing markets, including automotive and industrial, continue to drive more revenue from consumables, software, and service; and deliver 40% operating leverage on that revenue growth. Automotive represented about 63% of the bookings in the third quarter, consistent with our year-to-date numbers. Within automotive, we continue to see strength in EVs globally. And we like EVs, not just because they're electric vehicles, but because the platforms are newer and they tend to have more electronics per car as they have comprehensive IVI, ADAS, and other features. The content in EVs is estimated to be about two to three times that of semiconductor content in other vehicles, and the programming requirements continue to grow in these EVs. Regionally, we continue to see strength in North America. We have seen softness in EMEA. China is recovering from a soft first half, recovering slowly and steadily, which we believe will continue based on our channel checks. In the third quarter, we added four new customers, which now brings us to 19 for the first nine months of the year compared to 20 of all last year. Within those four new wins, we had two new EV factories internationally. And one of the new customers in the third quarter represents a major win for us on SentriX. We're excited to move further into expanding the SentriX market by winning our first major solar energy customer on our SentriX security deployment platform. This continues to make progress for SentriX as a leading technology platform, now including AI, EV, data center utilities, industrial, and now solar markets. That's a nice bridge here as we go from solar to sustainability and ESG. Green Power, ESG and climate disclosures are becoming increasingly important for public companies like Data I/O. For us, we see three basic requirements for our environmental strategies. First, as a leading supplier to the automotive industry, we must comply with purchasing requirements set forth by our largest customers. Many of our large EMEA-based Tier 1 automotive customers and many industrial customers have put forth their own ESG plans, calling for a significant reduction in greenhouse gas emissions from their suppliers. Second, as a public reporting company, we must comply with appropriate rules and regulations set forth by the SEC and NASDAQ. There are new disclosures required for companies starting next year. As a smaller reporting company, these will become effective for us starting next year and continue to increase in disclosure requirements over the next several years. And finally, as a good corporate citizen, we need to look at smart ways to be more environmentally friendly, consistent with the good use of cash. The importance of ESG and how it impacts our business operations will be the first subject in our next fireside chat series. The session will be entitled sustainability strategies for the auto industry and will be released and available for viewing later this month. In that session, you'll hear how we've made outstanding progress in our Scope 1 and Scope 2 emissions well ahead of regulatory and supply chain requirements and are in the programming industry and sustainability. In the months that follow, we plan to release five additional fireside chat sessions covering global perspectives on critical topics and emerging market trends from automotive to semiconductor growth opportunities. In addition to the fireside chats, we've expanded our investor communications content and channels with new technology discussions on LinkedIn, and we also recently joined the Weebo Corporate Connect Service platform to enhance our communications with tech-savvy retail investors. Weebo will provide us direct exposure to the second-largest app-based investment and trading platform. As you can tell, we're excited for the future growth of Data I/O and look forward to sharing our progress in perspective with you and also with these new channels. This will include some fresh ideas from Gerry that go well beyond our operational spending discipline demonstrated in the third quarter. He's focused on our ability to drive margins, improve cash flow, and invest in future growth. With that, I'll turn the call over to Gerry for a little bit more detail on the numbers.

