DAIO

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, operator, and welcome to the Data I/O Corporation First Quarter 2026 Financial Results Conference Call. In addition to the earnings, we are also addressing the recently announced transformational acquisition and strategic direct investment of $9 million. With me today are the company's President and CEO, Bill Wentworth, and Chief Financial Officer, Charlie 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, 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, the 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. Now I'll turn the call over to Bill Wentworth, President and CEO of Data I/O.

Thank you very much, Jordan. As you heard from Jordan, we've, you know, obviously have a lot of great news to talk about today, but I will start with kind of the low end of this conversation, which is, you know, talking a little bit about Q1 and talk a little bit about kind of what happened and what we did to pivot within Q1 to get the momentum that we now have in Q2 as a, you know, the core business. You know, we had some really good plans going into the year. They were well thought out. You know, as you know, we have a very large installed base globally, and a lot of that equipment has certainly gotten in age and some of it's aging out.

Our plans were really around generating revenue through our existing clients first. Obviously, that's the easiest place to go. Things got off to a little slower start than we thought, so we made some pivots and really started to change a little bit of that messaging, and you can kind of see through Q1, especially into March, where bookings really started to pick up. Now we didn't get those bookings in time to ship, but they certainly came into Q2 strong, and that continued to accelerate. I am, you know, this company, you know, in the past has typically not given any guidance, so this is something that's somewhat new. I'm highly confident that we've moved north of $5 million both in bookings and revenue for the quarter. I won't go anything beyond that.

This is really to give the shareholders an understanding of really directionally where the business is going on its own. Obviously, we have an investment we're gonna talk about, an acquisition, it's really important that the shareholders and the people on the phone understand that the core business is healthy. It's been a slow start, We've got new products rolling out the second half, We've got some really good momentum. A lot of it is actually in North America and Mexico. Asia is still a little bit slow. We did book three purchase orders for systems in Europe, which is the most we've booked more than the last two years combined in Q1. We are seeing some good pickup. We've landed about three net new logos since the beginning of the year.

We've got three right now in the active pipe for this quarter that we have a good chance at closing. To land three, and these are not three site changes. It's not like another Jabil location or Flex. These are net new logos that we've never invoiced. You know, that is obviously a big part of our plan was to diverse our customer base because we really were so heavily reliant on automotive. I know in the past those numbers were 58%-63%. You know, when I dug in during the year, and especially in the second half, it was pretty clear to me a lot of the subcons that we had as kinda industrial were really automotive. You know, coming off a really tough time in the automotive industry, this has been a big transition overall for us.

You know, we're seeing some of our automotive customers come back. You know, we happen to be riding a few of the right horses there, which is always good. You know, we feel really good about Q2 and where we're going with the core business. That's, you know, Charlie will get into some of the details and the financials. We have some one-time write-offs, and as we optimize the business, that has been a big part of the last two quarters. I will tell you that, you know, going into this quarter, our break even for the overall business starting April as a clean month going forward is less than $22 million a year overall. When I started, it was close to $27 million.

I will tell you, AI has been a big part of that ability to get more productivity but also save money. It's not just about saving money because we, you know, AI is impacting our lives everywhere. We all see it. You know, we see it across companies and across every domain. CEOs are asked about how they're deploying AI all the time. It has a real positive impact to the company and to companies and to productivity. We've seen a lot of that in different projects that we're working on, and I'll talk more about that in the Q&A. I'd like to move on to the direct investment.

This is something we've been In looking at the M&A pipeline that we started to build when we brought Benchmark on as an advisor, you know, that pipeline has stayed pretty healthy, and it still is. We're really looking for a transformational acquisition. I mean, that's You know, look, there's some small acquisitions we could do. We really needed something that was gonna take us to the next step, the next level, and give us some scale and scope and, you know, increase manufacturing capacity, things like that. You know, we've been talking to a company over the last, you know, three, four, five months, and during that time, talking to some investors.

You know, I'm happy to announce that we were able to bring in $9 million of proceeds in common stock warrants convertible debenture in support of our current M&A activity as well as future M&A. Fundamental institutional investor following our progress for and met with us over at least 3x, maybe 4x over the last year. I think we've built a really good relationship with the investor and other investors that are looking. I really like where we're going as far as bringing in new money. You know, it's time. This is a new day and age for Data I/O. We're excited about the future. The team's excited. The companies we're talking to are excited. There's a very large growing market for us.

If you look at the overall semiconductor market, it has gone through the roof over the last several quarters. A lot of that has been in specialty parts such as GPUs and high-speed memory. Now you're starting to see the tide rise for everybody, and this is where we're seeing the activity. As AI starts to get more pervasive across our infrastructure, there are other things that need to be built to support that or take advantage of AI automation, and we're seeing that in places like robotics, edge of the network. You know, two of our new logos are robotics companies. You know, you've heard me talk about this in the past couple quarters, and it was definitely a target market for us. Those are two of the new logos.

We're very excited about where we're going and where Data I/O sits in that supply chain, but as well as getting into services. You know, I'll talk a little bit more about the acquisition a little bit later. If, if you followed us in our launching of our new website on April 10th, it was a dynamic change in this company's history. You could see Programming as a Service, and we are in four or five very deep conversations right now with significant large subcontractors that wanna move from doing it themselves, insourcing to Programming as a Service on-site or regional. My expertise is services, so this falls right into a comfort zone of mine, and I'm really looking forward to getting back into the services business. It's a great industry. It's recurring.

It's got a higher quality of revenue, improved cash flows. It kinda takes out that lumpiness of the CapEx business. I'm sure that we're I know Charlie's gonna enjoy those new cash flows as we start to expand that business and the services. You know, we're focused on developing new software to also run our products in a multi-tenant environment. All that leads to better revenue, better recurring revenue, a more predictable business for the future. I'll move on a little bit to the acquisition. I do wanna save, you know, a good amount for the Q&A or Look, I hope you guys are ready, 'cause we're certainly ready for your questions. You know, as I said, we've been working on this acquisition for quite some time.

I will tell you that, you know, the team is very excited and, you know, what this acquisition does for the company, you know, it's gonna help us accelerate our growth. It's gonna expand our scale and scope and manufacturing capability. It is truly a transformational acquisition. It will double the size of this company from a run rate perspective post first quarter that we close or when that close happens. I do expect that to happen by the end of Q3. Stay tuned. I think at this point I'd like to hand this over to Charlie. Let's see, where'd it go? Yeah, I think at this point, Charlie, if you're ready.

