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

Thank you, operator, and welcome to the Data I/O Corporation fourth 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 on 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 over the call to Anthony Ambrose, President and CEO of Data I/O.

Well, thank you very much, Jordan, and welcome, everyone. I will begin my formal remarks by addressing our 2023 financial and operational performance, and then I'll turn the call over to Gerry Ng, our CFO, for a more detailed look at the numbers. We delivered very strong financial performance in 2023 with a 16% growth in revenue and a return to profitability. We also experienced encouraging business momentum which has carried over into 2024. A quick summary of 2023 shows that our top line grew 16%. The automotive market represented over 63% of our bookings in 2023. We had over 23 new customer wins in 2023, and that was worldwide and across all segments. This marks our third year in a row with over 20 new customers, many of which were marquee wins in automotive locations globally during the year. Our PSV platform for programming is now the most successful platform in the industry and has over 485 deployments worldwide. SentriX, our secure provisioning deployment platform, grew 150% in software and pay-per-use revenue in 2023 versus 2022. Gross margins for the year were nearly 58%, in line with our mid to upper 50%s guidance on gross margin for the year. Inventories declined nearly $900,000 as we unwound our COVID-era supply chain strategies. Cash grew about $830,000 for the year, reflecting operating profitability, inventory reductions, and spending controls. Finally, in terms of our strong operating leverage, we delivered increased profits with adjusted EBITDA increasing to $2.3 million for the year, up over $1 million from the prior year, and net income was positive, as I mentioned earlier. 2023 was an interesting year. Our global reach proved very positive for the year as we had excellent growth in both the Americas region and the Asian region outside of China. In Japan, we are pleased with our new partnership launched in the first part of the year with a leading company to establish the first SentriX security provisioning service in Japan, as well as a separate collaboration we formed with Nuvoton Technology to support their latest generation of IoT microcontroller products with our SentriX platform. As mentioned earlier, SentriX overall grew our software and pay-per-use revenue by 150% in the year. Additionally, solar was one of the new markets we tapped into in 2023, with multiple customers coming into production. Today, especially with AI being top of mind these days for good reasons, people continue to ask us how AI impacts Data I/O's markets. AI plays into our business in a couple of ways. First, the AI platforms need strong hardware-based routes of trust to ensure data sets for machine learning, training, and other learning are accurate and that their software is secured. This is a use case we have discussed with one of our customers, securing an AI accelerator card for the hyper cloud. We also see AI coming into play in the automotive space as we see more autonomous driving applications and other use cases, as automotive electronics become more sophisticated and centralized. In 2024, in addition to these markets, our focus will be on what we call disciplined growth. We'll continue to target the automotive, industrial, and programming center markets worldwide, while adding to this the spending discipline and focus that Gerry has brought in the second half of 2023. For growth, automotive electronics, which constitute 63% of our business, is foundational for us moving forward. As we have reiterated on multiple calls, we have applications driving the continuous increase in semiconductor content. These include Advanced Driver Assist Systems, active safety, in-vehicle infotainment, electrification, connectivity, and security. We continue to see strong growth worldwide. Even though we are a dominant supplier in automotive, people ask us how we can continue growing in automotive if we have 18 of the top 20 customers. We continue to win new customers as new entrants come into the market, we continue to win new sites as existing customers expand their factories worldwide, and we continue to win with new technologies as current and new customers expand their use of UFS flash memory in all applications mentioned earlier. Therefore, we see continued momentum in automotive moving into 2024. Not only in automotive, but also industrial and programming centers, our sales funnel has added significant opportunities in the past quarter, and it is now at its highest level in several years. This is the basis for our positive outlook for the year. Secondly, people continue to be a big asset for Data I/O. Our global team did an amazing job navigating through COVID closures, supply chain disruptions, and inflation spikes that we've faced over the past several years. We believe those challenges are largely behind us. We continue to maintain our great team and are adding to it. As you may recall, Gerry Ng was appointed our CFO during the third quarter of last year, and he is now leaving a mark on the company. I've specifically asked Gerry to focus on tighter spending controls, process efficiencies, and operating leverage, as improvements in these areas will turbocharge our financial performance as we grow the company's top-line revenues. I'll reiterate what we provided in our earnings release regarding 2024 expectations. Based on continued strength amid a stable global operating environment, we expect double-digit bookings growth in 2024. Gross margins are expected to be in the mid-to-high 50% range for the year. Operating expenses for 2024 are expected to be consistent with or moderately lower than operating expenses in 2023, excluding incentive compensation, sales commissions, and currency impacts. The combination of spending control and top-line growth is an exciting combination for us in 2024. Before I turn it over to Gerry for his commentary, I'd like to invite investors and other interested parties to listen to our recent fireside chat interviews. Late last month, we launched an interview where our CTO, Rajeev Gulati, and I were hosted by Small Cap Investor and Data I/O shareholder, Vishal Mishra of Bard Associates on the topic of AI programming and security requirements. Next week, we will launch an interview hosted by semiconductor Senior Equity Research Analyst, David Williams of Benchmark Company. We will talk about semiconductor programming growth opportunities in general. Also in April, we invite you to join us at the Annual Industry Trade Show, APEX Expo in Anaheim, California. If you're in the area, please contact Jordan Darrow if you'd like to attend as our guests. With that, I'll turn it over to Gerry Ng.

