Prepared remarks
Good afternoon, everyone, and welcome to Data I/O's Second Quarter 2026 Financial Results Conference Call. Please note this event is being recorded. At this time, I'd like to turn the conference over to Mr. Jordan Darrow, Investor Relations. Please go ahead, sir.
Thank you, Aksha, and welcome to everyone to the Data I/O Corporation Second Quarter 2026 Financial Results Conference Call. With me today are the company's President and CEO, William Wentworth; and Chief Financial Officer, Charles DiBona. Before we begin, I'd like to remind you that statements made in this conference call concerning future events, results from operations, financial position, acquisitions, financings and capital markets initiatives, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, foreign exchange fluctuations, product releases, new industry participants and any other statements that may be construed as a prediction of future performance or events are forward-looking statements, which involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied in such statements. These factors also include uncertainties as to the impact of global and geopolitical events, international tariff and trade regulations, order levels for the company and the activity level of the automotive and semiconductor industry overall, ability to record revenues based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part shortages, pricing and other activities by competitors and other risks, including those described from time to time in the company's filings on Form 10-K and 10-Q with the Securities and Exchange Commission, in our press releases and other communications. The company may also reference GAAP and non-GAAP financial performance measures, including one-time items, which are intended to provide listeners with a means to better understand the company's performance. Please refer to reconciliations in our earnings press release issued today after the market closed. Finally, accuracy and completeness of all discussions on this call, including forward-looking statements, should not be unduly relied upon. Data I/O is under no duty to update any forward-looking statements. And now I'll turn the call over to William Wentworth, President and CEO of Data I/O.
Thank you, Jordan. Appreciate it. We've got a lot to talk about and a lot to unpack, so I'll try to make sure I hit all the points. As you know, we welcome questions, so if I don't provide clarity on something, please ask. First, the Q2 highlights. We landed at the midpoint of our revenue guidance of $5.1 million to $5.4 million, achieving $5.2 million. Gross margins had a significant improvement; this is the highest level since Q2 of 2023 despite 30% lower revenue compared to that period. Our sales funnel continues to expand with new customers and new domains, which has been a huge focus for us. We have six new logos so far this year: three automotive, two robotics and one in global communications. All of these, especially the last two domains, have significant upside in future years, and we are seeing demand beginning to ramp. On the robotics side, I would expect to see that start to drive significant revenues probably in the second half of next year, but we're getting built into the supply chain of these companies, which is the first step you have to make. With stronger revenue performance and our drive to take costs out of the business while operating more efficiently, we have reached our goal of reducing the overall cost of running the business to less than $22 million. That was a goal we set early last year, and we achieved that in April of this quarter. This equates to approximately $5.25 million to $5.5 million of revenue to breakeven essentially, and we feel comfortable at that level that we can generate organic growth and start to turn a profit and see quarter-over-quarter growth. We entered Q3 with a pretty strong active pipeline and closed quite a few deals in July. Our improved revenue mix shows that we're selling systems with more value, more I/Os and more options. We've done a great job managing our quotes and making sure that we're charging appropriately for that value, and communicating that value to customers through multiple methods, which is helping significantly. With our margin improvement strategies and reduced operating expenditures, I can say for the month of July our second large milestone is to become cash flow neutral—i.e., stop burning cash. Preliminary numbers for July show close to cash flow neutrality. Yes, it's only one month, but it's a significant improvement and a result of hard work and execution across the Data I/O team. We're not done yet; there are still a couple areas where we need to improve operational efficiency and cost, which will also improve the customer experience. We'll be doing things in this industry that our competitors don't do. Through these efficiencies, we can react to customer demand faster. For example, we've received an email from a new client in India asking for a few weeks' turnaround on device support for new devices. We're in the process of meeting those challenges during Q3, and we've set a goal of four weeks for device turnaround; the industry currently averages about eight to twelve weeks. Regarding transformation and our acquisitions, we've announced those in May and they've been going pretty much to plan. These things never happen as fast as you want, but the team has done a great job looking at the business. We've engaged some great advisors to help find any holes or issues. We've completed the Quality of Business review (QofB), which identified a few items that allowed us to save some money on the purchase price. We've extended the exclusivity date to August 31 for close, so