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Edited Transcript of DAIO earnings conference call or presentation 25-Apr-19 9:00pm GMT

Q1 2019 Data I/O Corp Earnings Call

Redmond May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Data I/O Corp earnings conference call or presentation Thursday, April 25, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Ambrose

Data I/O Corporation - President, CEO & Director

* Joel S. Hatlen

Data I/O Corporation - CFO, COO, VP of Operations & Finance, Treasurer and Secretary

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Conference Call Participants

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* Arthur Michael Winston

Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer

* George Melas-Kyriazi

MKH Management Company, LLC - President

* Jaeson Allen Min Schmidt

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Robert Stephen Anderson

Penbrook Management LLC - Co-Founder

* Jordan M. Darrow

Darrow Associates Inc. - Founder and CEO

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Data I-O First Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Jordan Darrow with Investor Relations. Please go ahead.

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Jordan M. Darrow, Darrow Associates Inc. - Founder and CEO [2]

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Thank you, and welcome to the Data I/O Corporation first quarter 2019 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I-O Corporation; and Joel Hatlen, Vice President and Chief Financial Officer, as well as Chief Operating Officer of Data I/O. 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, estimated impact of tax 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 level of orders, ability to record revenues, based upon the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, 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, excuse me and 10-Q with the SEC, 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 of these forward-looking statements. I would now like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [3]

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Thank you very much, Jordan. I'd like to comment on 2019's first quarter results and our outlook and then, I'll turn it over to Joel Hatlen for some more details. In Q1, our revenues were $6.1 million, on $6.2 million of bookings. Automotive bookings represented about 55% of our orders in the quarter. Discretionary and variable spending was down a bit as we focused on improving efficiencies and our profitability, and we continue to see good growth in new products. We've achieved a sale of 250th PSV family automated programing systems during the first quarter of 2019. And we continue to win UFS business in automotive infotainment. Our SentriX security provisioning platform continued to gain ground in the quarter, with a new deployment, new device supports, new OEM customers supported through our programing center partners. Commenting on the quarter, our bookings were about the same as last year's Q1, although on $6.1 million of sales in the 2019 period, our book-to-bill moved just above 1.0. We're hoping to be a bit stronger on bookings, but we saw some deals push into early Q2 from Q1. EMEA showed good traction for us in the quarter, while APAC and the Americas were bit soft. EMEA's strength was driven by automotive, which was about again 55% of our orders and we continue to make progress with the top 20 global suppliers and their emerging electronics partners globally. Overall, we saw the effects of multiple announcements from semi companies discussing weaker demand in Q1. We are hopeful that their forecast of a stronger second half are accurate. Within the first quarter, we continue to win marquee customers and sites. We had a good win in automotive and a breakthrough win at a contract manufacturer in Southeast Asia. We hadn't done business with this customer in over a decade. But the Data I/O service support long-term stability in our products were fundamental in winning them over. We continue to win UFS deals in automotive and expect this trend to continue and grow in automotive, this year and beyond. On the product side, we announced turbo boost in the first quarter, which effectively doubles our flash programing performance for infotainment applications. This is keeping up with the demands in infotainment as we're now seeing requests for 256-gigabyte flash memory support, with the programmable images now exceeding 100-gigabytes. With long-term programing trends and secular market drivers intact, we continue to invest for the long-term growth. As expected, we had a great Embedded World event in Germany in Q1, primarily emphasizing our SentriX platform. Cypress announced their PSoC 64 product partnering with Data I/O. We had an announcement with Microchip on the SAM L11 product. We also did a joint presentation with Digicert, the leading certificate authority on true hardware-based security and how we are cooperating with them. We shipped our fifth SentriX system overall, third to the European region in Q1, and this went online in early Q2. Our balance sheet reflected our strategy to place inventory ahead of potential tariffs. The value of our inventory increased by about $500,000 in the first quarter. We think this is at an adequate level now to protect us against unplanned tariff exposure. Our capital allocation strategy also includes not only investing in the business for long-term, but also providing and returning cash to shareholders. To this end, we are about halfway through our most recent buyback initiated in October, which was authorized for $2 million. Let me just reiterate what we said last quarter about our views for the market. This year, we expect automotive to remain strong, with growth in overall semiconductor content per car, as well as sharp growth in the number of gigabytes of flash memory per car. We continue to see growth in infotainment flash memory requirements as well as a transition to UFS. SentriX will expand device supports, grow our system footprint in strategic locations, gain more OEM-driven leads, and begin to monetize the sales funnel we've created with our strategic semiconductor supports over the past couple of years. For new silicon devices, we see a typical design in cycle of 24 months. With the advancements in tools and experience and know-how we've gained in SentriX, we're now beginning to support OEMs directly in less than a quarter, as they approach our programing center partners when they are ready to go-to-production. Overall, we like our sales funnel, our products, our markets, and we're keeping an eye on macro variables, such as tariffs, trade tension and the late stage business cycle, that could impact spending decisions from our customers. Finally, I'd like to invite any shareholders in the area to our Annual Meeting on May 20th at 10 o'clock, here at Data I-O headquarters in Redmond, Washington. With that, I'd like to turn it over to our CFO, Joel Hatlen.

