Good afternoon, and welcome to the Data I/O Second Quarter 2024 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. 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 second quarter 2024 financial results conference call. With me today are the company's President and CEO, Anthony Ambrose; and Chief Financial Officer and Vice President, 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 forward-looking statements. And now, I would like to turn over the call to Anthony Ambrose, President and CEO of Data I/O.

Thank you very much, Jordan. I'll begin my formal remarks by addressing our second quarter 2024 financial and operational performance, and then I'll turn over the call to Gerry Ng for a more detailed look at the numbers. As we mentioned in the release, bookings and revenue were soft in Q2 and below our expectations. This wasn't monolithic, however, as we saw divergent business conditions across our sales regions and various markets. Throughout the first half of the year, Asia and EMEA sales regions are performing ahead of expectations as the Americas have substantially below plan. By market, we saw strength in programming centers, industrial IoT, and EMS and weakness in the automotive sector. We continue to have strong traction in new customer acquisition with eight new customer and location wins in Q2 for a total of 13 year-to-date. Most of these were in the industrial IoT and EMS markets, supporting Edge AI applications. This has contributed to our bookings of $13.7 million in the first half of the year, increased slightly from $13.3 million over the prior year period. At the same time, we’re winning new business. We saw significant push-outs from existing automotive customers who were planning capacity additions, primarily in North America. While system capacity demand slowed, we still saw good bookings for adapters and software and services. Together, they reached 49% of our revenue year-to-date, including our centric security provisioning platform, and that set a record for units processed by our programming center partners in the second quarter. Moving along to spending, we made significant progress on spending controls, process efficiencies, and reducing direct product costs. Gerry will go into more details on the spending side, but we were pleased with the progress made in Q2. We're focusing on long-term structural efficiency improvements, including deploying AI and machine learning capabilities and other tools to accelerate these efficiency gains. Our balance sheet remains very strong. We moved cash from China to the USA in Q2 and paid the associated dividend taxes. Having the cash in the USA gives us more flexibility on the balance sheet as well as an opportunity to earn more on our cash. Looking to Q3 and Q4, all of us are wondering when automotive demand returns. We still see a long-term secular growth in electronics content in cars and view the recent softness as inventory corrections and a change in mix from EV to hybrid and internal combustion engine models. Automotive nameplates are recalibrating or at least taking a measured approach to their investments in EV development and related capital investments. The example of this is Ford moving their Super Duty production to Oakville assembly plant, that was originally meant for EV trucks to Super Duty trucks, which is an internal combustion engine product. Political uncertainty around U.S. policy as well as hopes for an interest rate reduction going forward may also be holding back capital additions in our customer base. Recent statements by automotive OEMs, Tier 1s, equipment suppliers, and semiconductor companies do not indicate a snapback in automotive demand in Q3, however. Our historical experience shows auto electronics demand moves sharply once they decide to add capacity. We have the capacity in our manufacturing plant in place to move quickly once demand returns. We also have the right technology for our automotive customers as they begin to add more capacity. This includes recent new releases for our UFS programming technology as well as entry-level programming trends. Our focus will continue to be on the things we can control, attracting new customers, making continued progress on spending and cost controls, and being ready with the right products for customers as their capacity needs return. Despite the softness in North American automotive, there's still a significant amount of contractual backlog that's expected to be shipped and recognized as revenue in the second half of 2024. As we ship this backlog, we look forward to benefiting from the operating leverage in our model, especially given the progress made on managing costs and expenses. With that, I'll pass it over to Gerry Ng. Gerry?