Yep.

Take it away.

Thanks, Bill.

Thank you, Charlie.

Good, good afternoon, everyone. I'm gonna cover four areas today. First, I'll walk through our first quarter financial results. I'll move on to our updated business framework and second quarter revenue guidance because I suspect that's top of mind for everyone. Third, I'll discuss the $9 million direct investment and what it means for our balance sheet and capitalization. Finally, I'll walk you through the transformational acquisition that Bill was just discussing. Let me start with the quarter. Net sales in the first quarter were $3.3 million, down from $6.2 million in the first quarter of 2025. The reduced revenues in part reflect lower bookings and backlog coming out of Q4, which was a function of the broader industry dynamics we discussed on prior calls.

In addition, as Bill noted, we saw a slower than expected ramp of our new sales initiatives. That said, we experienced positive acceleration of traction and momentum through the quarter. First quarter bookings were $4.2 million, which was a meaningful improvement from the $3.1 million in the fourth quarter of last year. Though it was still below the $4.6 million we booked in Q1 of 2025. We're encouraged by the sequential improvement both quarter-over-quarter and through the course of Q1, and importantly, by the composition and quality of the interest in bookings we're seeing. Regionally, first quarter bookings were strongest, most notably improved in Europe, as Bill mentioned. We saw especially late quarter growth in Europe, which is very encouraging.

Revenue mix was 47% adapters and 34% software and services, representing 81% of total first quarter revenue, providing a very stable and recurring revenue base, with capital equipment making up the remaining 19%. We do expect that capital equipment sales, though, with a strong strength in bookings, will rebound in Q2. Backlog as of March 31 was $2.6 million, up from $2.3 million at the year-end, and deferred revenue was held consistent at $1.5 million as of both quarter ends. Gross margin was 49.5% in the first quarter, compared to 51.6% in Q1 of last year. The decrease reflects lower absorption of labor and overhead costs on the reduced revenue base.

Direct material costs, however, remained relatively steady, and the teams have continued to actively mitigate the impact of tariffs and other inflationary pressures. Operating expenses were $4.75 million for the quarter, which was of which approximately $1.2 million was one-time expenses. The one-time items were primarily related to the optimization of our German operations, ongoing investments in core programming platform information systems, and our ERP, ongoing ERP transition. Excluding the one-time items, operating expenses were approximately $3.55 million, which is in line with prior year despite the additional operating complexity of the transition we're executing. I wanna emphasize that point. Ongoing operating costs are being managed down even as we invest for the future.

Bottom line, net loss, the net loss for Q1 was $3.2 million, or $0.34 per share, compared with a net loss of $382,000, or $0.04 a share in Q1 of 2025. The increased loss reflects both lower revenue and the one-time expenses. Adjusted EBITDA, excluding equity compensation and one-time items, was a negative $1.75 million for the quarter, compared to a negative $98,000 a year ago. Both periods include elevated overhead for annual public company expenses that are generally paid in the first quarter. On the balance sheet, cash at the quarter end was $5.7 million, compared with $7.9 million at year-end.

The decline reflects cash expenses paid annually in the first quarter, including public company compliance costs and insurance renewals, along with one-time items, platform investments, and a temporary increase in inventory as we built ahead to satisfy the demand we saw as it through the end of the quarter. Net working capital was $9.3 million, down from $12.3 million at year-end. Importantly, we continue to have no debt on the balance sheet as of March 31st. Today, we announced a private placement resulting in aggregate proceeds of $9 million, which I'll discuss in detail shortly. Before I get to that and the strategic transaction, let me address the forward outlook, 'cause I know near-term trajectory is top of mind for many of you.

Our framework for 2026, which we discussed in the last quarterly call, is built on the following pillars: organic revenue growth for 2026 over 2025, and we continue to see good demand signals for that, as well as strength in our recurring revenue base and new sales models we're implementing. Acceleration of recurring and services revenues, including the launch of our on-site Programming as a Service as we move forward. Entry into the programming services market, which represents a meaningful opportunity to expand our addressable market, and with our addressable market and in which Bill has particular expertise. Operational optimization is driving improved gross and operating margins. As revenue increases, we expect not only better absorption of labor and overhead, but mix will also continue to play a role as we introduce higher margin software and services.

Expense reductions totaling approximately $1.8 million in annual run rate from operational optimizations implemented since the beginning of 2026. That's over the last five months. Including the German restructuring and broader structural cost improvements. These are already in place, and we expect to reap the benefits of these as we go forward. Finally, as Bill mentioned, AI is deeply ingrained across all functions in driving productivity gains in engineering, operations, customer support, and administration and finance. For the second quarter, we are providing revenue guidance of $5 million-$5.4 million. That implies a minimum of approximately 20% sequential growth from the first quarter. I wanna be very clear, we are providing this guidance and the context around it.

We saw the sequential acceleration of sales activity within the quarter, we also saw some revenue recognition slippage of bookings that were processed but pushed into Q2 based on the timing of revenue. Q2 guidance includes these delayed first quarter sales, as well as solid new activity early in the quarter. Demand did not disappear, it shifted. Combination of the late Q1 momentum carrying over and customer engagement building in Q2 gives us visibility to provide this range. I also wanna be equally clear, we do not expect to be providing revenue guidance or other specific forward-looking guidance on a regular basis going forward. This quarter is an unusual circumstance as we saw such rapid acceleration from a weak start of the year.

We believe it's important and appropriate to share that with investors in this instance, but this should not be taken as a precedent for ongoing quarterly guidance. On an organic basis, the combination of revenue growth and cost discipline gives us line of sight to positive operating cash flow on an organic basis by the end of 2026, and that organic basis does not yet include the strategic acquisitions that we're gonna talk about today or other ones that might come through the course of the year. Let me turn to the $9 million direct investment, which we announced today, and which we expect to close before the end of May. We entered into a securities purchases agreement with a single institutional investor for an aggregate gross proceeds of $9 million.

The structure is, you can see in the press release, is as follows: investment includes the issuance of approximately 870,000 shares of common stock, a convertible debenture in the principal amount of approximately $6.8 million, and warrants to purchase up to 1.08 million shares of common stock. The warrants carry an exercise price of $3 per share and are exercisable for five years from issuance. The convertible debenture is unsecured and bears and is convertible into Series B preferred stock, which is non-voting and convertible into common stock at an initial conversion price of $2.50 per share. The debenture will automatically convert upon receipt of stockholder approval pursuant to Nasdaq rules. Let me explain why this is the right transaction for the company. First, it validates our strategy.

