Data I/O Corporation (DAIO) Earnings Call Transcript & Summary

Good day, and welcome to the IAccess Alpha Virtual Best Ideas Summer Investment Conference 2025. The next presenting company is Data I/O. [Operator Instructions] I'd now like to turn the floor over to today's host, Bill Wentworth, CEO at Data I/O. Sir, the floor is yours.

Thank you. I'd like to thank everybody for spending the time from the Best Ideas Conference. My name is Bill Wentworth, CEO of Data I/O. I became CEO around October 31 of last year. So why don't we dive into the presentation here. Here's our safe harbor. The next slide, this is a slide that try to tell what we do is a very complicated process. And what we do is we take a technology and we take some of the most complicated parts of semiconductor technologies, programmable semiconductor technology and provision data. So this slide tries to simplify what we do, which is a very complicated, technically heavy process. So if you see under one, the design side, think of that as, say, the inside of an iPhone that has not been provisioned data. It's basically blank silicon that gets placed on the board. What we do is we take, say, a file from an OEM, say, such as Apple. And we take that data file and we wrap our software engine around that. Think of it as a delivery methodology and takes that file and delivers it into the silicon using the technology that's under label as 3, our platform, which is the hardware and software that we produce, which is our core IP. That technology takes that software file and embeds it into the silicon. That silicon then gets placed on the board under 4. And once it's on the board, it basically has all the instructions and data files and the security and provisioning and things like that to make the product actually function for its intended purpose. So we're basically taking data and embedding it through embedded hardware and software through a platform, which is our IP to create functionality for the silicon, which comes out of factories blank essentially. That's kind of the simplest way to describe what Data I/O does. We do this for Fortune 500 companies all over the world. We have a significant amount of market share in automotive, IoT, industrial controls, service providers such as large distributors, which I'll get into later on in the presentation. So Data I/O was founded in 1972. And this is -- in the '70s is when, let's say, integrated circuits, which were programmable type silicon, which first entered the market in the early '70s. So Data I/O was really born out of 5 engineers driven by the engineering community to find ways to deal with this new type of silicon, which was going to allow for more complex technology products to be born. So they developed a proprietary programming platform. Their first product was called the Data I/O 1. You actually punch tree tables and hexadecimal files into a keyboard and have printed out a paper tape. That paper tape was your master. So that's obviously going way back. Since that point, Data I/O has become a global company with global service and support, over 100 employees. We have patents both in the U.S. and internationally. On our platform, there's probably been billions of devices programmed at this point. We have over 500 automated systems deployed across the globe, and those systems are very large automated systems for large manufacturing facilities and large volume of technology products. We also have a significant amount of manual systems that are deployed worldwide, mostly in engineering labs and preproduction and prototype facilities. So here is kind of how we look at the supply chain of the silicon that we deal with across the global supply chain. The middle is our 2 platforms, FlashCore III and LumenX. That's what we deploy into engineering labs. It's also what we embed in our automated systems. So we look at this as kind of a full circle of how we support our customers. We've -- there's new technologies in silicon coming out every year. And what our goal is to obviously be ahead of that silicon. So when it comes out that our technology has support, both from a software standpoint, but also from a packaging standpoint. There are hundreds of different package styles of silicon from QFPs to BGAs and fine pitch. And so these are the things that we work with silicon providers such as NXP, Micron, Hynix, Samsung, pretty much all the support Microchip, the suppliers that make microcontrollers and flash memory devices. So we have relationships with those suppliers, talk to them early and often. We review product road maps. We disclose our product road maps to make sure they're aligned with the silicon that's coming out today and also in the future. We have the global service and support. Data I/O has been around for over 50 years. I went to my first conference, which is our industry conference, APEX in March in Anaheim. And it was quite surprising to see how well the brand is still recognized. It was something as a new CEO, something, obviously, that we can continue to build off of. The brand has been around, like I said, for 50 years, and it's got a significant amount of recognition as we go out to market. Let's see next slide. Here we go. This is one of the things that's becoming new CEO and a little bit of my background, I've been in this particular space at a fairly young age when Dad was an entrepreneur in the electronics distribution business. And actually, my first intersection with Data I/O was when I was a teenager working in my dad's business. One of the things that Data I/O was very good at was being embedded into the engineering communities from a design standpoint. And they had a fairly significant product portfolio of manual programmers that were used by engineers, both at OEMs and silicon providers. What I found when I came here as a Board member and then took over as CEO was there was a kind of a gap in the product portfolio. So one of the first things we did was kind of reinvent the product portfolio and get back to being able to have a product that can be embedded and used in the engineering community. As we know that manufacturing has moved all over the globe, the U.S. has become more of a design community than a production community, although there are shifts in the supply chain coming back to North America, it's still going to be a global supply chain. So one of the things we've done early on late last year was reinvent the product portfolio and start with the manual systems, which is where technology is developed. So the importance of that is that we're designed in at the day of design of the product and that we're the reference products to be used as that product goes into production, which puts Data I/O in a really good position to capture the larger sales of systems -- automated systems that our technology is embedded