Thank you, Anthony, and good day to everyone. I look forward to outlining and elaborating on our recent financial performance in more detail. My comments today will focus on key points of interest for the second quarter of 2024 and our perspective looking forward, including our progress on spinning in efficiencies, unit cost reductions, and balance sheet management. Despite the current automotive market headwinds, Data I/O financial condition remains strong at the end of Q2. We maintain a strong backlog heading into the second half of 2024, a healthy balance sheet and a lower operating cost structure, which will contribute to improved financial performance as the markets recover, as Anthony commented on earlier. Despite the second quarter revenue shortfall, cash remained relatively steady at $11.4 million as of June 30, down $559,000 from the $12 million at the end of Q1. Cash benefited from continued strong customer collections and lower operating expenses, which were offset by a $337,000 tax related to a $3.4 million cash dividend repatriated from our China operations. Accounts receivable at $3.3 million as of June 30 is maintaining a steady day sales outstanding, or DSO, at 55 days and very low credit loss exposure. Inventory at $6.7 million increased from $6.4 million from the beginning of the quarter on lower Q2 sales volume and anticipation of higher sales volume and backlog reductions for system deployments in the second half of 2024. Overall, networking capital at $17.6 million at the end of Q2 declined slightly from the $18.1 million at the end of Q1 2024. The company continues to have no debt. Moving to the income statement, second quarter revenue at $5.1 million was down 32% compared with $7.4 million from the prior year period, reflecting sluggishness in the Americas region and extended timing of our backlog conversion to shipments. Second quarter bookings were $5.7 million on strong opportunity conversion in Asia and Europe as Anthony indicated. Our consumables software and services at 49% of total year-to-date revenue have provided a steady base of recurring sales helping offset the current CapEx system softness in the Americas region. Finally, ending Q2 backlog at $5.4 million has increased by $2.6 million from the beginning of the year. Moving on to gross margins, Q2 was at 55%, down 3 percentage points from the 2023 prior year level due largely to lower sales volume. However, our Q2 margins were 2 percentage points higher than the preceding Q1 2024 quarter from improved product mix and favorable cost control efforts. The improvement reflects ongoing initiatives to reduce material manufacturing and service costs. Product value, re-engineering, sourcing optimizations, quality improvements, and process streamlining have all contributed to the overall improvement and sustainable impacts. Similarly, I'd like to address the progress we have made on operating expenses. Second quarter operating expenses were $3.3 million down $886,000 or 21% from the prior year, and down $757,000 or 19% from the preceding quarter. Core personnel facilities, IT, and other outside service costs declined through the prioritization of critical initiatives and overall efficiency improvements. This lower and efficient cost structure has allowed the company to partially mitigate the current revenue decline and will contribute to improved financial performance when the overall market conditions and related assistance shipments improve. The company incurred a net loss of $797,000 for Q2 compared to a net income of $300,000 in the second quarter of 2023. Again, the decline was due largely to lower revenue. A foreign tax expense for cash repatriated from China, which was partially offset by significantly lower operating expenses and higher interest income. A form withholding tax of $337,000 was incurred in China from a $3.4 million dividend paid from our China operations to a parent company in the U.S. This was undertaken to optimize the cash position and operating needs of each operation. The increased interest earning potential of our overall cash hoardings and ensure available liquidity in the U.S to support future strategic and operational initiatives. Overall, we remain very solid financially, with a strong cash position, no debt, and the ability to navigate market opportunities and challenges. Looking ahead, our contractual backlog is expected to be shipped and recognized as revenue in the second half of 2024, as well as leveraging the progress we have made in managing costs that have been discussed earlier. That concludes my remarks for the second quarter of 2024. Operator, would you please start the Q&A process?

The first question comes from David Canan with Canan Wealth Management. Please go ahead.

Hi. Good afternoon guys. Thanks for taking my questions. Got a couple and then I'll go back into queue. Gerry, good job on the reduction of expenses and the cost efficiencies, and I'm assuming there's a sustainable benefit to gross margins on a go-forward basis as volumes increase. My first question is, in theory, if revenues were to increase, let's say from $5 million to $7 million, with the various measures that you've taken in cost of goods, can gross margins get into the high 50s, even 60% based on significant volume increases?

Yes, I believe we can. Let me give you a good example. For our current quarter, our revenue was at $5 million and our operating income was a $400,000 loss. We typically get a 60% fall through on revenue to the extent that we can maintain our efficient cost structure, we should see again, a similar future, 60% fall through on revenue increases. So correspondingly, as our revenue goes from 5 to 6 to 7, we should see a comparable and corresponding fall through to the bottom line.

Yes, the only thing I would add there, Dave, is, Gerry is right, it just depends on the mix, the location of the revenue. As you know, we have different margin structures and we sell through distribution versus selling direct. So just assume a normal mix and then I think we can maintain that.

Okay. So the next question relates to that. And again, we don't know how much is going to be direct or through distributors, but assuming a normal mix as you put it, what is the variable expense on the next million dollars of revenue? So let's say, for example, revenues were $6 million instead of $5 million on that incremental million, what is the variable component? Is it 10%, 15%?