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Joel S. Hatlen, Data I/O Corporation - CFO, COO, VP of Operations & Finance, Treasurer and Secretary [4]

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Thank you, Anthony , and good day to every1. Net sales in the first quarter of 2019 were $6.1 million as compared with $7.6 million in the first quarter of 2018 and $7.9 million in the fourth quarter of 2018. The year-over-year decline in sales was a result of strong cyclical demand during 2017, particularly from programing center customers that culminated in a substantial backlog at the end of that year of $4 million, as compared to with a backlog of $19 million at December 31, 2018. On a geographic basis, international sales represented approximately 94% of total net sales for the first quarter of 2019, as compared with 87% in the 2018 period. Europe was our strongest territory in the first quarter of [2019], as it was in the fourth quarter of 2018. Total capital equipment sales were 61% of revenues and adapters and consumables were 24% of revenues in the first quarter of 2019, compared with 65% and 24% respectively in 2018. For the first quarter of 2019, gross margin as a percentage of sales was 60.8% as compared to 58.1% in the first quarter of 2018. The first quarter of 2019 level exceeded the company's anticipated target model, primarily due to a favorable channel and product mix as well as favorable variances, ongoing cost reductions and factory utilization due in part to inventory production level, also contributed to the strength of gross margins with these initiatives being standard focus areas for our operations team. Total operating expenses in the first quarter of 2019 were $37 million (sic $3.7 million), down from $4.1 million in the 2018 and $3.8 million in the fourth quarter of 2018. Spending on research and development, R&D to support the company's 2 primary technology platforms was $1.7 million, which was down from $1. 9 million in the prior year quarter and $1.8 million in the fourth quarter. Selling, general and administrative expense of just under $2 million in the first quarter of 2019 were down from $2.2 million in the first quarter of 2018 and down marginally from just over $2 million in the fourth quarter of 2018. The year-over-year change is primarily related to variable expenses including lower incentive compensation accruals and sales commissions. The company continues to actively engage in market development and R&D initiatives for its SentriX platform, while emphasizing ongoing expense management practices. Operating income was 29,000 for the first quarter of 2019, down from 344,000 in the first quarter of 2018 and 744,000 in the fourth quarter of 2018. In accordance with U. S. Generally Accepted Accounting Principles, GAAP, net income in the first quarter of 2019 was $26,000 or $0.00 per diluted share, compared with net income of $130,000 or $0. 02 per diluted share in the first quarter of 2018. Earnings before interest, taxes, depreciation and amortization, EBITDA was $189,000 in the first quarter of 2019, compared to $397,000 in the first quarter of 2018. Adjusted EBITDA, excluding equity compensation was $476,000 in the first quarter of 2019 compared to 574,000 in the first quarter of 2018. EBITDAS, as a percentage of sales increased slightly to 7. 8% in the first quarter of 2019, from 7. 5% in the first quarter of 2018. Bookings in the first quarter of 2019 were $6.2 million, which compares to $6.2 million in the first quarter of 2018. Note that, traditionally, the first quarter is typically our seasonally lowest period of the year. The first quarter of 2019 bookings were also lower than the $6. 5 million recorded in the fourth quarter of 2018. Backlog at March 31, 2019 was $2 million compared with $1.9 million at December 31, 2018 and $2.7 million at March 31, 2018. Data I/O had $1. 6 million in deferred revenue at the end of the first quarter of 2019, flat compared to December 31, 2018, and down slightly from $1. 7 million at March 31, 2018. Data I/O's financial condition remains strong with cash of $14.8 million at March 31, 2019, down from $18.3 million at December 31, 2018. Approximately $312,000 was used to repurchase 58,000 shares in the first quarter of 2019. Cash was used during the first quarter of 2019 to fund shifts in working capital, which included an increase in accounts receivable of $900,000, and an inventory increase of $500,000, approximately $1.2 million of cash was used to pay year-end accrued annual incentive compensation and 401(k) matching. Our days sales outstanding or DSO, a receivables collection measure stood at 61 at the end of the first quarter of 2019, which was still near our target of 60 days. The increased inventory level reflects a buildup of equipment in China and United States, as a plan to avoid potential tariff charges and in anticipation of the sales in process. Net working capital at the end of the first quarter was $20.4 million, down from -- down $648,000 from $21.1 million at December 31, 2018 and up $1.5 million from $19.9 million at March 31, 2018. This quarter's decline was entirely due to the GAAP accounting for the leases ASC 842 that went into effect for the first quarter of 2019, which recognizes a right of use assets in a corresponding lease liability. As a result, we had to gross up the balance sheet to include a $2.4 million asset in an offsetting liability of $2.4 million. The liability is comprised of $662,000 in current liabilities and $1.7 million in long-term liabilities. The lease accounting adjustments have no impact on our P&L, but the entry of the current liability reduces our working capital calculation. The lease liability associated with the adjustments is qualified as just that a liability, not as debt. The company continues to have no debt. Finally, we had 8,287,825 shares outstanding at March 31, 2019. That concludes my remarks. I'll turn the call back to Anthony.