in. And that allows us to capture greater market share. So these products have been released. We introduced them at the APEX Show in March. We have a more formal release of 2 new versions coming out in September and November at both Productronica shows in India and the larger one in Munich. So the second half of this year is a pretty exciting time for Data I/O, especially with these new product introductions and a renewed focus on the entire supply chain of the technology that we support. Next slide. Okay. This slide shows kind of that what I was just talking about at the beginning of the supply chain and the design and engineering and MPI communities. As you can see, the manual systems there on the left, this is where we control the data files and where first articles are done, MPI. It's also where we test out new silicon that comes out from the silicon providers and manufacturers. And from there, our product is then embedded in a system that we make, we created and sell the automated systems. And this is more for medium volume and high-volume production environments. And then from there, the -- after products are sent to the market, if there's any repairs needed or rework or there's changes in the technology and those products are sent back to the manufacturer, our systems can be used for debug, test, quality, quality assurance, rework, repair. So we try to capture that whole supply chain and that whole evolution of the product from the beginning of the life of the product to the end of life of the product. As talked about earlier, there are -- the markets that we mainly serve, Data I/O probably since the last 10 years as automotive technology has gotten more complex. Obviously, we see in cars from entertainment systems, info systems to safety systems to engine control systems that embed or bring together electrical hybrid components and with combustion engines, there's a lot more complexity in cars. And with that complexity has driven the need for flash memories and microcontrollers. So that market has become almost 60% of our revenue. But one of the things that we've -- as myself and the new management team have come in to really diversify our revenue across a broader base. As you see that top section, that's an area that deploys and consumes a lot of our technology, not just ours, but our competitors, but one of the -- it's a market that we have -- I would say, Data I/O has not served well in the last 10 to 15 years. So the service provider network that would qualify as global distribution companies such as Arrow or Avnet, contract manufacturers such as Flextronics, Jabil, Foxconn and also independent distributors and independent programming companies. That market is probably twice the size of the automotive industry as a whole. So it's an industry that we're going to have a renewed focus on. It's a little harder to service due to -- and I want to say hard, they require more services and more resources in order to serve that market. So it's just a matter of resourcing that market segment the right way. And so that's one that we've invested in and have invested in heavily this year, and we'll continue to invest in and which will allow us to regain year-over-year growth in our market that we serve today. So some of the new focus that we have as a management team is focusing on our core competencies and expanding our addressable market. And we do this in a few different ways, going after, as I said, the service provider network, but also taking our technology and looking for places to embed it. Most programming today in our market is done offline. But the technology we have can be embedded in places like in-circuit testers at the end of the line of manufacturing lines or board testers in which you can deploy and provision data. That's another place that our technology could be embedded. So we are looking for ways to expand our market. It's a very large market. If you look at the programmable TAM globally, it's doubled since 2001. It's almost 20% of the global silicon has some type of programmable technology in it, whether it's a microcontroller or embedded flash memory. It's embedded in a significant amount of silicon that we have access to based on our platform. We have a good balance sheet, about $10 million in the bank. We continue to be kind of cash flow neutral right now. We're looking at the second half as we see a return to growth. We're starting to see an uptick in activity across all regions as recently as last night, talking to some of our global GMs. So we're starting to see that activity pick up after a fairly significant part of last year and probably the first half of this year. We continue to drive down our costs, use AI in certain instances. In engineering, we found ways to use AI to get through -- going through device specs, for example, when we get a device spec for a new piece of silicon, those specs have values buried in those specifications and once our engineers have to go through those and read those specs and some of them could be 300, 400 pages long. We created a document AI agent that can actually go and get those values within 3 to 5 minutes. So using things like technologies such as AI and other automation allows us to really scale the business without having to hire a lot of human assets. So we'll continue to look at AI and other automation to improve the performance and expense management of the business. We'll continue to diversify our revenue mix, not away from automotive. Automotive is actually still strong in certain regions such as Asia, but diversify into the service provider network, which allows -- which has built-in diversification in the network itself as they sell to most all verticals -- market verticals globally. And evaluating organic and inorganic strategic growth opportunities. There are some M&A opportunities that Data I/O can entertain. We're looking into getting into services. It's something that the company has talked about over the years, but just hasn't pulled the trigger to get into that market. Being in the CapEx market as good as you can be, it's always a lumpy market. It goes in probably 3-year increments. And one way that we're looking to smooth out our revenue and become a more predictable growth company to be able to predict where we're going, services will be an important part of that. It's a market in which my background comes from. I was in the service provider network for about 25 years. So we bring in -- and we have some new team members that also have a lot of experience in driving and selling services. So I would look to the future as something that's going to be a key part of our revenue growth in the future. Let's see. I think that's the last slide, I believe. All right. Well, I appreciate the time this morning. I'm going to take some questions. I see there's 3 in the Board.