Thank you, Anthony, and good day to everyone. I look forward to my first and future earnings updates after taking over as CFO on August 16. I will start with the balance sheet and then move to the income statement. My commentary today will focus on specific points of interest and allow you to review the earnings release for a more detailed understanding of our Q3 financials. Data I/O's financial condition remains strong at the end of Q3 with $11.9 million in cash, up $357,000 from $11.5 million at the beginning of the year. Cash and working capital at $18 million had a comparable increase of $520,000 from $17.6 million at the beginning of the year. Receivables at $4.9 million increased $175,000 from the previous quarter. Day sales outstanding, or DSO, was at 39 days at the end of Q3. Past due receivable balances greater than 30 days remain very low at less than $30,000 on September 30. Payables at $1.1 million decreased by $468,000 from the previous quarter. Moving on to inventory. We finished at $6.4 million, a decline of $476,000 from the previous quarter. Inventory had been intentionally elevated in 2020 to address potential shortage risk. Earlier this year, we went to a more neutral supply chain strategy, improving supply chain conditions, disposing of material for end-of-life products and our lean operational initiatives contributed to our overall reduction. Optimizing inventory levels remains a top priority, while balancing anticipated customer demands going forward. Moving to the income statement, revenue at $6.6 million declined $651,000 from the prior year on lower bookings performance in the current quarter and strong shipment recovery in Q3 of the prior year due to the supply chain disruption that occurred in the first half of the prior year. Revenue through the first months of this year was $21.2 million, up $4.2 million or a 25% increase from the prior period. Our Q3 ending backlog was $2.5 million, down from $3.8 million from the previous quarter. As Anthony indicated, automotive electronics continues to be our primary addressable market at 63% of year-to-date bookings. Gross margin at 54% in Q3 was down from 59% in Q2, due primarily to lower sales volume, lower inventory levels, and the related absorption of relatively fixed costs for our manufacturing and service operations. The good news is direct material and other variable costs declined in line with revenue change. Operational expenses at $3.6 million increased 5% from the prior year, with R&D representing the majority of the increase, while G&A remained relatively flat. Rate strides were made in reducing our Q3 costs with a decline of $626,000 from the prior quarter. A critical review of spending was performed, non-critical costs reduced or eliminated, and operational efficiencies increased. Excluding costs related to sales volume changes, we expect to maintain this strong operational discipline in Q4 and 2024. Currency transaction impact was minimal in Q3, resulting in a $15,000 loss compared to a $307,000 gain in the prior year from a strengthening dollar. Net loss of $53,000 in Q3 compared to a net income of $847,000 for Q3 of 2022 was due largely to the change in revenue and lower FX gain from the prior year. Net income remains positive, however, at $342,000 through nine months compared to a net loss of $1.6 million for the similar period in 2022. Adjusted EBITDA was $400,000 in Q3 and increased to $1.8 million through nine months of this year. This represents a year-over-year improvement of $1.3 million. Overall, we remain very strong financially with no debt and in a good position to navigate market dynamics. We have returned to profitability on a consolidated basis, but we will be able to take advantage of our NOLs, which stood at $15 million on September 30. I am excited to be part of the Data I/O team and look forward to working and partnering with Anthony and our global team to continue improving our operational and financial performance. This concludes my remarks for the third quarter of 2023. Operator, would you please start the Q&A process?

Ladies and gentlemen, we will now start the question-and-answer session. Our first question today comes from Kevin Garrigan from WestPark Capital. Please go ahead with your question.

Yes. Hey good afternoon and thanks for letting me ask a question. On the EV front, and congrats on the new EV factory customers, not saying that you'll supply every factory out there, but is it a safe assumption that you'd supply kind of one system per factory? Or is there a possibility that multiple factories would use one system like a programming center or something like that?

Yes, it's great to hear from you, Kevin. Generally speaking, we provide more than one system per factory in the automotive sector, based on our analysis. Some customers have only one system per factory, while others have as many as ten. So, the average is definitely more than one. We anticipate growth in automotive primarily from our efforts to acquire new factories. As customers expand in various regions, we aim to be their preferred choice for programming capacity in those new facilities, which we believe is a strong indicator of their future demand. Additionally, our long-term customers are increasing their capacity orders as more electronics are integrated into their vehicles, necessitating expanded capacity. Therefore, it's essentially a mix of both factors.

Okay. Got it. Got it. That makes sense. And then are you getting a lot of prior customers that already have a PSV system that are asking to add SentriX capabilities?

Most of our SentriX demand today continues to come from customers who already have the system. This includes our programming center partners and a few non-programming center customers.

Okay, perfect. And then just one last quick question. Looking at your customer additions, you started the year by adding 10 customers in Q1, and that number has decreased as the year has progressed, but you are still on track to exceed your 2022 customer additions. What is holding some potential customers back?

