Good afternoon, and welcome to the Data I/O Third 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 Mr. Jordan Darrow, Investor Relations. Please go ahead, sir.

Thank you, operator and welcome to the Data I/O Corporation Third Quarter 2024 Financial Results Conference Call. With me today are the company's President and CEO, Bill Wentworth; and Chief Financial Officer and Vice President, Gerald Ng. Before we begin, I'd like to remind you that statements made in this conference call concerning future events, 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 Bill Wentworth, President and CEO of Data I/O.

Thank you very much, Jordan. It is an honor to be presiding over this call, which is my first with Data I/O. While I was appointed to serve on the company's Board of Directors last year, we announced and managed the CEO transition plan in August of this year, effective September 1 as President and October 1 as CEO. We'll address our recent financial performance for the third quarter ending September 30 later on this call. It may be helpful to discuss my background experiences that are extremely relevant to the future direction of Data I/O. I've had 30 years of experience with data programming since the young age of 16, starting in my father's distribution company. Early exposure in the technology industry led me to found Source Electronics, an independent regional programming service provider with a partner in 1988. At Source, I started my career as VP of Operations and used Data I/O's programming solutions extensively. As Source expanded into a national independent programming service provider, the semiconductor industry had significant growth, driving Source to expand internationally. As CEO of Source, we sought financing for our international expansion, culminating in a strategic investment from HIG Capital in April 2001. We eventually sold the business to Avnet in 2008, providing significant returns for our investors. Fast forward to today, I see great opportunities in an industry I know well. We intend to tackle the industry's current challenges, and I'm excited to lead Data I/O given the market opportunities and set the stage for heightened value creation for our customers, business partners and shareholders. Let’s delve into how we will do this. Since recently joining the company, our team has thoroughly engaged in discovery, assessment and planning of new strategies to drive significant value for our customers in today's markets. The initial findings are encouraging as we set a new direction to address existing markets and explore new opportunities for Data I/O's growth. We intend to partner closely with our customers and suppliers to enhance the overall customer experience. The company will leverage our extensive experience with programming solutions to develop enhanced business models potentially leading to higher margins. Diversification of revenue streams across customer segments will be a crucial element of our go-forward strategy. We have identified customers that could lead to additional domains diversifying our revenue. Currently, Data I/O is dominant in the automotive electronics sector, and we aim to engage with electronic supply chain component suppliers serving all markets. This engagement will naturally diversify our revenue streams. Leveraging a strong balance sheet, we'll invest in these strategies to propel Data I/O forward, leading to sustainable growth. Thanks to the efforts of Gerry and his finance team since he joined last year, and as a Board member, he has done an outstanding job controlling expenses and cementing our financial controls. Year-to-date, operating expenses have decreased by more than $1 million, or 11% from last year. Our cash balance at the end of the third quarter is at its highest level in 10 quarters. While revenues and bookings were below our expectations as I joined the company, we are optimizing areas to be well positioned to implement our new growth strategies for the future. With that, I would like to pass it over to Gerry Ng for a closer look at our recent financial performance. Gerry?

Thank you, Bill, 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 third quarter of 2024, including market focus, progress on spending efficiencies, and balance sheet management. Despite the current headwinds in the automotive market across the Americas and Europe, Data I/O's financial condition remains solid at the end of Q3. We maintained a strong backlog, a healthy balance sheet, and a lower operating cost structure, which will contribute to improved future financial performance as the markets recover and as we implement our transformative plans, as Bill mentioned earlier. Despite third-quarter and year-to-date revenue shortfalls, cash remained steady at $12.4 million as of September 30, up $1 million from $11.4 million at the end of Q2. Cash benefited from strong customer collections and lower operating expenses. We remain a cash-generating business, reflected in our positive adjusted EBITDA of $37,000 in Q3. Accounts receivable totaled $2.6 million as of September 30, with days sales outstanding improving to 43 days from 55 days at the end of Q2. Inventory increased to $6.6 million from $5.9 million at the beginning of the year, reflecting lower sales year-to-date and anticipation of higher sales from backlog reductions from earlier bookings. Net working capital was $17.6 million at the end of Q3, unchanged from Q2 2024. The company continues to have no debt. Regarding the income statement, third-quarter revenue at $5.4 million was down 17% compared to $6.6 million from the prior year's period. Since the start of the year, uncertainty in Automotive Electronics has increased and customer capacity expansion has slowed, resulting in lower system shipments across the Americas and Europe. Despite this headwind, our Asia channel grew 29% in Q3 and 26% year-to-date. While sales of our systems to the automotive market are below expectations, we continue to achieve steady performance from our programming centers, industrial markets, and recurring revenue offerings. Specifically, our consumables, software, and services grew 6% in Q3, accounting for 50% of our total year-to-date revenue that provides a steady base to help offset current CapEx softness. Finally, backlog remains strong at $4.7 million as of September 30, down only $700,000 from the start of the quarter, with further reductions expected as planned customer deliveries occur in the next two quarters. Moving on to gross margin, we achieved 54% in Q3, comparable to our Q2 and prior year Q3. Lower sales volume hindered our margins due to relatively fixed manufacturing service costs. However, material cost reductions, inventory savings, quality improvements, and operational streamlining continue to generate favorable and sustainable impacts. Regarding operating expenses, third-quarter operating expenses stood at $3.2 million, down $334,000 or 9% from the prior year, and down $1.3 million or 11% on a year-to-date basis. Core personnel, facilities, IT, and outside services costs declined due to prioritization and efficiency improvements. This lower, more efficient cost structure has allowed the company to partially mitigate year-to-date revenue shortfalls while positioning us to fund critical future market, product, and transformative investments to drive future growth. The company incurred a net loss of $307,000 for Q3, an improvement of $490,000 from the net loss of $797,000 in Q2. The Q3 loss was primarily due to lower revenue, partially offset by lower operating expenses. Despite current challenges impacting sales performance, we continue to focus on providing the highest product innovation, quality, service and support, and new offerings. Looking ahead, we expect continued near-term market headwinds, partially mitigated by backlog reductions in the coming quarters and leveraging the progress we've made on managing costs. Overall, we remain very solid financially with a strong cash position, no debt, improved costs and offering structure, which enables us to begin implementing our new and reimagined market approach. This concludes my remarks for the third quarter of 2024. Before we take questions, we are excited to participate in a few upcoming events including the NASDAQ Closing Bell Ringing ceremony scheduled for October 24 in New York, and the LD Micro Main Event Conference on October 30. We look forward to seeing you there.