Thank you, Anthony, and good day to everyone. I look forward to my second earnings update, having joined Data I/O in mid-2023, and working with the team to enhance our operational capabilities and financial results. My comments today will be focused on key points of interest for the fourth quarter and full year 2023 performance and our perspective looking forward. Data I/O's financial condition remains strong at the end of Q4 with $12.3 million in cash, up $831,000 from the prior year. The full year cash increase reflects improved operating profitability, lower inventory levels, and higher interest earnings. Cash and working capital at $18.4 million had a slight increase of $846,000 from $17.6 million at the end of 2022. The company continues to have no debt. Inventory at $5.9 million declined $876,000 from the prior year. The change, as Anthony mentioned, addresses earlier market conditions during the COVID aftermath, and a strategy that has now unwound that increase; improved supply chain conditions and lean operational initiatives contributed to our overall reduction efforts. Optimizing inventory levels remains a top priority while balancing anticipated customer demands in 2024. Moving to the income statement, fourth quarter revenue at $6.9 million reflects lower coming-into-the-period backlog because of booking delays from the third quarter, which resulted in a decline of $397,000 as compared to Q4 2022. However, with a strong fourth-quarter bookings recovery at $7.2 million, fourth quarter revenue at $6.9 million increased $314,000 or 5% from the preceding quarter. For all of 2023, sales were $28.1 million, up 16% from $24.2 million, again reflecting continued growth in the automotive electronics and IoT industries, favorable comparison to post-lockdown recovery one year ago, and a strong backlog of $4.8 million at the start of 2023. Backlog has returned to a more normalized level at $2.8 million as of December 31 of this past year. Automotive electronics at 63% of 2023 bookings was 2 percentage points higher than 2022. Revenue remained steady with systems revenue at 58% and recurring and consumable revenue at 42% for 2023. Gross margin for both Q4 and full-year 2023 was 58%, up 3 percentage points from the comparable prior periods. The improvements were driven by a combination of higher sales volume, favorable mix of new systems, and recurring revenue growth, material cost reductions, and operational efficiency improvements. For example, lower inventory levels, which contributed to our increased cash, also contributed to lower freight, tariff, obsolescence, and carrying costs. Moving on to operating expenses, operating expenses at $3.8 million in Q4 represented two consecutive quarterly declines from the high of $4.2 million reached in the second quarter of 2023. Cost containment and efficiency improvements undertaken in the third quarter contributed to lower operating expenses and improved profitability in the second half of 2023. We continue to critically review spending, manage non-critical costs, and increase operational efficiencies. Excluding costs related to sales volume changes, we expect to maintain this strong operational discipline, which will generate near-term cost savings and longer-term operating capacity growth. Interest income growth also contributed to improved profitability was $190,000 for 2023 compared to $34,000 for the previous year. The increase was due to a stronger cash position, higher interest rates of return, and greater deployment of operating cash into short-term investments, such as sweep accounts and one to two months certificates of deposits. Net income of $144,000 for Q4 added to a profit of $486,000 for the full year, which compares to a net loss of $1.1 million for the prior year. The 2023 revenue increase of $3.8 million, the 320 basis point improvement in gross margin, and second-half operating expense reductions contributed to a net income increase of $1.6 million or 42% leverage from 2022. Similarly, adjusted EBITDA was $514,000 for Q4 and $2.3 million for 2023, again representing a full-year improvement of $1 million. Looking forward to 2024, we expect double-digit bookings growth, as Anthony highlighted earlier, to be weighted more in the second half of the year. The timing of orders and subsequent deliveries may impact our full-year revenue outlook. On a full-year basis, we expect operating expenses to decrease, which will help offset sales volume and compensation-related expense increases. As is always the case in the first quarter, our operating expenses will be significantly higher due to annual expenses, including year-end audit fees, 10-K and proxy filings, and similar public company costs. Overall, we remain very solid financially with a strong cash position, no debt, and a return to full-year profitability. I look forward to continuing to partner with Anthony and the Data I/O team in improving our operational capabilities and financial performance. That concludes my remarks for the fourth quarter of 2023. Operator, would you please start the Q&A process?

The first question comes from David Marsh with Singular Research. Please go ahead.

Thank you so much for taking the questions. First, guys, I just wanted to ask about the guidance for '24. The guidance, it's around bookings. Typically, your bookings do translate to revenue reasonably quickly. Should we assume that the double-digit bookings growth also translates to revenue growth in that relative ballpark? Or is that trying to draw too much conclusion from it?

David, that's a really good question. What we're saying with our sales funnel is we see the opportunities have gone up sharply in our sales funnel, and we believe that translates into double-digit bookings growth. The exact timing of when we get the bookings and when they turn into revenue is a little less certain. We do believe that it will be more back-end loaded from a revenue perspective overall. We think that's pretty clear across what we're hearing from test companies as well. It depends exactly on when you get the bookings and when they want the systems, but I think the expectation would be that revenue would grow a little bit less than the double-digit bookings.

Thank you. For my second question, I have a two-part inquiry. You have previously mentioned that growth is expected to come from electric vehicles. However, we are currently hearing some negative news regarding EVs, with some manufacturers scaling back production. Additionally, the recovery in China seems to be slow, and the economy is not performing optimally. Given these challenges, can you explain what boosts your confidence in providing solid booking growth guidance for the overall market? Could you also clarify what aspects are based on fact and what might be misconceptions?

So David, it's interesting. I think it was a pretty rough morning for the EV guys. I happened to turn on the business news this morning, and it seemed like they were backing up the bus over the EV guys this morning, except, of course, for Tesla and, of course, for BYD and maybe some of the other leaders. I also read that the Chinese market had cut prices pretty sharply, which is maybe not as great for them, but good for us because that should stimulate demand. I'm always a little nervous on comparisons in China this part of the year because the Chinese New Year is in a different month this year than it was last year. It would be like having Christmas shift from December to January and then wondering why your comparisons year-over-year were distorted. So, I will formulate a first-hand opinion. We will see directly on the ground, but we see people in China continuing to buy systems. We see people in China in automotive continuing to purchase service and consumables and related products. So, I don't know what to tell you other than we see what we see from our customers, and there's continued business in the market there. The other thing that I want to mention is EVs are just one of the five legs that we see as driving growth overall in automotive. We've talked a lot about them. One of the reasons we appreciate EVs is that they contain many new advanced driver assist systems or new infotainment platforms that consume a lot of programming. However, you don't need to be an EV to include those new systems. There has been no conversation regarding reducing the features in our infotainment platforms in the car; quite the opposite. When you look at everything and you look at our sales funnel, which includes automotive globally as well as industrial and programming centers, we like what we see in our funnel, and that's motivated us to make the predictions we're presenting today.

Thanks, guys. Really helpful. Appreciate it.

The next question comes from Kevin Garrigan with WestPark Capital. Please go ahead.

Anthony, for my first question, looking at the IoT market SentriX, I think in the past, you had noted that you were early to the security market. 2023, it seemed like things were kind of picking up steam with SentriX doubling revenues. Are things now starting to play out as you had originally imagined? Or are we still kind of early in the process?

I think we're in a situation where we're happy with the traction that SentriX is gaining. It's taken us a lot longer than expected, but the fundamental belief we have is that, and we've stated this before, 10 years from now, you won't be able to purchase a microcontroller that doesn't have security embedded. That represents a $30 billion market. What we've done is made some investments in the platform. Those investments are largely complete at a platform level. We still make investments to support new devices and add new features and capabilities for customers. However, what we need to focus on now is continuing to find new customers and help them understand the benefits of SentriX. Some of these customers will be new to us, while others will come to us from our programming center partners, and some will be well-known to us and will want to add SentriX capability to the systems they already have. I'm not going to declare an inflection point just yet, but 150% growth year-over-year is quite promising.

Yes, I understand that. That's impressive growth. Also, just as a follow-up. We're now two months into 2024, and you noted a few tailwinds in your prepared remarks. What kind of gets you most excited, and what keeps you up at night as you look out to the rest of the year?

What excites me is looking at our sales funnel and the opportunities we have across automotive, industrial, and programming centers. What keeps me up at night is the concern that people may end up in a situation where the world becomes a lot messier than it already is. We don't have control over that. If there were to be a significant breakdown of global supply chains, that would impact us, as it would for everyone. However, we are much more resilient than before by design. Therefore, we are taking measures to insulate ourselves, and as long as the world remains reasonably stable, we think we're in a good position.

Got it. Okay, perfect. Thank you, guys.

The next question is from Paul Xavier with Devon Capital. Please go ahead.

Hello. Thanks for taking my call. I believe some of it was already addressed by the previous analyst. We read, as you noted, all the time about the EV industry, the growth, the changes, the marketplace, and it seems like there’s new information out there from the companies involved every day. Companies like Ford are talking about how China's EV industry is becoming the biggest competition. With them wanting to expand into China, Mexico, Latin America, and other markets, is there any more color you can provide on your operating position and where you see this growing from an automotive electronics standpoint?

Well, thank you for the question. I share the view expressed by Ford's CEO and others that the most significant threat in the Americas region is likely from very low-cost imported electric vehicles from China. For us, that's partially a threat but also an opportunity. We believe we are leading in supplying the automotive electronics industry in China because we've had a focused strategy in that region for a decade. As those companies grow and expand, we want to be well-positioned to grow and expand alongside them. Our goal is to be a preferred supplier of programming for the auto industry wherever it may be.

Great. Excellent. Thank you.

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

Hi Anthony, Gerry, thanks for taking my questions. My first question is on SentriX. Do you have line of sight on the ramp this year with various design wins and customers you already have? Can that business reach a seven-figure run rate in excess of $1 million a year by the end of this year?