I think the numbers in any quarter are going to have some lumpiness to it, that's the nature of our business. That's why we give you the data on the quarter and then also try and provide some context with the year-to-date numbers as well. For us in Q3, we probably would have had more new customers if people had bought more systems. As I mentioned, it seemed like people just didn't want to place any orders towards the end of the quarter. And then once the quarter flipped over, it's like the spigot turned back on. I don't know whether they didn't want to have it on their books. I don't know whether it was the uncertainty created by the factors I described earlier, strikes, other stuff as well, interest rates. But at the end of the day, we believe that there'll be more capacity demand because there's more silicon going into cars and it needs to get programmed. It's not really any more complicated than that.

Okay. Perfect. Thank you very much.

Thanks, Kevin.

Our next question comes from David Marsh from Singular Research. Please go ahead with your question.

Hey guys. Thanks for taking the questions. I'm trying to understand your comments on China. It seems like there is a recovery occurring, but it doesn't appear to be strong or fast. Could you provide us with more details on that and help us understand?

David, I think 'tea leaves' is probably an appropriate metaphor for the future forecasting there. I think you nailed it. That's exactly what I'm trying to say. We've had continuous improvement throughout the year, but it's at a level of business that's lower than last year. We still haven't gotten to that level. I think you're going to continue to see more recovery there. And consistent with the fact that China produces and consumes an awful lot of cars, 30% of them are EVs.

That's helpful. It would be really beneficial to have a clearer understanding of what that pace will look like going forward, but I realize it’s quite challenging to predict.

Yes, I think there's a lot of third-party information there. I mean you can sort of pick the forecast you want. A lot of people are nervous about the property market in China. A lot of people are nervous about are people continuing to still build there. We just had a trade show there, very well attended, probably the best attendance in three or four years. And as I said, I would expect a continuous steady improvement. I don't think you're going to get a massive sudden uptick, but I think it will be better as we go forward.

Got it. Got it. That's really helpful. And then just as my follow-up, I guess one of the things that took me by a bit of surprise, and I think you addressed it a little bit, but I just kind of wanted to pull the thread on it. Your backlog is down from $3.8 million at the end of Q2 to $2.5 million at the end of Q3, but based on your commentary, it actually sounds like bookings have picked up as we've entered the new quarter. So, just with all of that information, I mean, I'm reading into your commentary that Q4 could be sequentially better, but I just was wondering if you might just help us with the information that you have today just kind of get a better understanding around that.

Yes, I think the tough thing for us is we don't give quarterly guidance. But as I indicated in my remarks, I certainly think the bookings will be better in Q4 than Q3, and the revenue, given our sales funnel that we still have in the funnel that has not yet booked, we have an opportunity to have a strong revenue quarter as well, provided the timing is such that we can book and ship some of those systems. So, the funnel looks good. We just have to deliver on it and we're off to a good start.

Great. That's helpful. Thanks. I'll jump back in the queue.

Thanks a lot, Dave.

Our next question comes from David Kanen from Kanen Wealth Management. Please go ahead with your question.

Hi, thanks for taking my questions. I've got a few. If it's alright to modify the rules a bit, I would appreciate that. The first one is regarding the five system orders noted for the quarter. What are the average selling prices on those systems?

Not going to get into that, Dave. They're consistent and typical with prior quarters, nothing strange either way.

Okay. And for the quarter, what were adapter sales?

The exact number we'll put in the Q, but I know the things were up pretty well quarter-on-quarter. Jerry, do we have the exact adapter numbers? Jerry will take a look at that and we'll let you know. What's the next question?

Okay. On operating expenses, we're up year-over-year. Revenues are down year-over-year. Gross margins are down. It seems like an unsustainable posture going forward. Can you talk about opportunities to trim costs and to be more efficient so that when we do report good revenues, we can get some leverage to the bottom line and if possible, quantify that? I'm assuming this is in the works. But if not, I would be quite disappointed.

I think Jerry has some ideas on spending which he began implementing in Q3. I'll allow him to discuss that shortly. However, I want to clarify that revenue has increased by 25% year-over-year for the first nine months. Yes, spending has also increased, more than we would prefer. Jerry is focusing on spending control and has already initiated that process in Q3. Our goal is to continue delivering on our operating leverage, which is currently around 40%, but we are aiming for improvement. Your comments about how we can become more efficient and enhance operating leverage to positively impact the bottom line are valuable. So, Jerry, what was our revenue for the adapters in Q3?

