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Edited Transcript of DAIO earnings conference call or presentation 31-Oct-19 9:00pm GMT

Q3 2019 Data I/O Corp Earnings Call

Redmond Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Data I/O Corp earnings conference call or presentation Thursday, October 31, 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 - Chief Operating & Financial Officer, 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

* 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 day, and welcome to the Data I/O Corporation Third Quarter 2019 Financial Results Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Jordan Darrow. 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's Third Quarter 2019 Financial Results Conference Call. With me today are Anthony Ambrose, President and CEO of Data Corporation; and Joel Hatlen, Chief Operating Officer and Chief Financial 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 statement 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 levels 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 and 10-Q with the Securities and Exchange Commission, press releases and other communications. The accuracy and completeness of forward-looking statements should not be unduly relied upon. Data I/O is under no duty to update any of these forward-looking statements.

With that, I'd 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'll start by commenting on 2019 third quarter results and our outlook on the overall market, and then I'll turn it over to Joel Hatlen for more detail on our specific numbers. The third quarter was very much a best of times, worst of times quarter. From an absolutely brutal summer, we saw a meaningful pickup in orders in September and continuing in October. We also completed development on several exciting new products and saw solid traction on our SentriX platform.

In Q3, our revenues were $3.8 million, and we had a $4.3 million in bookings. This low level of revenue led to a loss of $844,000, our first quarterly loss since 2015. Adjusted EBITDA, which excludes equity compensation was negative $306,000. We anticipated a challenging quarter and entered 3Q with minimal backlog but these results were below our internal forecasts. The months of July and August were particularly weak for new bookings. We made back some ground in September. October was also much better than the depressed levels of the summertime.

Softness in automotive and uncertainty created by tariffs and international trade tensions have been wreaking havoc on the global supply chain and freezing CapEx investments of many of our customers. As I mentioned last quarter, this is the worst CapEx environment since 2012. Forecast, when this sector will fully recover, vary between Q4 of this year and mid-2020. While we do not give quantitative revenue guidance, we feel better now than we did in the summertime and hope we've seen the bottom of the cycle.

Since we've been through several market cycles through the past 30-plus years, we understand how to navigate them. We did an excellent job of controlling spending in the third quarter. Discretionary and variable spending were down as designed as we remained focused on continuing improvements on efficiencies and our profitability. Our recurring revenue from software, service and maintenance contracts and consumable sales for adapters helped cushion margins as equipment sales dropped sharply. At the end of the third quarter, we supported over 270 PSV units in the field, globally. Despite these very poor short-term market conditions, we stay the course and continue to invest for the future. This ensures we have the best solutions to resume growth as sectors reverse course, and we're best positioned to take market share and grow when the market grows.

In the third quarter, we delivered multiple enhancements to our existing platforms as well as introducing new platforms and device supports. Earlier this week, we announced the PSV2800 platform. This is our first-ever entry into the Ultrafast segment of the market, with performance up to 3,000 parts per hour. Our performance is much faster and, hence, delivers a much lower total cost of programming for our customers. This allows us to serve new customers and pursue new applications versus end-of-line programming. Our approach is much more flexible and cost-effective compared with traditional end-of-line programming applications and that this makes the PSV2800, the perfect complement to our PSV3000, 5000 and 7000 family members.

Earlier this month, we also received the 2019 Mexico Technology Award in the category of device programming for our Job Composer software application at the SMTA Guadalajara Expo and Tech Forum. Our Job Composer software streamlines the process for customers to manage and control job creation from a central design location and seamlessly transfer the job configuration to a local production site for final compilation and programming. This saves significant time and reduces human error in the job-creation process. This allows us to aid and optimize the automation of all factory floors across the enterprise. This is especially important when we talk about connected and autonomous cars, car infotainment and other like applications.

We continue to make great strides with our SentriX security deployment platform in Q3 as well. Key performance metrics increasing in the third quarter include number of customers, design wins, device types supported and our overall sales funnel. Our customer engagements in 2019 have doubled from the same period last year, and our partners are seeing and closing more deals as we increase the number of devices supported on the platform and they get experience with the presales process. We've also been awarded numerous patents to protect our unique intellectual property and have additional patent filings pending.

