Data I/O Corporation (DAIO) Earnings Call Transcript

Good afternoon, everyone, and welcome to Data I/O's Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. At this time, I'd like to turn the conference over to Mr. Jordan Darrow, Investor Relations. Please go ahead, sir.

Thank you, [ Aksha ], and welcome to everyone to the Data I/O Corporation Second Quarter 2026 Financial Results Conference Call. With me today are the company's President and CEO, Bill Wentworth; and Chief Financial Officer, Charlie DiBona. Before we begin, I'd like to remind you that statements made in this conference call concerning future events, results from operations, financial position, acquisitions, financings and capital markets initiatives, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, foreign exchange fluctuations, product releases, new industry participants 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 in such statements. These factors also include uncertainties as to the impact of global and geopolitical events, international tariff and 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 Form 10-K and 10-Q with the Securities and Exchange Commission in our press releases and other communications. The company may also reference GAAP and non-GAAP financial performance measures, including onetime items, which are intended to provide listeners with a means to better understand the company's performance. Please refer to reconciliations in our earnings press release issued today after the market closed. Finally, accuracy and completeness of all discussions on this call, including 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'll turn the call over to Bill Wentworth, President and CEO of Data I/O.

Thank you, Jordan. Appreciate it. All right. We've got a lot to talk about. There's a lot to unpack here. So I'll try to make sure I hit all the points. And as you know, all of you are aware, obviously, love to take questions. So for those who -- if I didn't explain that you need some clarity, please hang on and ask away. So first, the Q2 highlights. Results midpoint of our revenue guidance, which was $5.1 million to $5.4 million, we achieved $5.2 million. Gross margins obviously had a significant improvement. This is the highest level since Q2 of '23 and 30% lower revenue. Sales funnel continues to expand with new customers and new domains, which obviously has been a huge focus for us as we [Technical Difficulty]. Sorry about that. Doing this remote from a cell phone. So anyway, I'll continue. Sales continue to expand, as I said, with new customers and new domains. We have 6 new logos so far this year, 3 automotive, 2 robotics and 1 in global communications. All of these, especially the last 2 domains have a significant amount of upside in the out years, probably seeing some of these things are ratcheting up now for their demand. And I would think on the robotics side, we'll see that start to really creep into drive significant revenues probably in the second half of next year, but we're getting built into the supply chain of these companies, which is first -- it's the first step you have to make. You have to be built into the process. With stronger revenue performance and our drive to take costs out of the business while operating more efficiently, we have reached our goal of reducing the overall cost of running the business to less than $22 million. That was a goal that we set early last year, and we achieved that April of this quarter. This equates to approximately $5.25 million to $5.5 million to breakeven essentially. And we feel comfortable at that level that we can generate organic growth and start to turn a profit and start seeing quarter-over-quarter growth. We entered Q3 with a pretty strong active pipeline. We closed quite a few of those deals in July. But this revenue and our improved revenue mix, we're certainly selling more, I would say, systems with more value, more I/Os, more options. I think we've done a great job of managing our quotes and making sure that we're charging appropriately for that value. And we've done a great job of, I think, communicating with our customers to show them that value through multiple different methods, and it's certainly helping out significantly. With the margin improvement strategies and our reduced operating expenditures, I can say for the month of July, our second large milestone is to get the cash flow neutral, right, stop burning cash. Preliminary numbers for July show close to cash flow neutrality. Yes, it's only 1 month. It's a significant improvement. That's a result of all the hard work and execution driven by the broader team at Data I/O. Again, we're not done yet. There's still plenty of work to do. I can see 2 or 3 areas we still need to get better operational efficiency and cost, which will also improve our customer set. And also we'll be doing things in this industry that our competitors don't do. Through these efficiencies, we can react to customer demand faster, which are increasing almost daily -- e-mail from a new client over in India and the demand for what they need as they gear up these new products is not easy. They're looking for a few weeks' turnaround on device support and new devices. So these challenges we have to meet. And we