$1.8 million.

$1.8 million.

Okay. And then last question. This seems like an inconsequential item, but it makes me question the seriousness and stewardship that you're approaching the business at the current time. Interest income for the quarter was $41,000. Now, this may seem trivial, but what it tells me is if I annualize that, on average, you're getting about 1.4%, a three-month T-bill is at 5.3%, a six-month bills is at almost 5.6%. You can get a multitude of money markets paying 5.25%. Why is that? And going forward, is that something you're going to pay attention to? Because on an annualized basis, we're talking about giving away according to my math, like $400,000, am I wrong? If so, please correct me, but if you can give an explanation on what we're doing going forward.

Yes, David, I can highlight that. As you know, we do have a fairly strong cash position. However, we do have operational needs, both in the US, in our Shanghai manufacturing facility, and in Germany. We do have a very active method of deploying unneeded cash to maximize the interest earnings. But it's not clearly the case where we deploy everything 100%. We are obviously looking at that and balancing operational needs as well as the earnings opportunity.

So, Jerry, we're clearly looking at that, but also my understanding is that if you look outside the US, the interest rates available on cash deposits may not be the same as the current high rates that we enjoy in the US.

Correct.

On a blended basis, we probably can't reach 5%. However, we're definitely considering it.

Yes. And we are currently using nightly sweeps. We are also deploying some of our money into short-term investments. So, we are obviously looking at it and on continuing to maximize the opportunity where we can.

How much of the $11.9 million is in the US?

Approximately half.

Yes. So, even on that, we're not maximizing it. I mean, you can put your money in the money market and get 5.25%. I'm sure it's better than 1.4% in Europe and in China? I mean across the globe, there have been numerous interest rate hikes. So, just pointing it out, it would make me feel better if you guys were maximizing that and also taking a look at every line item on the expense sheet.

Understood, Dave. Thanks.

Thank you.

Our next question comes from Michael Cooper. Please go ahead with your question.

Good afternoon. Anthony, could you provide more information about the SentriX funnel? I've been monitoring its sales progression over the past few years as the product has been improved and I've learned more about the market. It seems like you've shifted your focus towards the design aspect. However, I'm still not seeing a significant increase in revenue from SentriX quarter after quarter. I hope that behind the scenes, your team has been actively working on the design side over the last several quarters, and that progress is being made in the funnel. I understand that this takes time, but could you share some metrics to help us understand how the market opportunity for SentriX is evolving?

Sure. I'll start, Michael, by saying we don't break out SentriX separately. But in my comments, our pay-per-use revenue this year from units running through machines that are under that type of contract is up pretty close to 100% year-over-year. So, that's a good indicator on the revenue side. On the designing side, I didn't give you a size estimate of the win here in the solar market, but it's a pretty hefty win. Channel partners believe it's a mid-six digits, which would be a very, very nice volume run rate for us on the SentriX platform. Having said that, we continue to refine our marketing to better tailor our message and focus and we have customers that we're engaged with now on SentriX opportunities in automotive, industrial, and other markets. The key thing for us is to find the right person in the company to talk to about SentriX. And we've learned over the years that person is not the person we usually talk to for data programming. And so part of the problem and the strategy is, okay, if we have these relationships, how do we use them to find the right people in the company and talk about SentriX. And that's what we're doing on the marketing side.

Okay. Excellent. Thank you. And that $0.5 million potential number on your solar contract is very encouraging.

Yes, I guess a mid-six digits.

And ladies and gentlemen, at this time, I'm showing no additional questions. That will conclude today's question-and-answer session. I'd like to turn the floor back over to the management team for any closing remarks.

Well, operator, thank you very much. I'd like to thank everyone who joined the call and asked questions today. We look forward to sharing the developments with you as we go through Q4, and we'll be at the Productronica trade show in Germany in November in Munich. We also have an Investor Summit Group's Virtual Conference and the Singular Research Best of the Uncovered Conference in San Francisco in December, and we'd love to see you there. If you have any questions on that, please send a note to Jordan Darrow. With that, I'd like to conclude today's call. Thank you very much.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.