that's where we stand. On the security acquisition announced in the press release, I'm calling from a microcontroller conference that we would not have been invited to had we not bought these security assets from IAR. Having IP and a seat at the table with suppliers matters. There are many compliance and regulatory programs coming out, such as the Cyber Resiliency Act in Europe and RED, and these things have to be fully addressed by the end of next year; vulnerability reporting monitoring starts soon. We're seeing a big push on the medical side because of FDA approval processes, but other industries will have to meet these requirements or they cannot sell their product. This is perfectly timed for us. We've started engaging some of these customers, listening to their plans and schedules, and understanding their approach to getting customers compliant in the semiconductor space and at OEMs and subcontractors. Owning the security platform opens up a whole new branch of opportunities for Data I/O that we did not have previously. We had a partnership with IAR before, but now that we own the platform and will continue to invest in it, it differentiates conversations with almost every customer. Importantly, we are buying assets and will continue our commercial relationship with IAR. Their compiler and debugging software workbench remains an important platform for companies like Microchip. We are not decoupling completely; we will stay connected to service customers like Microchip, do launches in the channel with them, and provide technical support. We are working out the commercial relationship with IAR, but they will remain a strategic channel partner for this platform. The acquisition brings in four new revenue streams: the software platform itself, annual support contracts, licensing fees, the tokens that must be placed in parts (with a charge per token), and Programming-as-a-Service, providing security provisioning as a service. It is exciting to have multiple revenue lines. The beauty of this is we did not have to invest heavily up front; we're leveraging Data I/O's core LumenX platform and pivoting it to address the market need. Another key point is that security is domain neutral—everyone will need it—so this will help accelerate diversification away from automotive into other domains. As for PaaS, we discussed this last earnings call: we're now in the data collection stage for proposals on the pipeline we built. That is ongoing; we expect to have proposals ready by the end of Q3 and we aim to book one to three contracts in Q4. Overall growth drivers include improving opportunities from customer domain expansion in Q2: robotics, new automotive logos such as Valeo, industrial, med tech and global communications. We're working hard to diversify our customer base; I would say we are finally evolving after a long 18 months. Our goal of becoming a highly valued supplier in the semiconductor supply chain is beginning to come true, especially with the security capability. We can also add internal capabilities, such as licensing debugging software similar to IAR's, to be a higher value partner to engineering communities, paralleling growth in the programming industry alongside security mandates. Data I/O is well positioned with a strong tech team, our platform, balance sheet and market growth drivers. At this point, I would like to hand the call over to Charlie to provide more insight into our Q2 financial performance. Charlie, please take it away.
Thanks, Bill, and good afternoon, everyone. I'm going to cover four areas today. First, a quick review of our second quarter financial results. Second, I'll briefly dive into the accounting treatment for the convertible debenture we closed in June because it has a meaningful impact on reported net income and EPS. Third, I'll give an update on our 2026 business framework. And finally, I'll provide another quick overview of where we stand with some of the strategic transactions Bill discussed. Starting with the quarter: net sales in the second quarter were $5.2 million, up 59% sequentially from $3.3 million in Q1 and compared to $5.9 million in Q2 of last year. The sequential improvement reflects conversion of delayed Q1 orders and what we believe is an inflection in demand for capital equipment after a prolonged downturn. Second quarter bookings were $4.9 million, up from $4.2 million in Q1. We signed six new customer logos in the first half, three from automotive and three from diversified technology markets that Bill mentioned. Consumable adapters and software services represented 55% of total revenues with platform sales at 45% of Q2 revenues, a shift from the 81/19 split in Q1, reflecting the rebound in capital equipment orders. Deferred revenues fell slightly to $1.1 million from $1.5 million. Backlog as of June 30 was $2.1 million, down from $2.6 million on March 31, reflecting operating improvements enabling quicker response to orders and improved order-to-ship performance within the quarter. Gross margin was 57% compared to 49.5% in Q1 and 49.8% in Q2 of last year. The improvement reflects the cumulative effect of a positive mix shift, improved value-based pricing, increasing operational efficiencies and greater overhead absorption on the higher revenue base. Direct material costs remained steady as we continue to mitigate the impact of tariffs and other inflationary pressures. Operating expenses were $3.7 million, including approximately $527,000 in one-time expenses primarily related to the restructuring, but also consulting, IT and placement expenses. Excluding one-time items, operating expenses were approximately $3.1 million, a decline both sequentially and from the prior year. By April, we achieved our target total of