Based upon our encouraging results to date, we will be increasing our SentriX platform investment even as we manage spending tightly elsewhere. Next month, we intend to showcase our new products and security solutions at Productronica, the major biannual electronics manufacturing show in Munich, Germany. We have 3 speaking engagements and plan to demonstrate our latest announced products, and perhaps, even showcase a surprise or 2. If you're in the Munich area, please join us at Productronica and contact Data I/O for a free badge to the show.

With that, I'd like to turn it over to Joel Hatlen, our Chief Operating Officer and Chief Financial Officer, to provide more details on the quarter. Joel?

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Joel S. Hatlen, Data I/O Corporation - Chief Operating & Financial Officer, VP of Operations & Finance, Treasurer and Secretary [4]

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Thank you, Anthony. Good day to everyone. Net sales in the third quarter of 2019, were $3.8 million as compared with $6.5 million in the third quarter of 2018 and $5.8 million in the second quarter of 2019. Anthony discussed the down cycle in his remarks as well as address the bookings during the third quarter and for October to date. On a geographic basis, international sales represented approximately 90% of total net sales for the third quarter as compared with 88% of revenue in the 2018 period. Total capital equipment sales were 56% of revenue during the quarter, and adapters and consumables were 44% of year-to-date in 2019 compared to 65% and 35%, respectively, for the full year of 2018.

For the third quarter of 2019, gross margin as a percentage of sales was 52.6% as compared to 63% in the third quarter of 2018 and 61.4% in the second quarter of 2019. Third quarter gross margin reduction was due to the reduced sales volume and as a percentage by the inefficiency of fixed cost relative to that reduced sales volume. For the full year, we continue to model gross margin percentages in the mid to upper 50s. At this -- at the 9-month mark, gross margin has been 59%. Tariffs continue to cause uncertainty in our outlook but have been, and should continue to be, manageable. Tariffs impacted gross margins as a percentage of sales by 1.7 points in the third quarter.

Operating expenses were down compared to both the prior year and the prior quarter periods. The change is primarily related to variable expenses, including lower incentive compensation and sales commissions as well as stock-based compensation. Cost control measures were also significantly contributed to the reduction. We continue to actively engage in market development and R&D initiatives for our SentriX platform as well as our key programming platform initiatives addressing the automotive and industrial and other sectors. At the same time, we are emphasizing ongoing expense management practices. With the expectation of increased SentriX-related spending, we are modeling next quarter's operating expenses at approximately $3.3 million.

In accordance with U.S. GAAP, net loss in the third quarter of 2019 was a loss of $844,000 or $0.10 per share compared with a net income of $342,000 or $0.04 per diluted share in the third quarter of 2018. Bookings in the third quarter of 2019 were $4.3 million compared to $7 million in the third quarter of 2018 and $5.1 million in the second quarter of 2019. Backlog at September 30, 2019, was $1.7 million compared with $1.4 million at June 30 of 2019, with the increase due to late September orders.

Data I/O had $1.7 million in deferred revenue at the end of the third quarter compared to $1.5 million at the end of the second quarter. Data I/O's financial condition remains strong, with cash of $15.2 million at September 30 of 2019. As Anthony mentioned, we used $244,000 in the third quarter to repurchase 56,000 shares. It is important to note that even though we had a loss in the quarter and spent money to buy back stock, we did not burn cash in the quarter. Cash closed just slightly higher from the end of the second quarter. Our days sales outstanding, or DSO, a receivables collection measure was better than expected at 47 days at the end of the third quarter, an improvement from 51 days at the end of the second quarter.

Net working capital at the end of the third quarter was $18.4 million, down from $19.5 million at the end of the second quarter, again, primarily due to the loss as well as the share buyback. The company continues to have no debt.

Finally, we had 8.211 million shares outstanding at September 30, 2019. That concludes my remarks. I'll return the call back to Anthony.

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

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Thank you very much, Joel. And before we open it up for Q&A, I'd just like to remind investors that we'll be participating in the LD Micro Conference in Los Angeles on December 10 of this year. And if you'd like to talk with Data I/O, please let Jordan Darrow know and we'll get you scheduled. With that, operator, I'd like to start the Q&A process, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jaeson Schmidt from 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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Just want to start with a clarification. Joel, the split between equipment and adapters, 56% and 44%, were those year-to-date figures or was that the split in Q3 as well?

