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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Data I/O ( Nasdaq - DAIO ) -- Fundamentals Intact

Data I/O (DAIO $4.75) appears on track to report excellent on target Q3 results.  The stock has declined 25% in price over the past two months, reflecting soft demand for semiconductor manufacturing equipment in general.  Data I/O probably is selling fewer new systems than it would under more dynamic economic conditions.  Business remains good, all the same.  Recent software introductions have improved the underlying equipment's competitive advantage.  Data I/O is the leading producer of systems that load data onto virgin computer chips so they can be used in the real world.  Flash chips for smart phones and tablets are a major end market.  The company also is a leader in providing automotive computer chips.  Both of those segments continue to expand. 

Data I/O also has begun selling its new software packages to its installed base.  Those highly profitable sales promise to widen margins in upcoming periods.  Inventory fluctuations, which hit the semiconductor industry after the Japanese earthquakes, may be causing customers to hesitate when placing new orders.  A decline in the overall economy probably will continue to keep sales below potential over the next 6-9 months, as well.  But the combination of market share gains and new high margin software sales promise to keep income moving higher even during the dark days.  Bigger gains are likely when conditions improve in 2012. 

Technically, hedge fund selling has exacerbated the stock's recent falloff.  That overhang may continue to weigh on the price.  Looking past that short term pressure, the long term outlook remains bright.  Large as it is, the semiconductor industry remains in an early stage of development.  Data I/O is well positioned to keep gaining market share as it boosts productivity, and perhaps makes complementary acquisitions with its cash horde.  In 2-3 years earnings could reach $.75 a share.  Applying a P/E multiple of 20x suggests a target price of $15 a share, potential appreciation of 215% from the current quote.

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Data I/O ( Nasdaq - DAIO ) -- New Software Wins Acceptance

Data I/O (DAIO $5.75) appears on track to produce accelerating Q3 results.  That trend is likely to gain momentum and propel earnings to sharply higher levels in 2012.  The company launched its latest hardware product (RoadRunner) on August 1st.  That system contained all of Data I/O's new software packages that eliminate programming errors, enhance auditing, scheduling, and tracking, and make piracy substantially more difficult.  Inclusion of the software will boost revenues and margins directly.  The software also is designed to work with hardware already in the company's installed base.  Straight software sales to those customers could provide additional leverage.  More software programs are in development.  Data I/O continues to hold extensive cash reserves, moreover, so acquisitions of customers, other hardware lines, or complementary software products are possible, as well.  Our estimates are unchanged.

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Data I/O ( Nasdaq - DAIO ) -- Skeptical Audiance Creates Cheap Entry Price

Data I/O (DAIO $5.70) reported unexceptional Q2 results.  Earnings dipped 29% to $.05 a share.  Sales advanced 4% to $6.85 million.  Sales declined sequentially although orders improved to $7.3 million.  Backlog climbed $500,000 from the end of the March quarter to $1.6 million.  A series of high potential software products is slated for introduction in August.  That rollout probably will continue into 2012.  The new software features could leverage sales of Data I/O's semiconductor programming hardware products.  Stand alone sales of the software to the installed base promise to amplify performance.  Data I/O remains tight lipped about the product features and pricing.  That's caused most investors that currently hold the stock to take a cautious view.  New investors haven't gravitated to the story yet, either.  Downside risk is limited, since Data I/O is the leader in its field and the industry promises to remain vibrant over the long haul as computer chips become more complex.  The company's systems load specific applications onto standard computer chips.  For instance, Ford Motor may load a particular set of instructions and data files onto a Texas Instrument chip to control the brakes on a Fusion.

The new software could cover a lot of ground.  Loading data onto chips continues to be a fairly high end operation.  But the real growth will come from ancillary features like process control and tracking to thwart piracy and other forms of intellectual property theft.  That business promises to make a lot of money right off the bat.  It also could boost Data I/O's hardware penetration.  Competitive offerings will be able to perform the data loading but the value added software probably will be available only on Data I/O machines.

We are raising our 2012 earnings estimate by 25% to $.50 a share.  A stronger performance is possible if direct software sales take off, or the software leverages demand for the company's hardware.  Data I/O intimates the new products could expand its potential market by 1,000% over the next five years.  If that's even remotely true these shares could produce exceptional appreciation from current levels.

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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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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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Data I/O ( Nasdaq - DAIO )

Data I/O (DAIO $5.75) is the leading provider of programming systems used to load data onto semiconductor chips.  The company's automated machines convert blank semiconductors into intelligent devices.  Demand is rising due to the expanding complexity of electronic products, and the proliferation of computer chips into an ever widening array of applications.  Data I/O's systems are employed in a broad spectrum of devices, but are particularly relied upon in high end chips containing large data files and programs.  Demand is fueled by the volume of data that has to go in, along with other factors such as physical chip size, production line rates, and geographical proximity to final assembly plants.  A mitigating factor is Data I/O's own ability to speed up its machines' performance, enabling customers to process more chips per minute.  Competition exists, but much of that resides at the low end of the market.  Several prospective customers rely on in-house solutions, which also limits the company's potential somewhat.  Economic factors play a significant role, although those cyclical ups and downs tend to balance out over the long haul.  Right now Data I/O appears to be in the early stages of a major upturn that could last well into the coming decade.

Financial results experienced a nosedive in 2009 due to the recession.  Performance has rebounded in 2010 to prior levels, and momentum is continuing to build.  For the entire year we estimate sales will finish at $27 million, consistent with the 2008 level, and up 46% from the year before.  Non-GAAP earnings (see "Accounting Notes") could reach $.28-$.30 a share.  Data I/O ended the September quarter with $17.5 million in cash, moreover, representing 60% of total assets.  That figure might expand further in the seasonally strong December period.

Next year sales of $32 million (+18%) appear to be a realistic target.  Margins promise to widen on the higher volume to provide a 25% gain in earnings to $.35 a share.  Booming smartphone growth combined with solid gains in other electronics intensive industries could support a stronger showing.  Data I/O also could put its cash reserves to work via acquisitions or joint ventures, creating the potential for further leverage.  The company has increased its diversification efforts of late, so a material transaction is a realistic possibility.  A variety of targets have been identified, both in Data I/O's core market and in related areas. 

In 2-3 years sales could attain $40-$45 million, exclusive of acquisitions.  Margins may continue to widen, propelling earnings into the $.50-$.60 a share vicinity.  Acquisitions could provide an additional $.10-$.15 a share in earnings (assuming $10 million invested at a 10%-15% rate of return).  Applying a P/E multiple of 18x to the midpoint of the range suggests a target price of $10 a share, potential appreciation of 75% from the current quote.  A higher valuation is possible if Data I/O succeeds on the acquisition front.  The company's industry leading position could make it an attractive takeover target itself. 

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