This is a sophisticated institutional investor making a significant commitment to Data I/O at this stage of our transformation. They will become our single largest shareholder. That kind of conviction from an institutional source, particularly at this inflection point, is a strong signal. Second, it strengthens the balance sheet. $9 million in gross proceeds provides us with additional working capital and financial flexibility without encumbering the company with traditional secured debt. The debenture is unsecured, and we anticipate its conversion to preferred stock. This gives us room to operate and invest. Third, it enables our M&A strategy. Combined with our existing cash and the deal structure we've negotiated for the acquisition, this capital positions us well for the transaction and to continue invest in the organic business. Fourth, the terms are reasonable and aligned. The coupon on the debenture is modest.

The conversion and exercise prices reflect the conversion. Excuse me. The warrant exercise prices reflect the premium for where the stock has been trading, and the investor's willingness to take a large position at this stage speaks to their confidence in the combined organic and inorganic plan. The investment strengthens our foundation. Now let me tell you what we're building on. We executed a letter of intent to acquire a leading manufacturer in our space. The total consideration is approximately $23 million, and upon closing, as Bill mentioned, this acquisition is expected to nearly double our annual revenues as well as be immediately accretive to both earnings and cash flow. Let me start with the strategic rationale. Well, actually, let me leave that for the.

Yes, please.

Q&A later. Okay. One notable part of the structure, though, I do wanna mention, is that of the purchase price, about $3 million is going to be in the form of equity. The fact that the current private equity owners have agreed to take, you know, roughly 15% of the consideration in our stock is meaningful. These are people who know the business best, and they are expressing confidence in the value of the combined enterprise. Let me leave you with this. The first quarter financials reflect where we've been, a business in transition with costs coming down and customer activity building. The Q2 guidance of $5 million-$5.4 million revenue reflects where we're going on an organic basis.

The $9 million investment gives us the balance sheet to execute, and the acquisition that nearly doubles our revenue is accretive to earnings and cash flow. Signals the transformation of Data I/O in action. We're incredibly excited about what lies ahead, and we look forward to updating you as we move through the closing process and begin integration planning. With that, I'll turn it back to the operator for Q&A portion of the call.

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from David Cannon with Cannon Wealth Management. Please go ahead.

Hi, good afternoon and congratulations on the transaction. Very exciting.

Yeah, thank you.

You're welcome. The first question is for Charlie. Bill called out a breakeven of $22 million.

Yes.

-with the restructuring. In other words, Charlie, just to clarify, you're saying at five and a half million dollars of, per quarter, you'll essentially be EBITDA neutral. Is that correct?

Yeah.

What is this?

Assuming gross margins stay roughly in line with where they've been. Yes.

Yeah. Which we should see a slight improvement on that.

Yeah.

-based some of the changes. We'll see more improvement with the acquisition. Yeah, that's a bright phase.

That's correct.

Okay. Bill, you alluded to this will roughly double the size of the company.

Yep.

let's say, for example, that number is $20 million in services. Is this a double digit? Is this like a 15% EBITDA margin business? How should we look at that in terms of modeling going forward?

I think it'd be a little early to model that just because there is a lot. There are some solid synergies. I'm not gonna say significant. We still have some investigation to do there, Dave, during the due diligence stage of this, which we just kicked off yesterday. I'd probably hold that back. It's not all services. It's probably like a, you know, call it 60/40, right? It's not all services. There is CapEx in there. The services that come along with this company are much more, I would say, recurring nature than even our recurring on the adapters and things. There's, you know, more supply chain business and things like that that are pretty consistent.

Whether the tide goes up and down, there's always some consistent level of revenue, and fairly predictable regardless of what's going on market-wise. You know, again, it'll double the size of the company, certainly accretive. There's a lot of work to do between now and when we try to, you know, get this thing closed. There is certainly upside across the board and improving growth margin for both companies, honestly. I mean, when I think through AI and what we've done here and significant productivity improvements we've seen and, you know, taking projects that have taken years, and we're actually starting some of them over to reduce our technical debt. Dave, you know, you've been with the business for a while.

We've got a lot of antiquated equipment and software and hardware out there, and we're finding ways to literally cut this, the time by 70%-80%. Walking through their factory and looking at what they do, there's clear signs on where we can reduce, you know, design times by, you know, a couple, you know, four or five weeks and, you know, certainly, bring AI in to get them more productive. There's just a lot of upside across the board. From a revenue perspective, yeah, you should definitely think kind of 40+.

Okay. In terms of the capacity to grow organically with the existing footprint, or facilities that they have, what is the opportunity of that $20 million or so in revenue? Where do you think you can grow that organically with the current facilities that they have?

Yeah. It's a great question, David Cannon, thanks for asking it because, taking a tour of their facility, I was like, "Yes, we now have expansion capabilities and scale." You know, because if you think about where we're going, our core capital CapEx business, you know, we have a fairly tight production floor downstairs. You know, as we get into Programming as a Service, I'm gonna be building even more equipment for our own long-term contracts around Programming on-site as a Service. That will increase the need to build more. We would not be able to do that here, I can tell you that. This allows us to accelerate Programming as a Service because they have plenty of manufacturing space for us to grow into, as well as their core business as well.

Okay. Final question before I go back into queue. My apologies for monopolizing.

No, no worries. No.

with the acquisition.

We allow for multiple questions today, Dave. There's a lot going on.

Okay. Bill, you alluded to potentially the market coming to you. I forgot the exact phraseology, but there's, quote, "An increasing urgency around, edge AI infrastructure build-out security provisioning." Can you talk a little bit about that?

Yeah, sure.

You know, let's call it this AI build-out.

Yeah.

Exactly where that intersects with programming and what this opportunity is, you know, over the next 12 to 24 months.

Absolutely, Dave. Another great question. As you know, we talked about this in previous quarters, and we've just been kind of waiting for the wave to come. You know, we saw signs of this in Q4. It's why we really thought Q1 would really get out to a faster start than it did. Those conversations obviously accelerated towards the end of the quarter, and now we're deep in discussions in getting POs and booking new logos from those businesses. It's really products that surround or utilize AI, such as robotics and automation and cars. We've got a new client that we should be announcing soon, that has a very large business in both of those sectors.