So let me get to those. So first question is, given your mix and growth forecast, where can you take gross margins to as a percentage of revenue? Data I/O has historically been between 52% and 58% gross margins, which are pretty healthy, pretty standard, I would say, for the CapEx market. I do believe through a combination of services and improving parts of our supply chain and the efficiencies of the business, I believe gross margins could stay in the high 50s or get into the low 60s. That's going to take some time as we get through these economic times and get through the investment cycle that Data I/O has to invest in its core platform. But as we build that edge in our technology platform, that will also give us some pricing power. So those -- when it comes down to technology, I do believe that Data I/O can return to higher margins based on having that leverage in our technology platform. We have new products, like I said, being introduced at the end of this year. And then our B2 design should be completed by the end of next year, which is where I believe we'll have some pricing power across our portfolio and have pricing power against our competition as well. Next question is who are the primary providers in the service provider market that you need to beat out? The primary providers in the service provider, I'm not sure I quite understand -- that says beat out. I would say that there are -- in the service provider market that we have -- that Data I/O has not serviced well in the last 10 years. The Arrows and the Avnet are probably the largest consumers of this technology. We do have ongoing relationships with them and have sold to them in the past, and they do, in certain regions, use our platform robustly. There are opportunities though in other regions where they do not. And a lot of that's going to come down to us having support -- service and support mainly in those regions, but also have the platform that can service the technologies that they'll be -- their customers will be consuming in the future. So I think over time, regions such as Asia will be a big focus for us. We do have manufacturing in Shanghai, but Southeast Asia will be a focus for us going forward, especially as supply chains start to shift from China to Southeast Asia. Let's see. Next question is, can you talk a bit more about new products coming this year and what areas they address in terms of customer requirements? Great question. The platform that we have, which we'll be moving to, as you saw in the presentation, we have 2 platforms, one called LumenX, which is our older platform, which will be going probably end of life in the next 2 to 3 years as we build up the LumenX platform, which is the newer platform. That's the one where we're investing a significant amount of capital to release a new version at the end of this year called V1. That is going to address UFS flash, which is the highest growth market in silicon. For flash memory, it's about 14% CAGR over the next 5 years. There's a lot of complexity that comes with that technology. It's a multi-silicon layered stacked silicon inside a package. These pieces of silicon have a lot of technology that's buried within the silicon, almost like a mini hard drive. And so that technology requires a lot of what they call handshakes and crosstalk, which allows that memory to deploy the data to the different levels of silicon that's inside the package. This complexity, I believe, is where Data I/O will gain a technology lead against its competition. But also the fact that, that type silicon, UFS flash silicon is going to density such as almost 1 terabyte, I believe, by 2027, 2028. That, I believe, in the market is going to increase organically the amount of technology of flash memory that's programmed offline. So for the first time since I've been in this market, which goes back to the early '80s, I see a path of organic growth for our platform over the next several years due to this technology advancement and the actual memory density of UFS Flash. So great question. One of the things that this market hasn't seen is true organic growth in off-line programming. And with the densities of these flash memories coming online over the next 2 to 3 years, I do believe not only will we have growth in our own platform due to the technology, but also due to the organic growth of the amount of components that are going to have to go from in-line programming to offline programming. I believe, let's refresh -- more questions. All right. Next question, how are trends in automotive semiconductor demand influencing backlog and customer order visibility for 2025? It's a great question. Automotive has been in a little bit of a slump in '24. And then as the tariffs hit us in the end of Q1, a lot of some of that conversations as we saw some of the automotive companies start to come back online and start to reorder, pull back due to tariffs. Based on conversations I've had in the last week, we're starting to see that come back online. So I see the second half, especially in Asia, the automotive business start to pick up. We've seen -- as we announced in Q2, we had a significant order from one of our automotive customers in China. And so yes, I see the automotive demand continuing to stay strong. Even if unit volumes don't go up as they change models, the amount of technology of programmable technology that gets deployed inside cars, automotive industry will continue to grow. The technology doesn't slow down as far as the