We will now start the question-and-answer session. The first question will come from David Marsh with Singular Research. Please go ahead.

Hi, guys. Thank you for taking the questions and welcome aboard.

Thank you.

So if we could just talk about auto for a minute and maybe you can just talk a little bit more about the pace of activity that you're seeing, whether it be bidding activity or anything else that can give us kind of a better indication of maybe what the timeframe for recovery in demand in that sector looks like?

Yes. Sure. Thanks for the question. It's obviously been a choppy market out there for most of the year. And as you know, EVs drove a lot of content and expansion in that market, along with hybrids as cars incorporate more technology. We believe there has been an overshoot that caused the current slowdown. The infrastructure for EVs is also slowing down the pace of adoption. However, we have seen some socket module increases in certain areas, indicating some production beginning to pick up. While we don't see any significant pace of increase, we expect that sometime next year some of that production will start to re-enter the market along with new model releases. This is a significant part of our business, and while the current pace is slow, it’s a market that will grow in the future. I believe we are at the bottom of the trough and while still bumping, there may be signs leading us upward.

Bill, I found your comments about broader expansion into more diverse end markets encouraging. Could you discuss a few specific opportunities that you see as easily attainable? I know the company has performed well in the industrial sector, but I haven't heard much about other specific markets.

Yes, another great question. Obviously, during my discovery work over the last 60 days and with my background in this industry as an independent service provider, it's about inserting ourselves in the supply chain. It’s great to service direct customers, but who can we partner with to drive significant system sales and other products within our portfolio such as manual and semi-manual systems? Examples might include global component distribution companies, like Arrow and Avnet, and EMS contract manufacturers with diversified customer bases. We need to adjust our business models to manage and service those sectors, but we are certainly capable of doing it. These partners can serve as a good barometer for the global supply chains.

That makes a lot of sense. Let me jump back in the queue and let some others have a shot.

Yes, sure.

My question is around the executive compensation. Here's a company that for the last 10 years hasn't made any money for shareholders. You've been utilizing our capital for all that time. Anthony Ambrose has pulled over $6 million out of the company in terms of stock options and pay. Last year, he got a raise to $775,000. So I'm just wondering, is this company being run for executives or for shareholders? And what is the new CEO compensation package? And what is the philosophy around aligning executive compensation and performance? Thank you.

Yes, this is Gerry Ng. I'll address that specific question. There are multiple threads to your inquiry, so I'll keep it at a high level. First and foremost, we are managed by the Board of Directors, and we do have a compensation committee that reviews executive compensation on a recurring basis. The committee evaluates compensation levels to ensure they are market competitive, given the size of the company. Part of the compensation structure, which is available in our proxy, includes both salary and variable components, such as stock grants. A portion of compensation is tied to the company’s performance and the value generated for shareholders. These concerns are carefully considered by the board and the compensation committee when establishing executive compensation.

The next question will come from Kris Tuttle with Blue Caterpillar. Please go ahead.

Hi. Thanks for taking my question. I wonder if you could elaborate a little bit on the transition to a growth strategy. You've tightened the ship here and did a nice job in what's down for a cyclical market. But what should we be looking for, for the company to be back on a growth path? Do we need to wait for some new products announced, new marketing initiatives? Or is this going to be something that shows up in booking growth? And could you venture some timeframes on that?

Gerry, do you want to take the first stab and I'll cover it?

Yes. Sure. I’ll jump in first, Kris. Good question. I'll provide you with a couple of different perspectives in my response. First, short-term versus long-term. We are focused on delivering today, this month, this quarter, and this year. Our sales, marketing and operational teams have active initiatives aimed at driving performance now while balancing the current market dynamics. At the same time, we have longer-term opportunities that Bill and our team are exploring. Some will be product-related in optimizing and emphasizing various components of our product line. There are also go-to-market opportunities we can improve on, especially since our Asia market has performed well this year while our Americas and European markets have not. These initiatives will likely yield results, not necessarily immediately, but certainly in the near term. We are considering both organic and inorganic opportunities for growth.

Kris, to add to that, I'll reference my early days in this industry. When I started at Source, Data I/O was our sole supplier. They excelled in providing manual programming systems, which were prevalent in engineering labs and development teams. Their recognition in this space helped build a vast device library and algorithms. In my discovery work, I found gaps in the manual and desktop systems market, which we have the potential to address. While these gaps may seem small, filling them will expand our device library and brand recognition, leading to increased system sales. Early engagement with engineering labs can help us get specified in early production stages, which can lead to significant growth. Filling these gaps will become a significant growth driver over time.

Thank you, Kris.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Thank you very much, operator. To all listeners and participants in today's event, we trust that after this call, you share in our excitement and enthusiasm for the next phase of growth for Data I/O. At this point, I'd like to conclude the call. Enjoy the rest of your day. Goodbye and we look forward to seeing some of you out in New York City next week.

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