are in the process of doing that during Q3. We've set a goal for, I think, 4 weeks of device turnaround. Industry right now is about 8 to 12. So that's another great sign. Transformation, I'll give an update on the acquisitions. Obviously, we've announced those back in May. They've been pretty much going to plan. These things never happen as fast as you want. But we've done -- I think the team has done a great job of looking at the business. We've had some great organizations help us through the process, the -- just trying to find any holes or issues with the business. I think we've done the QoB, which was great because it did identify a few things that we were able to actually save some money on the purchase price. So everybody is doing the job. We've extended the date to August 31 for close. So that's where we're at with that. The security acquisition, which came out in the press release, I can tell you I am calling from a microchip conference that we would've never gotten invited to if it wasn't for buying these security assets from IAR. Having a seat at the table with suppliers because you have IP that's real and they need it for their businesses. And there's all these different compliance programs and regulatory programs coming out such as CRA in Europe and RED. And these things, they have to be fully compliant by the end of next year, and they're starting to monitor the vulnerability reporting starting next month. So we're seeing a big push on the medical side because they've got to go through their FDA approval. But other industries are certainly going to have to meet this requirement or you cannot sell your product in the year. So this is something, I think, from a timing perspective, perfect for us. We've engaged some of their customers. We're getting out in front of them and looking at and listening to their plans and what they have scheduled and kind of their methodology of getting customers compliant at the semiconductor space, but also at the OEM and subcontractors as well. So it's opening up a whole new branch of opportunities for Data I/O that honestly we wouldn't had prior to. We had the partnership with IAR, but that's just a partnership. Now that we own the platform, and it's a platform we'll continue to invest in, it is differentiating the conversation we have with almost every customer. We will continue -- by the way, an important point here is we're buying the assets, but we will continue our commercial relationship with IAR. Their compiler and debugging software, their workbench stack is an important platform for companies like Microchip. So that was one of the questions in today's meeting is, is this just decoupling completely. And no, we said we're absolutely going to stay connected to service customers like Microchip, do launches in the channel with them as well as technical support. And we're working out the commercial relationship between IAR and Data I/O. But no, we'll stay tightly coupled and they will be a strategic channel partner for this platform. It brings in 4 new revenue streams, the software platform itself, annual support contracts, licensing fees and then you've got the tokens that have to be placed in the part and there's a charge for every token. And then also as we get into Programming-as-a-Service, providing security provisioning as a service provider. So it's exciting. It's great having more multiple revenue lines. And I think the best thing about this is that we didn't have to invest anything new. Like we're using Data I/O's core LumenX platform. We're just pivoting it to address the market need. And so the beauty of that is we don't have to go and invest a bunch of money to be able to address the market. We can address it with our existing platform. And another key point to security is it's domain neutral. Everybody is going to need it. So this will also help accelerate our domain dependence on automotive and move into other domains, certainly help accelerate it. As far as PaaS, we talked about this last earnings call, we're now in the data collection stage for proposals on the pipeline that we built. That is ongoing now. We expect to have proposals ready to go by the end of Q3 and the goal of booking 1 to 3 contracts in Q4. Overall growth drivers, improving opportunities, customers domain expansion in Q2, robotics, new automotive logos such as Valeo, automotive showing some early signs of recovery, industrial, med tech and then global communications. So we are working hard to diversify our customer base. I would say it's safe to say that we are finally evolving. It's been a long 18 months. But our goal of becoming a highly valued supplier in the semiconductor supply chain is starting to come true, especially with the security. There's other things that we can add to our stack internally, licensing debugging software from like an IAR so that we can be a higher value within the engineering communities, paralleling the return for growth for programming industry alongside -- along with the security mandates. Data I/O is well positioned with tech team and tech platform, balance sheet and market growth drivers. At this point, I would like to hand this over to Charlie and provide more insight to our Q2 financial performance. Charlie, please take it away.