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [5]

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Thanks very much, Joel. At this time operator, I'd like to open up the call for any questions we have on the line.

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Questions and Answers

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Operator [1]

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Yes, sir. We will now begin the question-and-answer session. (Operator Instructions) The first question will be from Jaeson Schmidt with Lake Street.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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Sorry about that. Thanks for taking my questions. Just want to start with the macro backdrop, I'm curious if you guys could comment on, if you've seen any significant change in your visibility for this year?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [3]

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So, hi, Jaeson. You know, we rely a lot on the math which published by the feeders to our business, namely the semiconductor industry and also the consumers to our business, primarily automotive companies. I think we saw some negative comments from semiconductor companies overall in the first quarter that they were seeing some softness. We also saw that from some of the automotive indicators that they're looking flat on units this year. So I think Q1 was pretty soft from a macro environment. At the same time, they're telling us that they expect some sort of better picture in the second half. We really don't have any better visibility than what you can read from the semis and from the auto industry.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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Okay, that makes sense. And looking at the IoT opportunity, it definitely seems like it's progressing nicely. Any change as far as the potential cadence of a revenue ramp, it's still more of a 2020 story. Anyway, you can handicap if that's more of a first half, second half type deal?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [5]

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No, Jaeson, I think, we continue to be very optimistic here, and I think we just probably reiterate what we talked about it in the last call that 2019 is still predominantly a market development year. We're starting to see funnels, we're starting to see some forecast from some of our semi partners that give us a little more confidence in our own internal numbers. But I think, the macro picture is still, this is a market development year, and revenue accelerates next year.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

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Okay. And the last one from me, and I'll jump back into queue, how should we think about OpEx trending this year?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [7]

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I think the comment we made last quarter when we were talking about the full-year was, we'll be down a little bit. I think you saw it down in Q1, predominantly because of some of the variable compensation items that we have seen. What we're trying to do is, maintain the R&D spending to fully support the initiatives in automotive and security that we like very much and that are continuing to deliver the products, that give us the leadership position, that our customers like. So we're not going to change any of that. I think you'll just see some reflection of -- if, Q1 was a little softer than last year, so you saw us reserve less in terms of incentive comp. Conversely, if we get a really nice quarter, you'll see the incentive comp number go up, because we -- Joel reserves it, as we earn it, and then we pay it out in the first quarter of the following year.