cost of goods sold and operating expenses below a $22 million annual run rate. Operating loss was $724,000 on $5.2 million of revenue, an improvement from an $844,000 loss on $5.9 million of revenue in Q2 of 2025—better performance on lower revenue. Net loss was $1.6 million or $0.17 per share compared to $742,000 or $0.08 per share in Q2 of 2025. This increase was driven almost entirely by $873,000 of interest expense from the convertible debenture accounting, which I will walk through in a minute because it is unique to the situation we faced. Adjusted EBITDA, excluding equity compensation and one-time items, was essentially breakeven at positive $39,000 compared to negative $1.75 million in Q1. On the balance sheet, cash at quarter end was $10.8 million, up from $5.7 million as of March 31, reflecting net proceeds of $8.3 million from the June private placement. Net working capital was $10.8 million. On the balance sheet as of June 30, you will see $6.2 million of convertible debentures classified as short-term debt, which was netted from working capital. I want to flag that this was a quarter-end snapshot only: the debentures converted into Series B preferred shares on July 8, and the company currently has no debt outstanding. Removing those convertible debentures from short-term liabilities and the working capital calculation would have yielded working capital of $17 million at quarter end. Turning to the accounting on the convertible debenture: when we closed the $9 million private placement on June 17, the proceeds were allocated across common shares, equity-classified warrants and the convertible notes using the relative fair value method based on stand-alone fair values determined by KPMG, our independent consultant. Approximately $5.9 million was allocated to the notes, which have a face value of $6.8 million. This difference, combined with the allocated issuance costs, created a total discount on the notes of approximately $1.5 million. Under the effective interest method, that discount is amortized over the expected life of the notes. Because the notes automatically converted to Series B preferred stock upon shareholder approval, which both management and the investor expected promptly, the amortization period was not the five-year stated maturity of the notes but the period from issuance to the anticipated shareholder vote. Approval was obtained on July 8, giving us an amortization window of approximately three weeks. Amortizing $1.5 million of discount over three weeks produces a concentrated charge. Of the $873,000 in interest expense recognized in Q2, approximately $863,000 is noncash and nonrecurring accretion of debt discount and approximately $10,000 is the coupon interest at 4%. Again, the notes converted to preferred equity on July 8, and there is no debt currently on the balance sheet. Both the convertible notes and warrants remain outstanding in their applicable forms as described in our filings. Next, an update on the 2026 business framework we outlined in our first quarter call: following the strong Q2 and significant progress on two planned acquisitions, we are reaffirming the 2026 business framework. The pillars are unchanged: organic revenue growth over 2025, acceleration of recurring and services revenue including Programming-as-a-Service, continued expansion within the programming services market, and operational and process optimizations driving improved margins, including internal application of AI. The first-half trajectory supports these targets, and the framework now incorporates consolidation of transformational acquisitions in the second half. We are not providing specific revenue guidance for Q3. As we said last quarter, Q2 guidance was a onetime disclosure driven by near-term visibility from Q1 slippage. Nonetheless, we remain confident in the trajectory and the framework is tracking to plan. Finally, an update on the three strategic transactions shaping Data I/O: the $9 million direct investment closed on June 17 with net cash proceeds of $8.3 million, and the convertible notes converted to Series B preferred stock as of the shareholder meeting on July 8. The warrants remain outstanding and are exercisable at $3 per share over five years. Our lead investor is now our single largest shareholder. The transformational acquisition is on track; we have extended exclusivity through the end of August as Bill mentioned and are progressing through diligence and definitive documentation. Upon closing, as discussed before, the acquisition is expected to nearly double our annual revenue run rate and boost earnings and cash flows. And finally, in July we announced our intent to acquire IAR's embedded software security and IT-related assets. Combined with our programming platform, this creates a true end-to-end security provisioning solution that Bill referenced, aligned with regulations like the EU Cyber Resiliency Act that mandate device-level security. We'll provide additional details as we progress toward a definitive agreement and expected close. In summary, Q2 was an operational watershed: 59% sequential revenue growth, 57% gross margins and breakeven adjusted EBITDA as the strategic plans and operational efficiencies implemented over the prior 18 months began to bear fruit. The large reported net loss reflects a nonrecurring noncash accounting charge that will not repeat. We have $10.8 million of cash, no debt, and two acquisitions advancing to collectively continue the transformation of Data I/O into a company with greater scale and diversification, broader provisioning and security capabilities and reach, and new revenues and business models to exploit. With that, I'll turn the call back over to the operator for questions and answers.
