Good afternoon and welcome to the Data I/O Fourth 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 everyone. This is the Data I/O Corporation fourth 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 that 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, the ability to record revenues based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, parts shortages, pricing, competitors’ actions, 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, our 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'd like to turn the call over to Bill Wentworth, President and CEO of Data I/O.

Thanks, Jordan. Appreciate the handoff. Some comments, I'm going to be following the press earnings release we released a short time ago and try to follow along that path and add some color along the way to some of the things that we've started to see some traction, early traction. Since becoming CEO on October 1st, myself and the team have been in a deep discovery throughout the business. Our findings have taken us through pretty much every functional department looking for opportunities both to expand and where the company has had success in the past, but also look for other opportunities to create some operational leverage and expand the business into new markets. Given my experience over the last 30 to 35 years in the programming services business and opening up a regional programming center back when I was 22 years old and built it up to the largest global programming center in the world, it gives me a unique insight into what customers need and want toward the future. Being in this space as long as I have, it has been a pleasure getting back into it. Honestly, it's brought back a lot of great memories. It shows that I still have a significant amount of passion for this business, and it has been great to meet the team and get back engaged in this industry. It's a very unique, interesting niche industry with a lot of unique qualities that make it really special, at least to me. So in the post-initial phase of discovery, we've started using a consultative sales approach. By consultative, I mean programming and creating an operation. There are unique attributes that customers need to know when taking this process on. It's not just buying a big automated system, plugging it in, and throwing in a product at one end and having it come out the other end correctly. There are pre- and post-processes that have to be initiated and should be thought through when bringing things in-house. Even adding some of the experience that myself and some of the other team members such as Monty Reagan, who's been in this business for 20 to 25 years, can share with our customers and providers is crucial. Again, I mentioned Monty; he’s our newly appointed VP of Sales and Marketing and has really driven this consultative sales approach. We've seen some really good initial results; granted it's a small sample size, but if we look at the cycle time of sales, which typically from conversation to close was over 140 days in the past, we've gotten it down to 70. We can see the traction. The conversation is being recognized, and the customers appreciate this consultative approach because they feel like we're building a partnership with them. We’re here to help them not just buy capital equipment, but to help them put it to use the right way to ensure their success. As you know, one of the first moves I made early on was trimming some of the executive team. I was brought in to make change. It was really looking at where the business was going and understanding that the people here to set those directions were not in the best interest of the company, the market, and our customers. It made sense to part ways and set a new direction. Sometimes change is accepted; sometimes, it’s not. As we trimmed the management team, we got to focus on areas that matter to our customers and take those ideas to market. Since joining Data I/O, Gerry Ng has continued to reduce our operating expenses. We keep finding opportunities to optimize our spending. For example, we've deployed an AI agent to reduce time in our device request and algorithm process. We will continue to use technology to operationalize and automate what we do. There are a lot of opportunities to continue that trend. One of our main goals, as I've discussed with shareholders over the last four to five months, is really building out our algorithm library. This is not something in the past that you've heard a lot about, but back in the early '80s and '90s, when Data I/O had about 75% to 80% market share, they had the greatest library. That library of algorithms is what really creates the buying decision as a consumer. If I have to support a wide range of customers and products, I need to have a large library of algorithms of parts that we support. So this will be a real focus and one of the KPIs we will be tracking on a day-to-day, week-to-week, month-to-month basis because it will reflect growth and consumption of our platform. You'll see these KPIs and hear about them more in the future. It's clear that these strategies are spot on, and the numbers are starting to confirm that. Now we need to double down for acceleration of the business growth. We have visibility, as I mentioned earlier, to operational leverage, and we continue to see improvements in revenue growth, which indicates positive trends. There are areas where we will invest throughout this year, such as in our next-generation programming platform for the future. We’ve brought in thought leadership with exciting developments that we will communicate throughout the year, deploying our manual programming platform around summer and improving our algorithm and adaptive development and delivery. Supporting customers when they request a device means they want to use your platform. Its effectiveness, speed, and cost determine who gains market share. These investments, along with the other things I've talked about today, collectively enable us to tap into a much larger addressable market than in the past. Based on my experience, I've seen companies not having available technology for the customers' solutions they need. It's important that we stay engaged with semiconductor suppliers and our customers to comprehend their product development and ensure we have available technology. In closing, I would say my task is to return the company to profitability and accelerate our top-line growth and market share. This is something I've accomplished several times in my career, and it can be quite rewarding.

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 fourth quarter and the full year of 2024. Our recent performance has been impacted by automotive electronics uncertainty and limited customer capacity expansion, resulting in lower system shipments. Fourth-quarter revenue at $5.2 million was down 25% from the prior period. For 2024, sales totaled $21.8 million, down 22% from $28.1 million for 2023. The booking and revenue declines were greatest in the America and European markets. Automotive electronics represented 59% of our 2024 bookings compared to a higher 63% for 2023. While overall revenue performance was below expectations, we do have some positive performances to highlight. Despite the current automotive market headwinds in the Americas and Europe, revenue in Asia grew by 14% for the year. Our European channel booked a 10-system, $2.8 million order in Q1 of 2024, with initial shipments occurring in the past fourth quarter. Recurring revenue, such as adapters and services, remained steady, representing 50% of full year's revenue and providing a steady base to help offset the softness in system sales. Finally, order backlog remains strong at $3.5 million as of December 31, up $700,000 from the start of the year, which will contribute to shipments and revenue recognition as we enter 2025. Moving on to gross margin for the fourth quarter and for the full year at 52% and 53%, respectively, down from 58% achieved in 2023. The lower margin percentages reflect lower sales volume and related absorption of fixed manufacturing and service costs. However, our performance benefited from material cost reductions, inventory savings, quality improvements, and overall operational efficiencies. This was reflected in our actual production and service spending, which decreased by $250,000 or 4% from the prior year. Operating expenses in Q4 were $4 million, up $179,000 or 5% from the prior period. However, the fourth quarter spending included approximately $500,000 in one-time charges from the previously announced organizational and leadership changes and an additional $120,000 for strategic technology platform investments. These one-time charges and investments will contribute to future savings in 2025. Full year expenses were $14.6 million, down $1.1 million or 7% from the prior year. Excluding the one-time fourth quarter charges noted earlier, full year expenses would have been down $1.7 million or 12% from the prior year. The company did incur a net loss of $1.2 million for the fourth quarter and $3.1 million for the full year compared to a net profit of $144,000 in the fourth quarter and $486,000 for the full year 2023. The 2024 revenue decrease of $6.3 million and gross profit decline of 440 basis points contributed to the gross profit decline of $4.6 million, which was partially offset by the $1.1 million in operating expense reductions. Full year adjusted EBITDA was a loss of $1.4 million compared to a $2.3 million gain in 2023. Moving to the balance sheet, we continue to maintain a healthy cash position. Our trade receivable aging remains very low, and inventory levels are sufficient to cover our backlog and anticipated sales. Accounts receivable was $4 million as of December 31, with DSOs improving to 60 days compared to 69 days at the end of 2023. Inventory at $6.2 million increased by $300,000 from the beginning of the year in anticipation of future backlog reduction from bookings earlier in the year. Net working capital was $16.1 million at the end of 2024, and the company continues to have no debt. We ended the year with access to $10.3 million in cash, down $2 million from $12.3 million at the start of 2024, primarily due to losses stemming from lower revenue. Cash benefited from continued customer collections and lower operating expenses. Cash optimization between corporate and our international subsidiaries remains a focus, including the $3.4 million of cash repatriated from our China subsidiary in the second quarter of 2024, as reported earlier. We have sufficient cash and working capital to cover current and future operating needs but continue to focus on having necessary capital to fund future strategic and operating investments if needed. Looking ahead, our entire team and channel partners are focused on driving sales improvement by leveraging the new go-to-market and product strategies that Bill mentioned earlier. The improved cost structure achieved should contribute to our ability to make future business investments, as well as mitigate emerging supply chain uncertainties, including tariffs and inflationary pressures. Overall, we remain solid financially, with a strong cash position, no debt, and an improved cost and operating structure, which will enable us to proceed with the implementation of the new reimagined market approach, as Bill alluded to. That concludes my remarks for the fourth quarter of 2024. Operator, could you please start the Q&A process?

Certainly. We will now begin the question and answer session. Today's first question comes from David Marsh with Singular Research. Please go ahead.

Yes, hi. Thank you, guys for taking the questions. Good afternoon.

Hi.

Hi, Dave.

So, Gerry, I just want to start, I want to make sure I heard you right. So it sounds like $625,000 of nonrecurring in the fourth quarter. And so as we roll forward, we could kind of expect a commensurate decline in your kind of SG&A and R&D. Is that an accurate statement?

That is an accurate statement in the sense that these should be nonrecurring as we walk into the New Year. But Dave, of course, we will always continue to look at our spending levels, drive efficiencies, and at the same time, potentially redeploy and expand investments as needed. But you are correct, the one-time expenses in Q4 should not occur in 2025.

That's great. Now, focusing more on sales, Bill, this is directed at you. It seems that Q4 was somewhat below what many analysts anticipated. There were likely several fluctuations during that period. Could you discuss the current state of the sales funnel and help us set some expectations for the upcoming year, especially considering the recent political changes in the U.S. and their potential impact on the market?

Yes, sure. Obviously, given the change in the political environment, and with all the tariff wars, there's a lot of concerns out there. Could this slow down this year's growth perspectives? Yes, Q4 was definitely not what anybody would expect. But that trend was going on since really the beginning of last year. The bookings have been tilting towards $5 million quarter-over-quarter and continue to slow as the year progressed. There is a significant impact from a slowdown in the automotive industry, and being captured by one industry means if there’s any shift, you're going to feel the pain. This is one reason why we will expand and focus on other parts of the market, which I've discussed with shareholders and at conferences regarding the service provider network, franchise distribution, contract manufacturers, and independent service providers. There are many opportunities there. These entities sell to different markets and industries, giving you built-in diversity. They consume more of our technology than any other group in the industry itself. Data I/O has shifted away from focusing on that space due to heavy client demand. They feed many customers, including major players in the global supply chain, resulting in varying requests across a large technology space in semiconductors. So we need to position the company to service customer segments like service providers. If we meet their product and service needs, growth can be hugely beneficial.

Yes, I appreciate that.

So to expand on that going into this year, our bookings are strengthening. Q1 is definitely better than Q4. I can say that with confidence. How much better? We'll see. March is a favorite month because there are few holidays, and we usually get through it well. You get more shipping days in March, which is typically a strong month, a good indicator for summer manufacturing and spend. Yes, the political environment doesn’t help confidence, but big companies like Apple are investing in the U.S. because of recent developments. There is derisking related to China moving to different geometries and geographies in the world, and we need to ensure we capture that. Supply chain shifts are not new to this industry; I've seen many. In the '90s, North American OEMs sold manufacturing facilities globally, then quickly moved to Mexico, and then to China within three years. We must be positioned for these shifts to gain market share, and we are creating plans for that.

Great. Thank you so much. Appreciate that color. I’ll get back in queue.

Thank you. The next question comes from Igor Novyartsev with Lairs Capital. Please go ahead.

Hello, Bill. Hello, everybody. I’m a little bit new to the company, a new shareholder, so I think you have your work cut out for you. Let's just say that. I have actually a few questions, and I'll maybe ask a couple and get at the back of the queue because I don't want to monopolize the conversation. But let me ask, obviously, everyone is talking about the tariffs. So you have a big manufacturing facility in the U.S., and you have a big manufacturing facility in China. How much of your products need to cross from the U.S. to China, and from China to the U.S.? What is, if you can quantify, the tariff impact? Let's just assume that it will stay and whatever was announced would actually take place.

This is Gerry, and I'll try to tackle that question. Obviously, we are an international company with multiple manufacturing footprints and a broad distribution of customers throughout the world, which actually benefits us to a certain degree from a tariffs perspective. Not all products are coming from outside the U.S. into the U.S. as we are a U.S. company. We are well-leveraged. If you look at our gross profit, it's relatively high, and our material costs are reasonable. While we manage and want to mitigate tariffs, the ultimate impact on our material costs and profitability is somewhat minimized given our leverage. We are actively looking to mitigate tariffs. We can do that in a few ways. To the extent that we can bypass products coming into the U.S. and going directly to their end customers through others, that allows us to avoid tariffs. Also, products coming into the U.S. can use lower-value subcomponents instead of end items, which is another example. Additionally, the U.S. government allows us some duty recovery for items that ultimately leave the U.S. Those are just some examples of how we're trying to mitigate tariffs.

