What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-12 compared with 2025-05-13 · 50 added, 35 removed, 162 unchanged (34% of the section changed)

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The following discussions and the 2024 Annual Report on Form 10-K section entitled “Risk Factors – Cautionary Factors That May Affect Future Results” describe some, but not all, of the factors that could cause these differences.

Data I/O continued to make progress in key operational areas during the first quarter, despite a challenging global economic environment.

The period represents a first step in proving the growth and market expansion strategies being implementing over the past several months.

The Company achieved strong first quarter results, reporting increases in revenue, net income and EBITDA on a sequential and year-over-year comparison basis.

Data I/O continued to make progress in key operational areas during the second quarter, despite a challenging global economic environment.

The second quarter represents a continuation in proving the growth and market expansion strategies being implemented over the past several months.

At the same time, efficiency improvements and streamlining operations resulted in a lower cost basis for manufacturing and overhead.

Furthermore, we are encouraged to see customers increase the utilization of their existing systems which results in a greater need for engineering and maintenance services and heightened demand for consumable adapters, which represent a high margin source of revenue.

We are focused on improvements to our core programming platform and received a significant automated programming system order late in the second quarter from a leading global automotive EV supplier.

We are encouraged to see customers increase the utilization of their existing systems, which results in a greater need for engineering and maintenance services and heightened demand for consumable adapters, and represent a high margin source of revenue.

We continue to grow our pipeline of opportunities beyond the automotive sector including a revitalization of our activities with semiconductor companies and forging strategic product development relationships with leading firms serving the memory and microcontroller sectors.

Combined with continued efforts to expand our market reach, we expect to deliver revenue growth through end market diversification and an enhanced consultative sales process.

As the tariff and trade scenarios evolve, Data I/O is well prepared having implemented a resilient supply chain with dual manufacturing capabilities in both the United States and China during COVID which provides an advantage to manage emerging tariff policies.

With the flexibility to manufacture at either location, we are well positioned to cost-effectively support customers globally.

Efforts are underway to enhance our redundancies between our two manufacturing locations.

Additional manufacturing locations are being considered for placement within our European headquarters in Germany and with select distribution partners.

Overall demand for capital equipment continued to be negatively impacted by ongoing global trade and tariff negotiations throughout most of the second quarter.

However, ongoing supply chain planning and other actions have helped mitigate the impact of new tariffs, trade and inflationary pressures, including shifting material sourcing and product manufacturing.

Significant progress has been made in a short period of time against a backdrop of significant economic and cross-border trade uncertainty.

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Net sales by product line

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Net sales by location

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Net sales by type

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Software and maintenance

Net sales in the first quarter of 2025 were $6.2 million, as compared with $6.1 million in the prior year period and $5.2 million in the fourth quarter of 2024.

The improvements were driven by business recovery and backlog deliveries in the Americas and Europe with growth from the prior year period of 32% and 44%, respectively.

Asia revenue declined 40% due to strong prior year performance and bookings delay due to trade, tariffs and economic uncertainties.

New bookings activities were strong at the start and slowed at the end of the first quarter as customers delayed purchase decisions due to global trade and tariff concerns and related automotive electronics uncertainty.

First quarter 2025 bookings were $4.6 million, up from $4.1 million in fourth quarter 2024 and down from $8.1 million in first quarter 2024 due to a large $2.8 million contract from a single customer for multiple system deliveries that has spanned nearly 15 months.

Backlog on March 31, 2025 was $2.9 million, down $0.6 million from December 31, 2024.

Additionally, deferred revenue was approximately $1.5 million on March 31, 2025.

On a geographic basis, international sales represented approximately 88% of total net sales for the first quarter of 2025 compared with 96% in the prior year period.

Total equipment sales were 54% of revenues, adapters were 32% and software and services revenues were 14% of revenues in the first quarter of 2025 compared with 55% and 30% and 15% respectively for the first quarter of 2024.

Automotive electronics represented 66% of orders followed by 26% for IoT and 8% for programming centers for the first quarter of 2025.

Net sales in the second quarter of 2025 were $5.9 million, compared with $5.1 million in the prior year period and $6.2 million in the first quarter of 2025.

First quarter 2025 revenues were elevated due to the completion of a large order received in the first quarter 2024.

Overall demand for capital equipment continued to be negatively impacted by ongoing global trade and tariff negotiations through most of the second quarter 2025.

Net sales of Consumable adapters and services revenue represented 50% of total revenue and provide a stable base of re-occurring revenue.

Total equipment sales were 50% of revenues, adapters were 39% and software and services revenues were 11% of revenues compared with 46% and 36% and 18% respectively in the second quarter of 2024.

For 2025 year to date, equipment sales were 52% of revenues, adapters were 35% and software and services revenues were 13% of revenues compared with 2024 year to date sales of 51% and 33% and 16% respectively.

On a geographic basis, international sales represented approximately 95% of total net sales for the second quarter of 2025 compared with 88% in the prior year period.

Bookings increased in the latter half of the second quarter as customers had been delaying purchase decisions amid ongoing global trade and tariff concerns.

Second quarter 2025 bookings were $5.8 million, up from $4.6 million in the first quarter 2025 and $5.6 million in the second quarter 2024.