When I look at, you know, what AI is doing in our overall economy and across every domain, that automation is going to drive other products that need to be automated or it's the ability to accept that automation and those AI signals. As you say, like, if you look at Avnet and Arrow's quarters, the last three quarters, I mean, their numbers have gone through the roof, right? They're a great barometer 'cause they're really kind of what I would call supermarkets of the world as far as semiconductors. If you ever wanna look at really what are the trends, they're a great barometer for that. And I segregate that from like the Microns of the world and NVIDIAs of world that have just gone, you know, in the stratosphere with their numbers.

I mean, I never thought Micron from four years ago would go from $56 to almost $700 or more. You know, the overall semiconductor industry is rising with it because there's needs for, like, more photonics inside the cabinets and just the little discrete power management chips and all these things. You know, granted, those aren't programmable, there's a lot of automated solutions needed for these things. You know, I think overall, the AI push is here, and it's starting to drag other industries and semiconductors with it. That's what we're seeing, that's what we're hearing, and that's what customers are telling us. I will tell you, the OpEx model, customers love it, you know. The great thing about Programming as a Service is the signatory stage for an OpEx contract isn't at the VP of Finance level.

You know, you're at director, manufacturing manager. You know, these decisions could be made at lower levels, which means we can execute multi-year contracts and services, including a managed service fee that we'll have on top of a multi-year contract with guaranteed volumes and minimum monthly revenues that they have to meet. I'm really looking forward to that and also opening up regional programming centers for Look, like I said, we've got a huge installed base out there. We've got a lot of customers that bought one system, and they never really bought again. Maybe they thought their business was going to go one way, and it, you know, it stayed flat. Those customers probably still have a good amount of programming business that we could take back from them regionally.

The advantage we have, Dave, is that we can give them a little bit of value of that equipment, even though it may have, you know, aged out or also, you know, there's no depreciation left on it because there's still the programming heads and the adapters. We're in a great place to give customers real value, even on old equipment, to move to a new model. I hope that answers your question.

Okay. Thank you.

Yep.

The next question comes from Jon Hickman with Ladenburg. Please go ahead.

Hey, Jon.

Hi. Hi. I'm new to this story, and I'm sorry if this is naive of me or so, but could you elaborate a little bit more on the, it says that these guys do semiconductor handling and packaging.

With what's all going on, why is the seller wanting to sell?

Well, it wasn't a company that was in a process, right? You know, when I think of M&A, I've done a lot of M&A over my career, you know, when you're looking at transforming a company such as Data I/O, you're looking around for strengths and weaknesses, right? Where are we strong? Where is a company that might be a great target because they're an adjacent market, or they have some of the businesses in a core part of your market, and you put those two companies together and can help accelerate growth, scale, and scope, and revenue. You know, it wasn't a question that they had to sell or, you know. Like, obviously, I understand your question because you're thinking, "Why would anybody sell in this market right now?" Because it's so robust. Not everybody's benefit.

You know, their business is definitely strengthened over the last year and a half, and they're going into this year strong. You know, we like where their numbers are going as well as ours. You know, I think it was more of a, you know, you never know when you're gonna get a dance partner in life, right? Sometimes timing is everything. You know, I think the match, you know, between me and the other CEO, we felt strongly that this was a good idea. Quite frankly, if they were gonna go to market at some point, we were definitely one of the companies that would have received the book. You know, look, we both decided that we felt that this would be a good time for us to merge the companies.

We both saw the great opportunities for both firms and the strengths and weaknesses, and so, you know, that's why we, you know, have come to an agreement, so.

Who from the other company is staying with you?

Oh, I can't really get into those details.

Okay.

Kicked off an early due diligence status. We'll be able to.

Okay.

get more on that once we close and talk through really not only the strategic rationale, but how we're gonna lay each other's strategy out and how well they fit together in the future, the team members and things like that. That's a little way premature.

Okay. I missed one thing. How many warrants are going with this deal?

Uh, a million eighty-- uh, one million eighty thousand.

The next question.

I'm sorry.

The next question comes from Howard Root with Fairhope Capital. Please go ahead.

Hey, Howard.

Good afternoon. Thanks for taking my question, and congrats on the next step in this transformation. It's good to see.

Yes. Thank you, Howard.

A couple questions. First, a little one. On the $5 million in Q2 that you're kind of guiding toward, is any of that your Programming as a Service? Has that started to kick in yet? When do you see that kicking in, and what's kind of the scope of the size and ballpark, and you see that hitting your revenue line?

Yeah. Yeah, great question, Howard. No, it does not include any of that. I can tell you that we are deep in the conversations with 8 clients. These are existing customers that already have our equipment, but were looking to buy more. Their businesses are expanding. Some of them are just, you know, looking to maybe move to an OpEx model because of all the benefits that you get from an OpEx model, and there are many of them. No. No, I would expect that I'd be shocked if we didn't have at least one to three contracts signed by the end of Q3. None of that revenue is really built in our current model. There's a little bit in Q4. I will tell you, the conversations are accelerating far faster than even I thought.

No, none of that revenue is in there.

In terms of scope of that.

Like size of revenue or contract-

Yeah. Right

vary. Kind of the rule of thumb that I've used over the years in doing, 'cause even at Source, we had four on-site programming centers with clients. We typically minimal, the minimum part of annual volumes are usually around 1 million to 1.5 million. From there, that's a machine or two. You typically look at a big contract would be 5 million-10 million parts a year. Obviously, you can find one 20 million plus, and they're out there. I mean, we have one subcontractor that is talking to us about giving us space in one site and servicing six others from that site. Those deals can get big quickly.

You know, if you look at 10 million-plus parts and an average programming price of, you know, anywhere between, you know, $0.09 and $0.14, $0.15, and that does not include Security Provisioning, it's pretty good revenue. Obviously there's a managed service fee in there for things like sockets and maintenance and software, so you add that into the total equation. Multi-year contracts, these will be 3-year minimum contracts, so very dependable, reliable revenue. The other note that I didn't get to kind of touch on, which I think is important to everybody, is that Security Provisioning, and I know Data I/O went through this for, with SentriX for many, many years. There's a, there's a, the CRA Act, which is the Cyber Resilience Act, which is coming out from the EU, becomes mandatory September of 2027.

We're starting to see Security Provisioning start to become more of an important thing to get taken care of going into 2027. We are in discussions to have some definitive strategic relationships in that area with both semi houses and contract manufacturers. I just want to 'Cause that was a question Dave kinda talked about a little bit. I wanted to get back and get that answered. It's important for everybody 'cause Security Provisioning can be kind of 2x the programming charge. We've got three opportunities in Indy right now and, you know, one of them there is an on-site programming center, and they're just not happy with their services. We've got some opportunities to really dislodge some competitors as well.