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Operator [8]

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(Operator Instructions) The next question will be from Robert Anderson of Penbrook.

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Robert Stephen Anderson, Penbrook Management LLC - Co-Founder [9]

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Good afternoon, Anthony. My question relates to the programing centers. They were busy in 2017, and they've been pretty quiet in 2018, and so far in 2019. What's your outlook, as to their activity with your product?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [10]

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I think Bob, we expected for the full-year, the programing centers to be roughly flat year-over-year. As a percentage, they were a little bit higher in Q1, predominantly because the CapEx was down a little bit. I don't think we have any changes to what we discussed last quarter.

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Robert Stephen Anderson, Penbrook Management LLC - Co-Founder [11]

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Okay. And maybe you could chat a bit further on what you're doing with Cypress Semiconductor. I'm not sure I fully follow what's going on there.

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [12]

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Sure. As we announced a little over a year ago, we were working with Cypress on their PSoC 64, which is a new family of secure microcontrollers targeted for the embedded market. And we're working with them on the SentriX platform to enable them to provision security material into that product. They announced the product at Embedded World in Germany in Q1 and we are supporting them on that product announcement and ramp as we previously announced. We're very excited about it, it looks like a great product. We're also supporting and had announcements with Microchip in the first quarter on the SAM L11 microcontroller and we continue to do additional supports and look for additional announcements upcoming this quarter.

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Robert Stephen Anderson, Penbrook Management LLC - Co-Founder [13]

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And the Cypress chip in particular is, is it the application mainly automotive or does it go way beyond automotive?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [14]

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I think they're targeting the product, Bob for the Internet of Things market. I'll let them position their products, but that's what we understand.

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Operator [15]

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The next question will be from Arthur Winston with Pilot Advisors.

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Arthur Michael Winston, Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer [16]

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Hi, Tony. As time goes on, what have you learned about the potential and the opportunities for SentriX and how are you adjusting your strategy from what's transpired software?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [17]

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Good question, Art. I think the first thing we learned was that the designing ramp was going to be 24 months and we were sort of hoping it'd be a little sooner than that. The -- we, I think, had a decent understanding of what it would take to design boards with new secure products, but I think we underestimated the fact that a lot of the customers that were the target for these products also needed to learn a little bit about security and hence that the full 24-month design in. I think the second thing we learned is that, it's really important for us to continue to expand our partnership base targeting semiconductor companies and their distributor partners early on was absolutely necessary and the right thing to do, but I think we've learned quite a bit from working with people like DigiCert, people like ARM and maybe some others that I'll be able to talk about on a future call, but people that are, I'll call it more expert in the security space and that's helped us refine our offering and look at alternative ways of creating demand that we are excited about. The third thing is, I think the feedback from the market is very clearly, that SentriX is a product that is meeting a need in the marketplace, it's unique in its capability, it works, and it's able to support, as we've talked about all the secure elements and also secure microcontrollers, and that flexibility combined with the IoT business model with lots of smaller customers, I think creates a nice product category for us. And one that's sorely needed in a market where security remains the #1 concern and design factor for people building IoT devices.

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Arthur Michael Winston, Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer [18]

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Okay, good. And just, it sounds like you really have not curtailed any research and development efforts at all, it's just a matter of accruing less incentive compensation was going on. But the amount of dollars dedicated to research is constant, that the question.

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [19]

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That's pretty correct. That's accurate.

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Operator [20]

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The next question will come from George Melas with MKH Management.

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George Melas-Kyriazi, MKH Management Company, LLC - President [21]

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Hello, Anthony and Joel. 2 quick questions.

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Joel S. Hatlen, Data I/O Corporation - CFO, COO, VP of Operations & Finance, Treasurer and Secretary [22]

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Hi, George.

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George Melas-Kyriazi, MKH Management Company, LLC - President [23]

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Hello. Maybe just to follow up on the previous question, trying to understand sort of the IoT space right now. Products that are in fairly small -- that are not huge quantity product, but sort of medium quantity product, which I think is what you were targeting. Do they have any ability to have security at this point or is it just completely lacking in the market?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [24]

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George, I think I can't paint a broad brush for that. The short answer is, it depends. When we look at our customer base that we know of, already right now, we're seeing almost as many market segments are filling out a very comprehensive chart that you would expect in Internet of Things devices. The #1 thing we're seeing is, as people go and say why do you want to do an IoT device in the first place. Well, you want to do an IoT device in the first place, so that, that device can communicate to resources in the Cloud, either for extracting data, which then can be monetized either internally or externally by customers or to provide for things like software updates in the field, performance analytics, and things like that. So if we're going to connect the product, you need to secure the product, because if you can't secure the product, you'll never be able to trust the data, and you'll never be able to trust the fact that you're going be able to do a secure update. So I think the first generation of IoT products may have skimped on that, and you've seen a lot of newspaper articles and stories about the negative results that the consumers' experience when they find that their product is not secure. It's very clear to me that the second-generation or the concurrent generation of products now being designed in IoT are demanding security. We hear that not only from OEMs, but also we see that from what the semiconductor companies are announcing. They're announcing second-generation secure elements that have very targeted features, and a very cost effective implementations. We're seeing secure microcontrollers being announced by nearly every microcontroller company, and they're providing an integrated capability whereas a secure element would be providing a standalone capability. We're seeing things that have been retrofitted onto existing designs, we're seeing new ground-up designs from companies. But in general, the promise of IoT really can't get realized, unless you have a secure implementation at the endpoint. And given the market dynamics, given the size of these customers, the annual volumes, their supply chains, SentriX is just a great fit.

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George Melas-Kyriazi, MKH Management Company, LLC - President [25]

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Okay. That's really super helpful. But just to understand a little bit better, the first generation of these IoT products, they have no ability to, for example, to do a software upgrade on the secure -- in a secure way. Is that correct or is there a way --

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [26]

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George, I can't make a -- yes, I can't make a blanket statement on old devices, but let me give you some examples. Although, a lot of people heard about the baby monitor that got hacked, because someone could get in via an insecure update process and get to update firmware and essentially takeover that product. These devices are designed to communicate wirelessly. Now you can have a secure wireless communication channel, that's great. But if you don't have a secure firmware, then once someone gets in somewhere, they can get that firmware updated and essentially takeover the device. So again, what we're seeing is engineers in surveys, coming back, list the #1 concern they have is securing their product, because without security, you can't really securely update the products, you can't control your firmware update, #1, and #2, you can't really monetize the data you get from the product, because you have to make sure that data are uncorrupted. And the beautiful thing is when you employ a strategy of using a secure element or secure microcontroller, that gets provisioned by SentriX, you secure your firmware over the life cycle of the product, you can protect your data, and you also secure your supply chain. All at the same time.

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George Melas-Kyriazi, MKH Management Company, LLC - President [27]

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Right, right, right. Okay, that's great. Quick question on that, [CM] that -- that you guys were able to make some sales there. And you said that they have not purchased a Data I/O product in about 10 years. How big is that CM, is it a division of a much larger one and maybe you know how many machines, how many programing machines they have in their plants?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [28]

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Well, I --

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George Melas-Kyriazi, MKH Management Company, LLC - President [29]

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I'm just trying to size the opportunity.

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [30]

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Yes, their name, that I think anyone that understands the contract manufacturing market would recognize instantly. They are global in scope, they are on 5 continents and obviously the opportunity we won was in Asia. You know the -- I won't, I don't want to prejudice anything we might be working on with them now, for the future, but suffice to say, we continue to talk to them to that, perhaps additional opportunities.

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Operator [31]

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

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [32]

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Well, thank you very much operator. With no additional questions, I'd like to at this point close the call and thank everyone for attending.

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Operator [33]

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