Friday, October 21, 2011

Data I/O ( Nasdaq - DAIO ) -- Economy Hinders New Product Acceptance

Data I/O (DAIO $4.50) reported lower than expected Q3 results.  The company launched its next generation hardware line in the period.  Data I/O is the leading provider of semiconductor programming systems.  The machines take blank semiconductors produced in large volumes by companies like Texas Instruments and loads them up with specific applications.  One batch might be programmed to control a Camaro's brakes; the next could be for a Cadillac.  Data I/O also introduced a series of software products that provide new features, particularly in the inventory control and security areas.  The company had hoped to sell those software packages to its installed base, in addition to including them on new machines. 

Slowing sales of semiconductors around the world impacted demand.  Most of the company's customers are independent middle men that customize chips for a wide range of end users.  Data I/O's new systems offered those customers the ability to boost throughput and provide more value added functionality.  The downturn in economic conditions encouraged Data I/O's customers to stick with the tried and true, however, slowing the sales cycle and adoption rate.  Start up costs should decline in upcoming quarters.  So earnings are likely to improve over the unusually low Q3 level.  But a major acceleration in 2012 appears less likely than before.

Earnings (fully taxed) fell 71% to $.02 a share in the September quarter.  Sales improved 7% to $7.05 million.  Even with an expansion in profit margins in Q4 we've reduced our fully estimate by 33% to $.20 a share.  Next year a gain to $.35 a share appears attainable.  We estimate next year's sales will climb 14% from $29 million to $33 million.  Data I/O is a well financed company with an industry leading market share.  Downside risk is limited as a result.  Value investors realistically can maintain positions with an eye towards an industry recovery over the next 2-3 years.  Aggressive investors are advised to close out positions and reinvest the proceeds in a Special Situation with more dynamic growth prospects.

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