Great. Great. Thanks for that.

Yeah

in terms of the acquisition, it's, you know, if I do the numbers, $23 million, basically $20 million of that in cash. You're raising $9 million gross. You've got $5 million on your balance sheet. That still leaves $6 million-$7 million kind of unaccounted for. How are you gonna finance the rest of the acquisition?

I'll turn that over to Charlie.

Well, we're looking at sort of a combination, potential combination of other sources of cash, also potential debt or assumption of debt. They do have some debt on their balance sheet as it is right now. We may just bring that over. That might be the most expeditious way. We're very confident about the ability to raise this, to secure the rest of the financing.

You need to raise more money in order to close the transaction? Is that one of the conditions of closing?

No, no, not raising. We don't need to raise more equity. We think we can do it most likely with debt or absorption or assumption of their debt.

Okay. Okay, finally, in terms of the big, big picture, is this acquisition kind of a next step in the process, or do you see this as kind of the step, and now you've got to kinda, you've got your three legs of the stool, if you will, from what you had, this Programming as a Service and then this, and then you've got to integrate and go forward. Are you still looking at doing other acquisitions within the next six months to a year?

Oh, yeah. Oh, yeah. It gives me the second leg. We still need to go after the third. You know, the second leg obviously is in, you know, it's my background. That's why we launched services in the early, in early this year. Well, obviously in March or actually April 10th is when we launched the new website. Services is always gonna be on our schedule, whether organic or acquisition. Obviously, doing both accelerates everything. There are a lot of other, you know, service-only providers out there that, you know, will be worth taking a look at. This is the first step in that, it really gives us a great foothold along with what we're already doing organically.

Okay, great. I appreciate all the color. Thanks.

Yeah.

Congrats, guys.

Thank you. Thank you.

As a reminder, if you would like to ask a question, please press star then one to join the question queue. The next question comes from Robert Anderson with Penbrook. Please go ahead.

Yeah. Hi, Bill.

Hey, Robert.

I'm having a little trouble understanding what this acquisition actually does. On the one hand, you suggest it's a manufacturing company somewhat similar to what you do, so I get the sense.

Yeah

They're right now a competitor, they also provide programming as a service. Help me to understand, broadly speaking, what this company does.

Yeah, sure. I mean, they're in, you know, they're in a couple different markets that are, you know, complementary to ours. I wouldn't say they're a direct competitor, Bob. You know, I've talked about buying other programming companies that would be interesting to look at. I'm not saying that's off the table, but we're looking more in the adjacent plays and services. Complementary to us, I wouldn't say not competitive directly. You know, the other attributes of this business is that, as you know, we've been so, you know, bolted on to automotive. You know, one of the other attributes of this business is there are various different domains that they have. You know, less than 10% of their business is in automotive.

They do service a lot of semiconductor companies, which we can latch onto those relationships and expand our technology into those companies. Military defense and aero, kind of a hot spot. Would like to get there as well. You know, when you think about the domain barriers that are broken down right away because the customer relationships are there to leverage, are pretty significant. You know, we both benefit from some of that. I would say on our side, you know, there's obviously when you think through when you're mapping out what your strategy is, once you get through a transformational deal like this, you start looking at who are the people that are gonna help you execute all this, right?

You know, I've been planning that for probably at least the last three, four or five months of the people that can come in and help, and I've come across some wonderful people that have been in this industry that can help both companies grow. There's only so much, Robert, I can share right now, but, you know, stay tuned. I think you'll get a much clearer picture post-close.

Okay. Thank you.

Yes, no problem. Thanks, Robert.

This concludes our question and answer session. I'd like to turn the floor back over to Bill Wentworth, Chief Executive Officer, for closing remarks.

All right. Well, I wanna thank everybody for the time today. It was, you know, this is an exciting time in Data I/O's history. You know, I can tell you, and thank you, operator. The team, you know, we've got members here that have been for 20, 25, 35 years. I can tell you from the energy inside this building right now, they are all extremely excited for this next chapter. There's a couple people here that were supposed to retire six months ago, one year ago. I don't see them going anywhere. They are really excited about where we're going. These are key contributors that have been with this company for a very long time.

They're like, "This is something that we've been looking forward to for over a decade." The energy here and just utilizing the new tools and, you know, we've really started to really work on, you know, graduating from within. If you wanna build a great culture, lean on the people that have been here for a while, but give the younger generations and the talent here that didn't maybe get the opportunity they should have had in the past, and giving that to them now. We are really grooming some really great leaders for the future. Very excited about the future. We still have a lot of work to do. You know, this is where the real work begins. Although it feels like the last three months feels like 10 years.

Look, I've done enough M&A and integration in my time across my own business and larger companies. Charlie's also done the same. We've also brought in some talent that's on the executive team now that also has a significant amount of M&A experience, but as well as, more importantly, integration. It's really how you handle the people during that. You know, when I look at acquisitions and M&A, you know, culture is a huge part of that, if not number one. On top of that is being able to bring strengths and weaknesses together that complement each other, which in my at least in my experience, accelerates growth.

Looking forward to all of this, and, I'd like to close out and thank everybody for their time today, and we're really looking forward to the next several updates over the next months and quarters coming. Thank you.

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 line.

Good afternoon, everyone, and welcome to Data I/O's Fourth Quarter 2025 Financial Results Conference Call. Please note, today's 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, operator, and welcome to the Data I/O Corporation Fourth Quarter 2025 Financial Results Conference Call. With me today are the company's President and CEO, Bill Wentworth; and Chief Financial Officer, Charlie 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, markets, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, 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 onetime 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 market close. Finally, the 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 Bill Wentworth, President and CEO of Data I/O.