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Joel S. Hatlen, Data I/O Corporation - Chief Operating & Financial Officer, VP of Operations & Finance, Treasurer and Secretary [3]

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I'm sorry. For the quarter, that was the split. And then -- but that was being compared to last year's total year figures.

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

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Okay, okay. And then it sounds like orders have been picking up here over the past couple of months. Could you just comment on if visibility has improved at all? I know it never extends too far out, just the nature of the sandbox you play in, but any additional color around overall visibility would be helpful.

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

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Yes. Sure, Jaeson. This is Anthony. I'll take that one. As we talked about there, the July and August were absolutely brutal, and we did see a pickup in September and October has actually been a little bit better than September. What it feels like is happening, I'm not sure we're getting more visibility, but I think a lot of things happened towards the end of the second quarter that just simply froze people. And it looks like some orders were released in September and October simply because our customers absolutely needed them. And so, I think, it's more of a case of that happening. I think visibility is pretty much as we've always had it. Although the reality is when decisions are being made or held back at a corporate level, we tend not to be actively engaged with the people that might be holding back purchasing. We're typically engaged with the local people when they're buying equipment. So when you have a tough economic situation, the visibility inherently goes down because CFOs like to put the kibosh on spending.

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

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No, that makes sense. And then just the last one for me, and I'll jump back into queue. You noted the number of customer engagements doubled on the SentriX platform. How should we think about that revenue contributing meaningfully to the model, sort of, a timetable there?

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

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Yes. I'll be pretty consistent with what we've talked about. It's not this year for "meaningful." That'll happen more like next year. What we're anxious and happy to see is that our sales channels are figuring out how to sell this and close business. As our supports grow, it means customers can get to market faster. So all those things are happening. And as I mentioned, we continue to be very excited about SentriX.

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Operator [8]

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(Operator Instructions) Your next question comes from Robert Anderson from Penbrook.

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

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A 2-part question. You completed the authorized stock buyback, so do you anticipate initiating a new stock buyback? First question. And then what was the backlog at the end of October? You did mention the backlog at the end of September.

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

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So Bob, let me answer the second question first. I actually don't have a backlog number, end of October. I won't get that till tomorrow. It's just -- typically, we don't give out backlog numbers in the first month of a quarter, and I'm not sure it would be terribly meaningful. We did see an acceleration in September and October. The anticipation is those orders get fulfilled in time to be recognized in Q4. And so that's what we'd expect.

And then the first question on the buyback. We just completed the buyback. I don't anticipate that we'll be doing another buyback shortly. We just met on that yesterday with the Board. We'll always keep an eye on things but don't anticipate that changing anytime soon.

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Operator [11]

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Your next question comes from Art Winston from Pilot Advisors.

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Arthur Michael Winston, Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer [12]

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Tony, I was just curious as to what prompted you to decide now to increase the spending on SentriX? Why now as opposed to some other time?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [13]

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Well, we're looking at a number of areas, partially the demonstrated traction, partially some new and interesting things that we're adding to the platform. We just completed our internal strategic review. This is the time of the year when we do that, and we try and take a 3-year look at our opinion on where the best growth opportunities are in the market. And we just completed the 2800, which is a very exciting new handler product, so most of the R&D is done on that. We'll be showcasing that product and now that gets into the sales cycle in earnest. We had a number of enhancements on our other platforms as well. Significant releases for our programmers, for our handlers. And so that part of fuel on the core business, that R&D has largely been done. And I think on the SentriX side, looking forward, we continue to reinforce our opinion that the world is moving to security. The world is moving there in certain segments ahead of others, namely, automotive is doing it very, very quickly, and IoT is happening as well. And that we had some additional new opportunities. It's a little too early to describe them in detail here on the earnings call but that's -- that was our thought process and the strategic planning.