advancement of silicon inside of everyday cars. So I see the demand of automotive continue to grow, and there'll be times in which it increases due to market demands, but also it's just going to -- it will just grow just due to the technology advancements in automotive cars. This is autonomous driving and other automated features. Let's see. Next question. The semiconductor programming issue often thought as one that simply sells large capital equipment. Can you talk about your view of overall industry, various market segments, addressable market sizes in terms of dollars? And if services is included? Well, capital equipment market, again, for us is, it addresses various different industries. I don't really see the large capital equipment machines. I guess the best way to answer this question, overview of industry market segments. I would say our market, it's been tough to determine because our industry as a whole has not done a good job of staying ahead of technology. And honestly, I don't believe -- whether it's been Data I/O or our competitors have not done a good job of staying ahead of technology. So in ways, I think we've suppressed our own market. So one of the things, as I said earlier, that we're staying engaged with silicon companies to see the technology that's coming out ahead of time so that we have the solutions ready. So I believe through that and through those relationships, we'll see organic growth in our overall market just by staying ahead of technology and not being reactive. We're down to about 3 minutes, probably 5 to 6 more questions. So I'm just going to pick a few before we end this session, let me just get through -- what verticals do you see picking up in 2025 second half? Well, based on the calls the past week with the regional presidents, I can see -- starting to see automotive staying fairly consistent other than the U.S., starting to see some upticks in Europe. I can't tell you any defined markets there, but just more, I would say, across the board, conversations about CapEx coming back online. IoT, definitely certainly seeing, I would say, just overall industrial starting to pick up as well. So I'd say it's still early, but I would say that most markets are starting to -- at least we're hearing more chatter across a broader range of verticals, not just automotive. Let's see what question here -- with specific trends on standards -- explain. All right. Let's talk about this question. This will be the last question. We got 2 minutes left. Can you explain what you mean by services? So my career started in actually providing programming services to OEMs. So we would buy equipment from companies such as Data I/O. OEMs would send us a file or a bunch of files for a product. And we would take those files and do what's called the first article. They would approve that first article and then they would send us product or silicon or we would buy the silicon either direct from a vendor such as Micron or we buy through distribution channel distribution such as an Arrow and Avnet. We would take that silicon and we would provision data and then do either other services after programming such as testing or packaging, such as tape and reel, mark the device with its new identity and ship that to the manufacturing location of their choice, either their own or a subcontractor such as a Foxconn or Jabil. So that's what a service provider performs as a service in this space. So Data I/O is in a unique position as we build the CapEx, we build all the technology. So being a service provider or somebody who's provided services in the space, it was something puzzling as to why didn't we provide these services as a business. There are gaps and some people may say, well, wouldn't that compete with some of your customers such as an Arrow and Avnet? It could, but there are gaps in parts of the market that they don't serve, such as direct large volume customers that don't go through the channel. There are also capacity constraints they may have and may need a service partner to outsource. There are other technologies such as silicon vendors that don't have a channel that require or need services or need to require a service partner. So there are gaps across the whole industry in which a Data I/O wanted to open up a services division, could service that industry. It's a far larger industry than the capital equipment itself, that part of the market. Services would allow us to diversify our revenue. It's higher quality revenue because it comes in kind of in a reoccurring event, which will allow for better cash flows. And also, like I said, it's a much larger market. I would say the independent programming service market from a dollars and cents is probably $200 million to $300 million worldwide, served by distribution, independent providers and other folks that are in that supply chain. So I believe it's a great opportunity for Data I/O to enter into services, and it's something we're taking a look at for our future growth strategy. I guess we're probably a minute by. I want to thank everybody for the time. Sorry for a chalk up. This is an interesting platform reading through all these questions. So sorry, I wasn't as fast as I'd like to be, but I appreciate everybody taking the time this morning to listen to Data I/O story and look forward to talking more about it in the future.

Thank you. That concludes Data I/O's presentation. You may now disconnect. Please consult the conference agenda for the next presenting company.