Thank you, Jordan, very much. Thank you for everybody dialing to the call. And I want to start off, obviously, this is a Q4 earnings call, but obviously, there's a lot that transpired over 2025. It was certainly a little more difficult of a quarter than we planned. There were a lot of things and headwinds that still continue with tariffs. But I want to assure everyone that, that did not waver us from the continuation of our transformation. You have to get through these tough times and you can't stop the transformation in this company needed. Data I/O had some transformation work that was fairly heavy. We did invest a lot of money into the business, specifically our platform. And I'm pretty proud of the team, very proud of the team and how we ended the year and how we've teed up this year, which I'll talk a little bit about shortly. The setup, our mission throughout '25 was to transform Data I/O for long-term growth. That plan proving to be approximately 1 year ahead of schedule. I've been through personally quite a few transformations in my own business and with other companies. So this is something I'm fairly good at measuring. I'm pretty -- I'm very confident that we are ahead of schedule. There are things that could even speed that up throughout '26. We executed against 6 strategic priorities, modernizing the go-to-market, which you'll hear about a little bit later, investing in our core platform. That was #1, then we started that early in '25, strengthening customer relationships. We have really got out in front of customers myself personally, probably really extended more of our employees into talking customers, which is so important in order for transformation to really occur because our team needs to hear from all of our customers and suppliers in order for those transformations to really take hold and for everybody to get energized around those. Optimizing business operations, IT infrastructure. We went through a fairly sizable cyber attack. We made it through that. I felt extremely well. We were up and running within 11 working days. So we found out a lot about our infrastructure, too, and some of those things that we needed to button up. And that also continues as part of the transformation. We've made great strides there. Moving to the cloud, that offers obviously additional security, getting things off-prem into the cloud, moving data into more secure applications that are also in the cloud. And again, that continues, improving operational processes and deploying AI company-wide, and you'll definitely hear more about that later in this conversation. Over the last past 18 months, we have made deliberate changes to the Board and executive suite to ensure that we have the right team in place. Boards -- we've added a Board member and the executive team, obviously, has been -- you have some pivots here and there. I think we, for sure, have the right team on the field to execute the plans this year and return Data I/O to revenue growth and cash flow neutral to positive throughout the year. Again, transformations take time. And I've been through these and they're not easy. I can tell you that the team has put in a ton of time. They've really stepped up and really have positioned Data I/O for a great 2026. Our new direction, we're expanding our addressable market. Data I/O is shifting from our traditional programming CapEx market to servicing a broader data provisioning market, a significantly larger opportunity for the company. We're leveraging our platform to reach into 2 adjacent markets, programming services and programming and tests with activity building for both. Yesterday, if you've seen the press release with IR, this is one of the -- this is one of the -- what we feel is going to be a significant opportunity this year and going forward. I've been a big believer in partnerships ever since I've been in the business and been in this business in particular. It's really important. We're a small company. You can't just go it alone. And being able to forge a relationship and a really strong collaboration with IR really combines their security expertise with our provisioning expertise to create a very comprehensive device support model for security provisioning in the industry. They have a significant algo library aligned with our algo library. We feel the solution is frictionless, fairly easy, and I won't get into the details of how complicated security provisioning could be, but it's very difficult. We presented at a few of their conferences. It's gone really well, and we have business opportunities that we're now talking through with them and our collective customers. I would say the interesting opportunity I've had from shareholders and other meetings and podcasts conversations around, well, how does AI help Data I/O? Well, I would say during the year and have -- you've heard me make this comment many times, it doesn't really help us now. That has changed. If you remember back in the mid-'90s, the Internet boom and obviously, that went through its change, but it continued even through that pause, and it continued to grow our industry. AI, with the build-out with the hypervisors, that continues and will continue. But what it's doing is these AI models are starting to really gain traction. And I'm sure we all see it in the news -- what this does is now create the need for the build-out of the Edge AI, which is the edge of the network. You can't have autonomous cars and robotics and IoT devices that are fairly -- have a high level of technical capability without expanding the edge of the network. It's just not possible. We have had conversations with new customers this year already, which was not part of our revenue plan coming into the year of significant build-outs around this Edge AI. This is something that, look, I've been in the technology industry for almost 40 years. And this build-out is something that I think is going to dwarf what the Internet build-out was back in the late '90s. And I don't see this pausing because AI is changing things so fast. There's just -- to keep up with it, I can see that edge of the network continuing to grow. So we're very excited about the setup, the tailwinds, the new drive and demand for semiconductors as we see things start to pick up across the board. I expect this to be a multiyear growth cycle and new revenue opportunities for Data I/O. New and existing customers are confirming that Edge AI build-outs are real. Early customer alignment and interest validates our strategy and the framework for the company. As we enter 2026, we are poised to deliver organic revenue growth this year with very encouraging customer activity in Q4 and into 2026. And now I'd like to hand the rest of the conversation to Charlie DiBona, our CFO.