To add on to that tariff discussion, obviously, we owe it to our customers to have alternate plans in case things get worse. That is always a possibility, and we must have contingencies. We are working on moving adapter manufacturing out of China if necessary, or at least a portion of it. However, we would not move all of it because we have significant business in China itself. There are things we are looking at.

To build on that, one benefit of the COVID years was that we had to become more resilient, covering disruptions in our supply chain. And that was indeed the case during COVID with our operations in China and in the U.S. We do have strong resiliency where it makes sense and is efficient, which gives us flexibility as well.

This facility in Redmond can build all products. We have partners to build our adapters as backup if needed, and we can activate that switch quickly.

We have both short-term actions, short-term mitigations, as well as some longer-term strategic directions.

All right. That's a lot of information – a lot of details. My other question, and it's a bit of speculation, is obviously, first thing I noticed that Asia is doing well and U.S. and Europe, not so much. As your main segment is automotive, how much of it is attributed to the success of electric vehicles in Asia versus the less successful internal combustion vehicles in Europe and the U.S.? My speculation is that you sell a lot to electric vehicles, which have a lot more electronics, right?

Yes. Automotive is a very interesting space. It's one that my old services company entered in the mid-'90s when automotive began to use technology for entertainment, safety systems, and engine control modules. The complexity of those modules has grown significantly. Back when we entered the automotive market, an average car had about 22 microcontrollers, including some flash. The complexity inside the cockpit has exceeded that significantly. While electrification adds more complexity, combustion engine cars still use a substantial amount of technology. Electric cars represent only about 10% of the total market. We saw growth beyond that 10%, especially in 2017 and other years where we captured significant programming. However, it's not just automotive; consumer electronics also use a large amount of our technology. So while electrification contributes to demand, traditional combustion engine vehicles still drive significant content.

The next question comes from George Marema with Pareto Ventures. Please go ahead.

Yes. Hi, guys. Thanks for taking the call. Happy to see the energy and changes at Data I/O.

Yes. Thanks.

I was wondering, with the changes ongoing and expanding the aperture to new verticals, looking at sales processes, do you think you can inflect to some sequential kind of lift off these sort of $5 million quarters sometime in 2025? Or is that more of a '26, '27 kind of phenomenon?

Gerry, do you want to take the first half of that?

Well, obviously, we at Data I/O do not give forward-looking guidance. However, I think, George, what you've articulated is correct. We have averaged around $5 million plus or minus per quarter recently, and management’s expectation is to implement initiatives that allow us to increase it beyond that. Clearly, some of the strategies Bill discussed will take time to impact, as product development, go-to-market, and customer engagement take time. We do anticipate that the benefits will be seen as we go into 2025, aided by our strong backlog.

To add some color to that, the consultative sales approach we started in January is showing early traction. Monty and I discussed this, as we both got reengaged in the market around the same time. Reflecting back on our experiences, we re-engaged with suppliers and it's been exciting. Although it’s only been our direct sales force using this approach so far, we’ve seen promising initial results, and we plan to create a sales playbook to roll out to our reps later this year – likely in late Q2 or summer. We will pilot it with some of our stronger reps with technical capability and understanding of supply chains, which should further accelerate growth.

Okay, great. Sounds great. Thank you.

Thank you. The next question comes from David Cannon with Cannon Wealth Management. Please go ahead.

Hi, guys. Thanks for taking my questions. Could you, Gerry, give us a more detailed understanding of where OpEx is going to come down to? I know there was some one-time expense in Q4. Are we going to get below a $3.4 million a quarter run rate?

Dave, you're going to make me look at my numbers. I think a couple of things about our expenses: because we are a public company, our typical Q1 expenses will be higher due to audit, SEC filings, and so forth. To your question regarding the $3.5 million run rate, I think we've been averaging $3.3 million to $3.2 million. In Q4, we were at $3.5 million. These are factual numbers. The expectation is to hold expenses at the lowest level possible while making appropriate strategic investments. Regarding the one-timers, they have a double impact: one, they won’t occur next year; and two, we hope they will yield savings in the following year.