Questions and answers
The first question comes from Jon Hickman with Ladenburg.
I got on late, so maybe you already talked about this, but did you say something about the progress of the closing of your acquisition that you mentioned a couple of months ago?
Yes. We just mentioned we extended the exclusivity to the end of August. That's all we commented on other than due diligence is ongoing and tracking to plan.
Okay. So you're still pretty confident that that will happen?
We remain confident, yes.
Okay. So could you elaborate a little more on — I know you've spent some time and energy and money on building out your team. You've added some new executives recently.
No, we haven't added any new executives formally to payroll.
You added somebody like just a couple of weeks ago. They used to work with you at your...
We have a strategic consultant who came in to review some of our customer-facing activities and also look at the Programming-as-a-Service side. Whether that person becomes a full-time employee will probably become clearer as we go through the quarter; I fully expect that could happen. But no, we haven't formally added anyone new to the payroll yet.
Okay. And then this might prove my naivete as far as the industry in general is concerned, but we're hearing a lot about shortages in the memory world due to AI. Is that affecting your customers and their demand for product?
Well, customers that use the same high-speed memory that NVIDIA needs or that AI requires are likely being adversely affected. There's always a ripple effect when newer technology is in such high demand. If fabs can produce different flash technologies that aren't as cutting edge, they may shift production and that can have an impact. For the most part, what we've seen is that on the UFS side we haven't seen lead times extend too far. There is a client related to the acquisition that had allocation challenges with a few memory parts, but it's not as widespread as the high-speed memory needed for AI and cell phones. It's more narrowly related to those specific AI-driven components.
Since there are no further questions, this concludes the question-and-answer session. I would like to turn the conference back over to William Wentworth, Chief Executive Officer, for any closing remarks. Please go ahead.
Yes. Thank you, operator. There's a lot of changes going on in the industry that are significant, including allocation and price increases. When the industry picks up, it broadens reach beyond AI into areas like edge computing, autonomous anything, AI-driven robotics and industrial automation, and those areas will continue to expand and affect the overall semiconductor market. Lead times have pushed out in places, but the industry has learned since 2001 and does a much better job managing through disruptions. This is a unique time because the amount of infrastructure being built out is huge; we haven't seen anything like this. You just don't know how it will affect the supply chain long term. That said, many of the technologies we work with are not tied directly to this specific memory squeeze, and the broader build-out is bringing new products to life that help us drive volumes. Becoming a more highly valued vendor is one of the main reasons buying the security asset was so important: it gives us a significant differentiator against competitors and fills a huge customer need coming up soon. Between the two assets we are acquiring, we're picking up roughly 60 to 70 active accounts that would use our technology that we have not previously served. That's a lot of new logos and domain growth. Realizing those revenue synergies should be visible soon and will help cash flow generation; our internal FP&A analysis has been fairly conservative. Overall, I think we're in a great position for Data I/O to return to continued growth, both inorganically and organically. We're off to a good start in Q3, and I'm confident in the internal targets we've set, which makes me look forward to the Q3 earnings call. Stay tuned: there will be more announcements over the next 30 to 60 days that are significant. With that, I'll hand it back to the operator.
Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.