Thanks, Bill, and good afternoon, everyone. I'll take this time now to walk through our fourth quarter and full year financial results, covering revenue and bookings, our revenue mix, margins, operating expenses, bottom line and then also some balance sheet items. Net sales in the fourth quarter were $4 million, down from $5.2 million in the fourth quarter of 2024. For the full year, net sales were $21.5 million compared with $21.8 million in the prior year. Similarly, fourth quarter bookings were $3.1 million, down 25% from $4.1 million in the prior year period, while full year bookings were $18.6 million, down 17% from $22.5 million in 2024. Regionally, 2025 bookings and revenues were strongest for customers throughout Asia as North America demand remained consistent with the prior year, but Europe declined. Moving forward, as a global company headquartered in the Western Hemisphere, Data I/O is well positioned to support customers migrating manufacturing facilities to the Americas. In terms of mix for 2025, consumables and adapters and services represented 58% of total revenue for the year, providing a stable base of recurring revenue. As a result, deferred revenue rose to approximately $1.5 million on December 31, 2025, up from $1.4 million as of September 30 of the year. Capital equipment sales represented the remaining 42% of 2025 revenues. Demand for capital equipment continued to be negatively impacted by the realignment of technology spending with AI-related data center investments at the forefront. In particular, reassessment of EV capacity and manufacturing impacted the company's largest end market, the automotive electronics sector. Notably, sales to the automotive electronics sector represented 52% of 2025 bookings compared to 59% in 2024, while backlog -- overall backlog as of December 31 was $2.3 million, down from $2.7 million at the end of September. All that said, as Bill mentioned, we've recently seen very positive indications of demand for our products as the build-out of Edge AI is beginning to ramp up. Gross margins as a percentage of sales was 43% in the fourth quarter compared to 52.2% in the fourth quarter of 2024. Full year gross margin was 49.3% for 2025 compared to 53.3% in the prior year. The decrease in gross margin reflects some mix shift as well as lower absorption of labor and overhead costs. Direct material costs remained relatively steady and consistent with prior periods as the company continued to actively mitigate the impact of tariffs and other inflationary pressures. Operating expenses for the fourth quarter were $4.2 million, which included approximately $312,000 in onetime expenses related to SEC filings, restructuring work and the initial phases of our transition to a new ERP system. This compared to $4 million in the fourth quarter of 2024. Full year 2025 operating expenses were $15.7 million, of which $1.4 million represented onetime expenses primarily related to the company's leadership transition, investments in the core programming platform and information systems, again, SEC filings and the remediation of the cybersecurity incident first identified on August 16, 2025. This compared to $14.6 million in 2024, wherein there were no onetime operating expenses recorded. Net loss for the fourth quarter was $2.5 million or $0.27 per share compared to a net loss of $1.2 million or 13% -- $0.13 per share in the fourth quarter of 2024. For the full year, net loss was $5 million or $0.53 per share compared to a net loss of $3.1 million or $0.34 per share in 2024. Adjusted EBITDA, which excludes equity compensation, was negative $2.5 million in the fourth quarter compared to negative $1.1 million in the fourth quarter of 2024. Excluding onetime expenses of approximately $312 million in the fourth quarter -- $312,000 in the fourth quarter, adjusted EBITDA would have been a negative $1.9 million. For the full year, adjusted EBITDA was negative $3.9 million compared to negative $1.4 million in 2024. Excluding the onetime expenses of $1.4 million, full year adjusted EBITDA for 2025 would have been negative $2.6 million. The company's balance sheet and liquidity remains solid. Cash at the end of the fourth quarter was $7.9 million compared to $10.3 million on December 31, 2024. The decreased cash balance reflects onetime expenses, technology platform investments and IT spending through the year, partially offset by reduced inventory levels and increased accounts payable. Net working capital was $12.3 million on December 31, 2025, compared to $16.1 million on December 31, 2024. In addition to cash, inventories reduced by about $0.5 million as the team implemented programs to become leaner and more efficient. Finally, the company continues to have no debt on the balance sheet. Before wrapping up and before we turn to questions, I'd like to provide a framing or framework for thinking about 2026, which is based solely on organic growth. First, we are targeting organic growth for 2026 over 2025, supported by early demand signals we are seeing from Edge AI infrastructure and continued strength in our recurring revenue base. Second, we have a growing pipeline for entry into the programming services and programming test markets, which represent meaningful opportunities to expand our addressable market. Third, as revenues increase -- as revenue increases, we expect improved absorption of labor and overhead costs, which should drive improved gross margins relative to what we've experienced in 2025. Fourth, on the expense side, we are targeting an additional $1 million in run rate reductions beyond the benefit of previously implemented structural and operational cost improvements starting in early 2026. Fifth, Edge AI is becoming -- AI itself is becoming deeply ingrained across all functional departments in the organization, driving efficiency and enabling us to do more with less. And finally, the combination of revenue growth and cost discipline gives us line of sight to positive operating cash flow by the end of 2026. Again, this preview only addresses organic operations and does not include the inorganic initiatives, which we're actively pursuing to accelerate our growth and build out. With that, I'll turn back to the operator for Q&A portion of the call.

[Operator Instructions] Our first question comes from David Williams with Benchmark.

So, Bill, good to hear from you, and thanks for all the updates. I guess maybe first, can you maybe talk a little bit about the semiconductor manufacturing and maybe what the reshoring does, especially as we come back to the Americas regions. What do you think that means for your revenue opportunity? And is that an area of growth and opportunity for you in the near-term?

Well, Dave, thanks for the question. Great to hear from you. Semiconductor manufacturing coming back to the U.S., I mean, it's great. Obviously, it creates a lot of jobs, which creates growth in other domains and things like that because of factories being built. I wouldn't say the semiconductor manufacturing coming back to the U.S. directly impacts us. What is impacting, again, as we talked about AI build-out, and that's not at the hypervisor level. This is the edge of the network, right, to be able to have all this automation that's coming our way that's going to be AI-driven and AI-enabled. What we're seeing though is, sure, there's some reshoring going on. That's the other thing that we're seeing is not the semiconductor side, but just products being built and brought back to the Americas. We're seeing things like factories kind of spinning up and activity that we really didn't think that would happen until second half of this year, starting early in the first half. It's been a little slow out of the gate, but the conversations are definitely picking up. We've got a lot of -- we've got conversations with quite a few clients and new logos that were not in part of our revenue plan, and they're very definitive about when their production is going to start, when they need systems. And I will say the plan that we put in place, our strategy, we've been displaying to these customers, existing and new. The comments are things like you're exactly the supplier we're looking for. You're hitting all the areas that we provision data and need to provision data. And in the past, we were in 1 box. Now in the 3 box, we'll get there. Obviously, that's part of the plan that we'll execute this year inorganically and organically. But it's to be able to be in a position to address the different areas of data provisioning. The great thing about the strategy is, David, is that we have the platform. It's not like I have -- we have to go out and buy a new technology or make some other investment, which does create risk when you do M&A. We get to use exactly what we've been investing in last year. Going into this year, we're just putting it in other areas of the data provisioning like security. I hope that answers your question.

Yes. Great color. And then maybe just speak to the AI-assisted software development. And maybe what that means...

Yes, absolutely. [indiscernible] huge evangelist of this, right? So I can tell you personally, I probably watch AI way too much on TV and not shows. I'm talking podcasts, educating myself. When I first became a Board member, it was one of the things we created as -- one of the first couple of meetings was getting AI to just search the technical documents that come from semiconductor companies. These would normally take the engineers 3 to 5 days to read through to get all the information that's important to load the table up to create an algorithm as an example, that would take 3 to 5 days. Now the Doc AI that we created 8 years -- 18 months ago, almost 2 years now, it costs them in the project, the POC and to get it to work and function probably costs $120,000. I can tell you today, if we did that same project today, it would cost about $100. That's how far AI has advanced. So to give you an example, we are now creating a CI/CD process, and I know this might be over a few people's heads, but that stands for continuous improvement, continuous development. That's what you have in every software process. It's important to have that built into your DevOps and Agile. So what you do is, when you're writing code, you automate all the functions and what it takes to write code and get software tested and then more importantly, released. So for the first time, we have AI that we built in our process that actually released production code this week. So meaning like very minimal human intervention. That's how far it's come. And so we're adopting -- we've mainly been using Quad. It's in -- we're using it across every department, but we're creating teams around bug fixing and enhancements and then other teams to just do the new software that we have that's going to be coming out this year that's going to start to retire technical debt, which will further reduce our costs. I can tell you, David, the AI advancements are just amazing, and they are making a huge difference in our company and the ability to produce new products faster and get to market faster. But on top of it, I've done a lot of M&A in my career. I can tell you, looking at synergies when you do M&A, you have your standard that's 10%, 20%. You can carve out of the back office when you consolidate roles and jobs and things that overlap. AI brings a whole new component to that because you can look at the company and go, if they have not deployed AI, for example, the many places that they could that would advance the optimization of their business. So not only for what we're doing today, but also when we look at inorganic growth as well. I think it's going to accelerate that. It's going to greatly help us get our new ERP online far faster. I mean the things we're doing now with AI before we start the actual process of the transformation of ERP is setting enough to make it. I don't want to say easy for Charlie because he's heading the project. But I can tell you it's had a huge -- it's filled some huge gaps that you would normally be concerned with an ERP implementation. If you want to comment on that, Charlie?