Yes, Dave, I’ll chime in here. I believe the main factor will be related to sales expenses, which is the primary variable component. If we sell directly, those expenses will increase, while using distribution will lower them. However, there won’t be a significant increase in electricity usage in the factory. There may be some additional travel or operational costs to produce the product, but I don’t expect those to be substantial.

Yes, just to add to that again, material costs, freight, logistical costs, commissions, those are typical variable expenses associated with revenue activity. And again, if you kind of follow our typical leverage fall through on revenue, we should get a beneficial impact.

Okay, what I'm trying to determine is, with the variable component assuming a normal mix on a million dollar change in revenue, is it around 10% or 15%? What is that approximately? Because SG&A will increase.

Historically, we've always told people, Dave that the operating leverage is 40%. Given where we are, it might be better. But we've always told people when you net everything out, that's where the operational leverage comes to.

Okay. And then, guys, are there incremental expense reductions or efficiencies that we should see in the back half of the year? Or is everything complete at this juncture?

It will be smaller as we continue to work through the opportunities. A lot of these initiatives we have some short-term as well as longer-term benefits, particularly on material cost reduction, that may have a longer-term but more sustainable impact. So we expect some continued improvement as we move forward.

Okay. And then final question, and I'll go back into queue, I promise. A lot of hype around artificial intelligence. So, Anthony, if you could sketch out for us the impact of AI on your business. I know you're using it, but also can you talk about various enterprises using AI, their deployment of it, and how that affects your business and the opportunity, if any?

Sure. And I would refer you and all investors to our latest investor material on the website. I think it looks like Slide 8 has some of this conversation and a little bit better graphics. But in short, Dave, there are a series of applications that we've identified, and others use the term Edge AI. And it's built around a set of products that will require AI implementations to become better, but they will not be able to leverage the AI capabilities in the cloud. And I'll give you an example. For an automotive application, this would be ADAS, advanced driving assistance. You're not going to go back with latency and unpredictable connections to, go to the cloud for directions on whether you're taking a right turn on Main Street or not. You're not going to teach the car from the cloud. It's going to have to come from the Edge, you're going to have to learn as you go. There are other applications around smart cities, industrial automation, and a lot of the smart metering applications we've talked about. The whole set of other IoT applications, smart homes, etcetera. Now, those applications benefit Data I/O in a number of ways. We've talked a lot about automotive and ADAS and the demand increase that we see there. The code size gets bigger. The minute you add AI or machine learning components, right? You just increase the code size. It also ensures that you're developing newer platforms, replacing some of the older platforms that may have even smaller code sizes, which again is good for us. So the whole AI market that I think will benefit Data I/O more directly is in this segment called Edge AI and the various segments that I just highlighted.

Got it. Thanks guys. Good luck.

Thank you, Dave.

Thank you, Dave. And the next question comes from David Marsh with Singular Research. Please go ahead.

Hi guys. Thanks for taking the questions. So I guess we just start on the automotive side. I mean, you guys specifically said that Americas is weak. Could you just kind of give us a little bit of a broader global landscape? I thought you guys had some pretty promising opportunities in China and perhaps India. Maybe you could just talk about those a little bit.

Yes. Hi, Dave. So basically, most of the promising opportunities in Asia closed as we expected. Asia is far ahead of our plan for the year, and that's been on strength in Q1 and Q2, including some strength in China. The Americas by contrast, have gone from a Fiesta to a Siesta. We’ve seen deals that we know of that went to competition, but they just pushed out. In my checks with other channel partners and other companies in a similar industry, they’re seeing a very similar set of activities. Automotive, after really two big years for us in Mexico, they’re just digesting the capacity, and I think trying to figure out how much they're going to build in Mexico, how much they might have to build in the U.S. depending on the election. Also, there's talk of interest rate reductions, and corporate CFOs like to pay 4.5% for something instead of 5% for something if they can. And so I think that's also contributed to some of the potential waiting. You heard comments from Ford, Stellantis, NXP, some of the tier ones really talking about also a product rotation. So I think all that contributes to, Hey, let's run the factory with what we've got as long as we can. And then as you know, our experiences with, especially with the automotive guys, they always seem to come in when they're ready to buy with demands where they need it right away. We saw that in 2016 and 2017, we saw it in 2020 and 2021. We had a little mini bump I think 18 months ago. And so when it comes back, I think it will come back fairly rapidly. But I'm telling you, it was among the roughest quarters for a region I've ever seen just in terms of everything getting pushed out.