Dave, thanks for the call. We don't break out SentriX separately. As you know, we break it out within our software services and SentriX line, which grew substantially during the year. I can't give a separate SentriX forecast, but if you look at where we need to be to achieve that $1 million in software and pay-per-use, it’s not out of the question. I think reaching that this year would be more aggressive than we'd forecast. The idea is to scale the platform to support that volume. To put this into perspective, we have around 485 data programming systems in service globally, representing about 1.5 billion units a year of installed capacity. That alone is more than enough to support a seven-figure SentriX business. The question now is not whether we can get there but how quickly the world will convert to security overall, and specifically to our method, which is SentriX. The total addressable market we are targeting consists of 30 billion units of microcontrollers. While this won’t happen overnight, down the line, I don’t see how microcontrollers can be sold without security features.

Okay. And my follow-up is on our expense structure. I believe last quarter, you discussed looking at ways to reduce operating expenses. At this point, your prepared remarks are honestly, as a shareholder, not sufficient. You reported a net income of $144,000 this quarter. For a successful return for shareholders, we need to be earning $0.08, $0.10, $0.12, or $0.15 as we've seen in the past. What can be done to look at every expenditure and help us reach savings of $2 million a year? Otherwise, with just 10% growth, we may not achieve enough net income to be an attractive investment for shareholders.

I can address that, David. First and foremost, as we look into 2024, our primary objective is to cover what we anticipate to be increases from an inflation perspective. Consequently, we will see higher expenses due to revenue growth and related compensation. Our first order of business is to find operational efficiencies to manage that. Secondly, the focus will be on improving the bottom line, which depends on both operating expenses and improving gross margin. We have initiatives in place to review the entire profit and loss statement for additional opportunities to enhance performance. For example, we're looking at material cost reduction, logistics improvements, and controlling carrying costs resulting from lower inventory levels. All of these initiatives will assist in improving our gross margin line. We did see a three-point improvement this past year, which was influenced by volume and operational efficiencies, translating to improved profitability. With respect to operating expenses, we’re also assessing costs and exploring ways to enhance operational efficiency. Our goal is to maintain and hopefully improve upon the 42% increase in net income from revenue growth.

Dave, I just want to reinforce your message. There's more in play than perhaps we can share in detail on the earnings call right now, but we fully understand your points.

Okay. And what was the adapter sales for the quarter?

While Gerry looks that up, let's take the next call, and we'll provide that answer shortly.

The next question comes from Michael Wetherington with Wildglen Ventures. Please go ahead.

Hi, thanks for taking my question. Looking over the past four years, it seems your stock appreciates when trading at a low EV to sales ratio, as it is today. What does that indicate about your valuation?

Michael, thank you for your question. First, let me address Dave's inquiry. We recorded $2 million in adapter sales for Q4 and $8.1 million for the year. For those conducting analysis, you may have observed that the enterprise value to revenue ratio tends to follow a four-year semiconductor cycle. It’s an interesting correlation, albeit not entirely predictable. Recently, I noticed a historical divergence between the multiples paid for large-cap and those for small-cap or micro-cap companies. While I'm not a technical analyst, I find this setup intriguing, particularly when considering the idea of reverting to the mean.

Fair point. As a follow-up, regarding your cash flow generation and the strong operating leverage as you exited '23, what are your plans for excess cash going forward? Is a buyback one of those options?

Concerning excess cash, we require a certain amount to manage the business. This surplus cash, at least for now, is being handled more effectively since we've recently started generating interest income. We're exploring ways to deploy that cash for maximum return for shareholders. We have previously indicated interest in potentially engaging in accretive M&A deals, though nothing has emerged that meets our criteria. While we've historically executed buybacks, given the current cost of capital, I don't foresee that happening in the short term. In the meantime, we will rely on our finance team to ensure any surplus cash, which isn't required for day-to-day operations, is deployed effectively to earn interest income.

Thank you.

Ladies and gentlemen, thank you. This will conclude our question-and-answer session. I would like to turn the conference back over to Anthony Ambrose for any closing remarks.

Operator, thank you very much. I'd like to thank everyone that had a question today. Given that there are no more questions, I now close this earnings call. Thank you very much.

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