Thanks, Bill, and good afternoon, everyone. I'm going to cover 4 areas today. First, a quick review of our second quarter financial results. Second, I'll dive briefly into the accounting treatment for the convertible debenture we closed in June because it has a meaningful impact on the reported operating income -- sorry, net income and EPS. Third, I'll give an update on our 2026 business. And finally, I'll give another quick overview of where we stand with some of the strategic transactions that Bill discussed in his remarks. But let me start with the quarter. Net sales in the second were $5.2 million, up 59% sequentially from $3.3 million in Q1 and compared to $5.9 million in Q2 of last year. The sequential improvement reflects conversion of delayed Q1 orders and what we believe is an inflection in demand for capital equipment after a prolonged downturn. Second quarter bookings were $4.9 million, up from $4.2 million in Q1. We signed 6 new customer logos in the first half, 3 from automotive and 3 from diversified technology markets that Bill mentioned. Consumable adapters and software services represented 55% of total revenues with platform sales at 45% of Q2 revenues, a shift from the 81-19 split in Q1, reflecting the rebound in capital equipment orders. Deferred revenues fell slightly to $1.1 million from $1.5 million. Meanwhile, backlog as of June 30 was $2.1 million, down from $2.6 million on March 31, reflecting operating improvements enabling quicker response to orders and improved order to ship performance within the quarter. Again, as Bill mentioned, we're getting our product out to our customers faster. Gross margin was 57% compared to 49.5% in Q1 and 49.8% in Q2 of last year. The improvement reflects the cumulative effect of positive mix shift, improved value-based pricing, increasing operational efficiencies and greater overhead absorption on the higher revenue base. Direct material costs remained steady as we continue to mitigate the impact of tariffs and other inflationary pressures. Operating expenses were $3.7 million, including approximately $527,000 in onetime expenses, primarily related to the restructuring, but also consulting IT and placement expenses. Excluding onetime items, operating expenses were approximately $3.1 million, a decline both sequentially and from the prior year. By April, we achieved our target, as Bill mentioned, total COGS and operating expenses below a $22 million annual run rate. Operating loss was $724,000 on $5.2 million of revenue, an improvement from $844,000 loss on $5.9 million of revenue in Q2 of '25, better performance on lower revenue. Net loss was $1.6 million or $0.17 per share compared to $742,000 or $0.08 per share in Q2 of '25. This increase was driven almost entirely by $873,000 of interest expense from the convertible debenture accounting, the accounting for which I will walk through in a minute because it is unique to the situation that we faced. Adjusted EBITDA, excluding equity compensation and onetime items, was essentially breakeven at positive $39,000 compared to a negative $1.75 million in Q1. On the balance sheet, cash at quarter end was $10.8 million, up from $5.7 million as of March 31, reflecting net proceeds of $8.3 million from the June private placement. Net working capital was $10.8 million. On the balance sheet as of June 30, you will see $6.2 million of convertible debentures classified as short-term debt, which was netted from working capital. I want to flag that this was a quarter-end snapshot only. The debentures converted into Series B preferred shares on July 8, and the company currently has no debt outstanding. Removing those convertible debentures from short-term liabilities and the working capital calculation would have yielded a working capital of $17 million at quarter end. Now let me turn to the second part here, to walk through the accounting on the convertible debenture because I know the $873,000 interest expense will draw questions. When we closed the $9 million private placement on June 17, the proceeds were allocated across common shares, equity classified warrants and the convertible notes using the relative fair value method based on stand-alone fair values determined by KPMG, our independent consultant. Approximately $5.9 million was allocated to the notes, which have a face value of $6.8 million. This difference, combined with the allocated issuance costs, created a total discount on the notes of approximately $1.5 million. Under the effective interest method, that discount is amortized over the expected life of the notes. Because the notes automatically converted to Series B preferred stock upon shareholder approval, which both management investor and the investor expected promptly, the amortization period was not the 5-year stated maturity of the notes, but the period from issuance to the anticipated shareholder vote. Approval was obtained on July 8, giving us an amortization window of approximately 3 weeks. Amortizing $1.5 million of discount over 3 weeks produces a concentrated charge. Of the $873,000 in interest expense recognized in Q2, approximately $863,000 is noncash and nonrecurring accretion of debt discount and approximately $10,000 is the coupon interest at 4%. Again, the notes converted to preferred equity on July 8, and there is no debt currently on the balance sheet. Both the convertible notes and warrants -- well, excuse me, let me just quickly turn to the update of the business framework we laid out in our first quarter call. Following the strong second quarter and significant progress on 2 planned acquisitions, we are reaffirming the 2026 business framework we laid out earlier this year. The pillars are unchanged: organic revenue growth over 2025, acceleration of recurring and services revenue, including Programming-as-a-Service, continued expansion within the programming services market and operational and process optimizations driving improved margins, including the internal application of AI. The first half trajectory supports these targets and the framework now incorporates consolidation of transformational acquisitions in the second half. We are not providing specific revenue guidance for the third quarter. As we said last quarter, the Q2 guidance is a onetime disclosure driven by the near-term visibility from Q1 slippage. Nonetheless, we remain confident in the trajectory and the framework is tracking to plan. Finally, let me briefly update -- give you further update on the 3 strategic transactions shaping Data I/O. The $9 million direct investment closed on June 17 with net cash proceeds of $8.3 million, and the convertible notes converted to Series B preferred stock as of the shareholder meeting on July 8. The warrants remain outstanding and exercisable $3 per share over 5 years. Our lead investor is now our single largest shareholder. The transformational acquisition is on track. We have extended exclusivity through the end of August, as Bill mentioned, and we progress -- as we progress through diligence and definitive documentation. Upon closing, as we discussed before, the acquisition is expected to nearly double our annual revenue run rate and boost earnings and cash flows. And finally, in July, we announced our intent to acquire IAR's embedded software security and IT-related assets. Combined with our programming platform, this creates a true end-to-end security provisioning solution that Bill mentioned, even as regulations like the EU Cyber Resiliency Act mandates device level security. We'll provide additional details as we progress forward toward a definitive agreement and an expected close. In summary, Q2 was an operational watershed, 59% sequential revenue growth, 57% gross margins, and breakeven adjusted EBITDA as the strategic plans and operational efficiencies implemented over the prior 18 months began to bear fruit. The large reported net loss reflects a nonrecurring noncash accounting charge that will not repeat. We have $10.8 million of cash, no debt, 2 acquisitions advancing to collectively continue the transformation of Data I/O into a company with greater scale and diversification, broader provisioning and security capabilities and reach, and new revenues and business models to exploit. With that, I'll turn the call back over to the operator for questions and answers.

[Operator Instructions] The first question comes from Jon Hickman with Ladenburg.

I got on late, so maybe you already talked about this, but did you say something about the progress of the closing of your acquisition that you mentioned a couple of months ago?

Yes. We just mentioned we extended the exclusivity to the end of August. That's all we commented on other than due diligence long and tracking to plan and that. So...

Okay. So you're still pretty confident that, that will happen?

We remain confident, yes.