Okay. That's really helpful. And then just, obviously you got to wait for the queue for the breakdown on revenues, but maybe could you just give us some sense directionally, specifically with regard to the kind of software-centric business. That's clearly the line you really want to see your growth in because it's kind of more recurring. Can you just talk a little bit about what's going on there? I mean, there were, I did catch some comments there, but I didn't get a lot of details.

Yes. From a shipment perspective, we processed record units through our programming center partners on SentriX, and this trend continues to show steady growth. When looking at SentriX along with our software and consumable adapters, it may not be a record, but it is very close, as it accounted for 49% of our revenue in the first half of the year. Typically, we've seen this running around 43% to 44% for the previous year. We aim for a long-term goal of a 50-50 split between recurring revenue and systems, and we are nearly there this year. This is partly due to a slight decrease in systems orders, but it reflects the strong demand for consumables. Combined with the cost reduction initiatives Gerry is implementing, this will help us maintain cash flow. Should there be a drop in systems demand, we will be well-positioned for a couple of strong quarters when demand picks up again.

Okay. Thank you. And then just one quick last one. I mean, and I'm not trying to read anything into this. I mean, I understand that there was an opportunity there to repatriate that cash from China and get it, but that's not by any means an indicator that you feel like your China business is slowing or you're not going to need as much cash over there to support the business operation. It's just you had an opportunity and took advantage of it. Am I reading that correctly?

You got it. As Gerry indicated in his earlier comments, we have substantial operations in the U.S., China, and Germany. It's fundamental that we maintain working capital to support those operations flawlessly. We continue to do that. But as he indicated, the benefit for us, even though you have to pay the tax, is you get the flexibility of having it in the U.S and the opportunity to earn a little bit more on interest. And so, when we discussed this with the Board, it's pretty clear. Let's go ahead and repatriate the cash and move on.

Got it. Okay. Thanks guys. I'll yield to other callers. Thank you very much.

Thanks, Dave.

Thank you, Dave. And the next question comes from Kevin Garrigan with WestPark Capital. Please go ahead.

Yes. Hey Anthony and Gerry, thanks for letting me ask a couple questions. Anthony, just to clarify, so in Q1 you said that your bookings had strong demand across all end markets. So compared to three months ago, automotive companies are just kind of waiting to see how things play out in the market, like interest rates as you mentioned. Are they noting a significant decline in demand at all?

Yes, Kevin, I mean, it just disappeared in Q2 in North America, right? I wish I could come up with a softer way of explaining it, but that's basically what happened.

Yes, no, that makes sense. Okay. Yes, that's what I was kind of wondering. Okay. And then you sound pretty confident that you're going to fulfill backlog orders in the second half of the year. So I mean, does your backlog consist of non-cancelable orders or what kind of gives you the confidence that these orders won't get pushed out or canceled?

Some of the terms are non-cancellable, some are not. But the way our industry has traditionally behaved is people don't cancel orders on us once they place an order. We had one exception when COVID hit and shut down, and literally one customer that canceled it four hours after they sent us the order. But knock on wood, we don’t see behavior where customers come in and cancel. Now they have the right to do so under our standard terms up until we ship, but it's not something that's plagued us.

Got it. Got it. Okay. That makes sense. And then just as a last quick question. On Dave's question earlier regarding Edge AI. I know automotive and ADAS are large markets for you guys. But I would say ADAS might be taking a little bit longer than expected. Is there another application that you're kind of seeing take off more now for Edge AI?

Well, we went over the list earlier a little bit around certainly the smart metering. We've won a number of deals there. IoT factory automation, we had a number of factory automation wins over the past couple of years. And on the new customer, new location wins, I mean, it skewed more towards everything besides automotive and including Edge AI in Q2 with the eight wins. I think auto was two of the eight. So yes, it has not displaced automotive. I'm not going to go that far. I think automotive will come back hopefully sooner rather than later, but it does represent some interesting growth opportunities for us. And, you know, we're going to continue to dig a little deeper on that.

Okay. Perfect. Thank you.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, operator, thank you very much. I'd like to thank everyone who asked questions, and at this point, I would like to conclude.