Monday, March 7, 2011

Data I/O ( Nasdaq - DAIO ) -- Follow-up Report

Data I/O reported Q4 results that were moderately below our expectation.  The company's order rate declined early in the period.  That coincided with a general slowdown throughout the semiconductor industry.  Business picked up midway in the quarter and has remained vibrant since then.  Data I/O's systems are used to load programs and datafiles onto blank computer chips before they are shipped out for final assembly.  The long term outlook is positive because more products are being computerized, and the volume of information that's being embedded in computer chips keeps growing at exponential rates.  Business is prone periodic downswings, though, due to inventory drawdowns and slowdowns in overall economic activity.  Sales rose 40% in the December quarter to $6.95 million, despite the early sluggishness.  Fully taxed earnings advanced 400% to $.05 a share.  Both year ago figures were depressed by relatively weak economic conditions.  Profit margins in the latest period were affected by a sudden jump in R&D spending.  Data I/O remains the leading producer of semiconductor programming systems by a wide margin.  But it does face considerable low end competition, especially from Chinese manufacturers.  Data I/O accelerated development of several proprietary software upgrades in response to customer demand.  Those initiatives also promise to thwart potential competition.  The use of outside consultants and other nonrecurring expenses probably reduced income by $.01-$.02 a share in the quarter.

The new software features are slated for introduction in the second half of 2011.  In the meantime, sales are likely to exhibit positive year to year comparisons.  But some orders may be deferred until the new technologies are made available.  As a result, we have reduced our 2011 sales estimate by $2 million to $30 million; and our earnings estimate by a nickel to $.30 a share.  Data I/O has stockpiled $18.9 million in cash ($2.10 a share), and the company continues to aggressively pursue complementary acquisitions.  Spending half that amount and generating a 10% rate of return would boost earnings by $.10 a share.  Earnings should get a further boost when the new product lines gain momentum, setting the stage for substantially higher levels of profitability over the next 2-3 years.

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