Second quarter 2025 bookings and backlog include an order for 10 PSV automated pro-gaming systems with LumenX programming platform from one of the largest EV manufacturing suppliers in China valued at over $1.4 million which is expected to be delivered during the second half of the year.

Automotive electronics, a primary business segment in the second quarter of 2025, was 66% of second quarter 2025 bookings.

Backlog at June 30, 2025, was $2.8 million, down from $3.0 million at the end of the prior quarter.

Deferred revenue was $1.3 million on June 30, 2025, down from $1.5 million on March 31, 2025.

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Percentage of net sales

Gross margin as a percentage of sales in the first quarter of 2025 was 51.6% as compared to 52.8% in the same period last year and 52.2% in the fourth quarter of 2024.

The change in gross margin percentage primarily reflects a higher mix of system sales revenue and lower spending absorption from related inventory reductions in the first quarter of 2024.

Gross margin as a percentage of sales in the second quarter of 2025 was 49.8% as compared to 54.5% in the same period last year and 51.6% in the first quarter of 2025.

A lower margin product mix and configuration of automated systems driven by a large customer order led to reduced margins.

Direct material costs remained steady and consistent with prior periods.

Ongoing supply chain planning and other actions have been mitigating the impact of new tariffs, trade and inflationary pressures, including shifting material sourcing and product manufacturing.

RESEARCH AND DEVELOPMENT

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Percentage of net sales

Research and development (“R&D”) expenses decreased in the first quarter of 2025 as compared to the same period in 2024.

The slight decrease is due to transition from prior to new R&D programs and the associated changes in project and outside services spending.

Research and development (“R&D”) expenses increased in the second quarter of 2025 as compared to the same period in 2024.

The increase is due to transition to new R&D programs and the associated changes in project and outside services spending.

SELLING, GENERAL AND ADMINISTRATIVE

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Percentage of net sales

Selling, General and Administrative (“SG&A”) expenses were lower in the first quarter of 2025 as compared to the same period in 2024.

First quarter spending reduction reflects primarily lower sales commissions related to lower first quarter bookings and lower compensation expenses from headcount reductions which occurred in fourth quarter 2024.

Continued efficiency improvements and cost reduction efforts remain a focus, offset in part by inflationary increases and seasonal first quarter public company costs.

Selling, General and Administrative (“SG&A”) expenses were higher in the second quarter of 2025 as compared to the same period in 2024.

Second quarter spending increase includes higher compensation expenses and leadership and other human resource transition requirements that continued through June 30, 2025.

Continued efficiency improvements and cost reduction efforts remain a focus.

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Interest income

Interest income was lower in the first quarter of 2025 compared to the same period in 2024 due to lower interest rates and invested balances.

Interest income was lower in the second quarter of 2025 compared to the same period in 2024 due to lower interest rates and invested balances.

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Income tax benefit (expense)

Income tax benefit (expense) for the first quarter of 2025 and 2024 primarily related to foreign and state taxes.

Income tax benefit (expense) for the second quarter of 2025 and 2024 primarily related to foreign and state taxes.

The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as foreign taxes.

We have a valuation allowance of $8.9 million as of March 31, 2025.

As of March 31, for both 2025 and 2024, our deferred tax assets and valuation allowance have been reduced by approximately $444,000 and $434,000, respectively.

We have a valuation allowance of $9.1 million as of June 30, 2025.

As of June 30, 2025 and 2024, our deferred tax assets and valuation allowance have been reduced by approximately $447,000 and $437,000, respectively.

Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets including our net operating losses and credit carryforwards and continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance.

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Working capital

At March 31, 2025, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash at $10.5 million increased $159,000 from December 31, 2024 primarily due to higher sales, an improved costs structure and lower inventory levels, partially offset by higher cash expenses paid annually in the first quarter.

Correspondingly, working capital of approximately $16.0 million on March 31, 2025, remained relatively flat as compared to December 31, 2024.

At June 30, 2025, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash at $10 million decreased $534,000 from December 31, 2024, primarily due to one-time expenses and investments in the second quarter, partially offset by an otherwise improved cost structure and lower inventory levels.

Correspondingly, working capital of approximately $15.6 million on June 30, 2025, was down slightly as compared to December 31, 2024.

The Company continues to have no debt.

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Our working capital may be used to fund possible losses, business growth, project initiatives, share repurchases and business development initiatives, including acquisitions, which could reduce our liquidity and result in a requirement for additional cash before that time.

If the Company determines to pursue significant acquisitions or business development initiatives, the Company may need to raise additional capital.

If additional capital is required, the Company will review the amounts and options to raise capital at that time, but future financing would most likely be through debt and equity offerings.

Any substantial inability to achieve our current business plan could have a material adverse impact on our financial position, liquidity, or results of operations and may require us to further reduce expenditure and/or seek possible additional financing.

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NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($272,000) in the first quarter of 2025 compared to ($645,000) in the first quarter of 2024.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was ($98,000) in the first quarter of 2025, compared to ($364,000) in the first quarter of 2024.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($687,000) in the second quarter of 2025 compared to ($379,000) in the second quarter of 2024.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was ($437,000) in the second quarter of 2025, compared to $3,000 in the second quarter of 2024.

Non-GAAP financial measures, such as EBITDA and adjusted EBITDA, should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

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Interest (income)

Depreciation and amortization

Depreciation & amortization

EBITDA earnings (loss)

Equity compensation

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis