Friday, April 22, 2011

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

Data I/O (DAIO $5.75) reported good Q1 results, consistent with our expectation.  Sales rose 13% to $7.04 million.  Non-GAAP earnings declined 17% to $.05 a share.  Escalating product development costs foreshadowing an acceleration in financial performance clipped income by $.03 a share.  Those projects are software related, and could be sold into Data I/O's installed base of semiconductor programming machines (in addition to new hardware customers).  The technologies are focused on security and parts identification and could attract broad based demand.  Overall margins are likely to widen due to the inherent profitability of software products.  Q1 results also were affected somewhat by gang violence in northern Mexico.  That area historically has been a major semiconductor programming center but business recently has started to shift to Asia and other parts of the world because of the criminal activity.  Data I/O kept most of its lost Mexican orders.  But some of those customers didn't set up at their new locations in time for the revenue to be recognized in Q1.

Our 2011 earnings and sales estimates are unchanged.  We think sales will finish around $30 million to yield non-GAAP earnings (fully taxed) of $.30 a share.  The new software promises to drive margins higher in the second half of the year.  Hardware demand is likely to stay robust, moreover, fueled by the ongoing boom in mobile devices and other consumer electronics.  In 2012 fully taxed earnings could achieve $.50 a share on sales of $35 million as Data I/O enjoys the benefits of a full year of software sales along with a levelling off in R&D expense.  Cash totals $19.0 million ($2.11 a share).  Those funds could be invested in acquisitions of complementary products and services.  Downside risk exists.  The semiconductor industry is cyclical and Data I/O would be exposed to a severe decline.  But the company already controls a leading share of the market and that figure could expand in the future as device complexity keeps increasing, forcing low-end Chinese competitors to either keep pace technologically or abandon the business.

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