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Arthur Michael Winston, Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer [14]

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Are you far enough along to really understand how the models should be in terms of recurring revenue, onetime sales, in terms of follow-on sales to keep it going? Or is that premature to know how the model is going to play out at this rate?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [15]

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No, I think -- that's a good question. We certainly have our own internal model. As I've indicated, we'll be sharing more of that with investors. We've described that our principal model is to provide the SentriX security deployment platform as a service primarily, and that helps for a number of reasons, both for market reasons as well as internal reasons. The specific terms of how that works out, that's something I don't want my competitors to figure out pretty easily, which, unfortunately, they would be able to do if I told you on the call. So we'll keep that -- those cards a little close to the vest for now.

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

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Okay. This is not a question, but if you could please possibly pass on to Board that at least one of your stockholders is disappointed that the company is shortsighted not to buy back shares. It's quite disappointing, but not a question.

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

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Okay. Thanks, Art.

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Operator [18]

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Your next question comes from [Jeremy Levin] from [Webco]

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Unidentified Analyst, [19]

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Gentlemen, in all the positions I've held in life, if I went to my bosses and I said that I came short because of the failings of the sector that I was involved in, my bosses would have said, "Well, I don't really care what your sector is doing. We don't grade on the curve. We're only interested in what you're doing." And I would have been in a lot of trouble to constantly come up quarter after quarter and say that there's a statistical issue, and that's the problem. It's nice that you get awards and you get special plaudits for achievements that you make from Mexico or wherever, but I mean shareholders are really only interested in the share price, which is dismal. So you have to figure out to possibly do another strategic review why going down the route that you've been going down is not producing the results. That would make this company shine. And you have to figure out how to beat expectations, not through an award given out by Mexico, but maybe an announcement of $100 million of unexpected sales, something on that nature, because until you do that, your company is grading on a curve. And I don't invest in companies that grade on a curve.

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [20]

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Thank you very much. Let's move to the next question.

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Operator [21]

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(Operator Instructions) Your next question comes from Robert Anderson from Penbrook.

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Robert Stephen Anderson, Penbrook Management LLC - Co-Founder [22]

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Anthony, I would echo the thought that a resumption of share buybacks would be a very good idea. That's a comment. Now my question is about the PSV2800 and you talked about end of line. And I'm a little confused. Is that putting code on the chips, such as would be done by Teradyne equipment? In other words, your test equipment and also echo...

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [23]

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Yes. So as we've discussed before, right, you can program products in a few different ways, technically. Data I/O's primary approach is we program the parts when they are components, which is prior to placement on an SMT line. You can also program parts when they're panelized on an SMT line, and we generically call that programming end of line, whether it's a dedicated piece of programming equipment or you can program a test. I was specifically referring more to dedicated pieces of programming equipment. They tend to be pretty expensive and somewhat inflexible. And with the capabilities we're able to get on the 2800, that brings some replacement of that type of business into our served market.

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Robert Stephen Anderson, Penbrook Management LLC - Co-Founder [24]

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So then I was right. It takes volumes off Teradyne-type equipment and moves it to your equipment?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [25]

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Correct.

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Robert Stephen Anderson, Penbrook Management LLC - Co-Founder [26]

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Okay. All right. I didn't understand that. Now on SentriX, what's your installed base now of SentriX equipment?

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Anthony Ambrose, Data I/O Corporation - President, CEO & Director [27]

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We have 5 systems deployed globally.

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Operator [28]

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Your next question comes from [Vishal Mill].

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Unidentified Analyst, [29]

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Anthony, this is Vishal. I guess, it put -- if you could clarify even more why the Board and you on our strategic review decided not to continue the share buyback? And second, what is the reason you need that much cash on balance sheet of almost $15 million? There's no cash burn now, but do you expect an investment or cash burn to pick up? That's the reason you have that much cash? It's a 2-part question.

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

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Well, I think the question is, we just completed a $2 million share buyback. That's the largest share buyback we've had in 6 years. So I think we've been very clear that we were returning capital to shareholders. The $15 million is not all in the United States, okay? We have to fund operations, not only in the United States, but in China and in Germany. At the same time, we're in a down cycle on the business. So I think we've looked at a number of alternatives, and we frankly believe that the cash is best served by doing what we're doing right now.

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Operator [31]

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Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Anthony Ambrose for closing remarks.

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

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Well, operator, thank you very much. I'd like to thank everyone that asked a question. And at this point, we'll close the call.