Okay. And then in Q1, we’re two-thirds of the way through Q1. Did you see an improvement in orders? I believe for Q4, you guys called out orders or bookings were like $4.2 million. Did you see a better run rate starting the New Year? Can you give us any color on that, Bill?

While we typically do not give forecasts, Dave, I think my commentary indicates that I have seen improvements over Q4. The trend is increasing, and we have a significant backlog of orders. We have been pulling in opportunities through conversations. We'll see how the quarter ends, but the signs look good.

Correct. Our $4 million bookings performance in Q4 was the low mark for the year. Our expectation is to reverse that in the upcoming quarter in terms of our bookings performance, which should lead to improved revenue from conversion. Our backlog is also beneficial.

Just as an example, our adapter activity is up 49%. While that might not account for all orders, just that activity increase is a sign. That's a recurring number pivotal for our business, which is why it’s a focus area.

You previously mentioned Data I/O being overly dependent on the automotive market and that there was low-hanging fruit with programming centers and other verticals. Can you speak to the progress made reaching out to those verticals? Are you starting to see that translating to actual orders?

Yes, I'll quickly reference the adapter KPI: with service providers, we're up 20% early this year in adapter activity and sales. This indicates our platform is being used. The more it’s used, the more automated systems are needed, so that’s necessary for market share. We must focus and invest in servicing that market. Even though we haven't made major changes, simply directing resources toward that area has yielded positive signals.

Okay. And Bill, just a follow-up regarding adapters. You track users; is the past focus missed opportunities with existing customers not capitalizing on follow-on orders?

Yes, the focus was largely on the customer base. If you think about an automotive customer, their space remains relatively steady in terms of bill of materials for years. With limited changes, an existing bill of materials means less demand for new device requests. Service providers are crucial because they generate device requests that were previously lacking. If we service that group, we generate new demand for our library, leading to further growth.

Yes. Thank you for clarifying that.

Thank you. The next question comes from Jeff McCaffrey, a retail investor. Please go ahead.

Hi, good afternoon, guys. Thank you very much for this call so far. Definitely one of the most helpful I’ve listened to from the team in years. So greatly appreciate it.

I appreciate that.

I wanted to see if we could elaborate on expanding the TAM with service providers and contract manufacturers. What end markets will these partners drive? What markets are you excited about?

It's a great question. I grew up in distribution. My dad started a distributor called Linux and sold it to Anthem, which became Arrow. Distribution was never primarily automotive, but operations have significantly expanded; now they can't ignore it. They support a vast variety of verticals, including consumer electronics, IoT, etc., which makes them great customers due to their diversity. No one industry drives their content primarily.

No, that helps a lot. One more thing. Before the election, there was talk about automotive uncertainty, especially regarding EVs or combustion mandates. Now that it's settled, is this certainty more significant than the tariff uncertainty?

From the political standpoint, it seems there are many supply chain impacts. That's more complicated than tariffs that can be managed. Supply chain uncertainty can create risks we don’t control.

Identifying strategies to manage tariffs is somewhat easier, whereas the market’s progress, particularly in Europe and the Americas, reflects a larger uncertainty.

There is a potential opportunity in navigating these supply chain shifts, and we are preparing for that. It could create a competitive advantage if managed well.

Thank you. There are no more questions at this time. I would now like to hand the call back to management for closing remarks.

I really appreciate all the questions. I was hoping for a lot today, and it was great considering I've been around for a couple of these calls. I appreciate those questions; they help me discuss the business and my vision. The challenge is that you're always challenged in business, and it's how you meet those challenges. We are excited about our strategies. Although it's a small sample size, being in this industry as long as I have and engaging with the team has motivated us. It’s energizing, and we’re looking forward to making progress quarter-over-quarter. We have announcements aligned with milestones coming up this year. We were selected to present at the first ever GEO Investor Investing Virtual Investor Conference on March 6, and I suggest you attend. I look forward to being one of those micro-cap small-cap stocks to watch this year. Thank you for joining us today.

Thank you.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.