Yes. I mean...

I could go on and on about AI.

I won't take open objections to the word easy. But it's certainly the speed at which we're doing what are fairly time-consuming tasks like mapping your old chart of accounts to the new chart of accounts, creating new chart of accounts, putting in new policies. The speed at which you can do that with assistance from AI, obviously, overseen by people, making sure everything works. It's just accelerating and derisking the process. And I think it's probably the biggest impact on ERP is going to be the reduction in implementation costs as we go forward. It's just amazing how quickly we're getting the ball in place.

We have a current example. We just launched Salesforce Service Cloud 2 weeks ago, right? Actually, soft launches 2 weeks ago. Formal launch was last week, a week ahead of schedule, which is rare when you're implementing new software. This is -- Service Cloud is going -- is now what we use for taking ticket information from customers when they have a challenge with any of our equipment or software, and that's where they enter the tickets. That project originally was scoped at, and this is only 8 months ago was scoped at almost $250,000 with AI and with some other things that we did to maximize the process and make it easy. We did this for $100,000, and we were on time with the project. And I can tell you after 5 days, typically, you'll see -- you'll hear a lot of issues with changes substantial as that. I just talked to the Head of Service out the park lot before I went and ran an errand. I said, how is it going, Sam? He's like 5 days in, we're good. Like no noise, no challenges. There haven't been any problems with the customers being able to answer tickets. I mean -- and AI was a big part of that.

Great. Really fantastic color there. I appreciate it. And maybe, Charlie, just one for you. Just kind of thinking about the balance sheet and where you are, how -- what's your level of comfort, I guess, with the balance sheet given the strategy and kind of what you see out in front of you?

Yes, I'm comfortable with it. Obviously, we did drain some cash last year. That's sort of the inevitable outcome of making the investments and the transformation that we were undergoing. But we do see that there is a turning point through the course of the year here as we -- we are very focused internally on controlling costs. We're making moves that we -- like I said, we expect to be at least $1 million of run rate savings, and that will happen through the early part of the year. So we'll realize a lot of that through the course of the year as well. This is, I think, a very solid. We're a debt-free company right now with decent cash on hand and in a good position to sort of execute on the strategy we have, both organic and -- organic and inorganic, excuse me. And I really don't have any -- it doesn't -- certainly, the balance sheet does not keep me up at night. ERP transformation is keeping up at night.

But I would say in that to add to that, David, is that going back to AI, and I'm sorry to go back to this, but the transformations do cost money, right? And the thing is that coming into the business over 1.5 years ago, this company was very thinly threaded, whereas you were going to need additional resources to do transformations. They don't happen on their own. I can tell you that AI has an impact in lowering the cost of the transformation, especially where we are today and moving forward, then I don't have to hire a bunch of resources to continue the transformation because AI is picking up a lot of the slack and creating product -- huge productivity increases, especially in engineering and software development. So it helps in all areas and will create new sources of revenue for us.

Our next question comes from Michael Legg with Ladenburg Thalmann.

I wanted to dig a little deeper into the M&A pipeline and where you are there. Could you just give us a little update on how that's going?

Yes, absolutely. Mike, as we've talked about, that was certainly a big part of my charter and strategy. And this goes back to October of 2024 when we laid out the original strategy of the Board to get into these other capabilities. We have -- we are in a data room was just opened up on one of our opportunities just 2 nights ago. We have another one being opened up most likely tomorrow. I got a call from a CEO in one of our strategic initiatives to meet at APEX to discuss a serious discussion around acquiring their business, and we have 2 other irons in the fire. So it is a quite active pipeline. More in there -- probably a little more than I'd like, but at least it gives us choices, and that's great. I fully expect something to happen this year. Obviously, we wouldn't be having these conversations. But everything, again, is directly tied to the strategy that we discussed. So very active pipe, Mike. And there's more behind that once we get through a few of these that fit exactly where we want to fill and the holes we want to fill in our strategy. And then we will refill that pipeline, and we will take another pass at it next year.

And Mike let me just follow-up on that. I do want to emphasize that both Bill and I are very disciplined acquirers. We have already walked from a couple of transactions, and it did not make sense once we got into looking at the financials. We are not going to be -- we're good stewards of the capital of the company. We have very exciting targets that we are looking at. We're enthusiastic about them, but we're also not in deal heat.

And they're day 1 accretive. That's the important thing. I mean, really accretive in a couple of cases. And the important thing, too, Mike, is I've done a fair share of M&A activity. And I can tell you, it's really important. Look, there's things like roll-ups and things like that, that the private equity firms have been doing from day 1 with their LBO funds. There's not a roll-up. This M&A strategy is a place where you have a company that has vertical capabilities and a business that has horizontal. When you put those types of companies together, it accelerates growth because you're filling each other's gaps. And that's where M&A really makes sense, logical sense, but good financial sense as well.

Okay. Great. And then obviously, we have some headwinds in the industry right now. You talked -- you mentioned in the fourth quarter, you saw a lot of good customer activity. Can you just expand on that customer activity and what you're seeing?

Yes, sure. I wouldn't say Q4 had a lot of customer. There were some conversations. A lot of it was tailing off like we'll talk to you in Q1 and Q2. So those were good conversations, trying to get an idea. You're always trying to set up next year, right? So you do a big push, trying to find out when budgets expire, what's left, what's the budget going to look like next year? What are your projects you're working on? A good amount of our pipe this year that are opportunities that are in our pipeline, revenue plan, 75% of them are new from last year. I mean, so we've had conversations throughout the year, and they're not all new logos, but just new activity, right? Some new logos, it's a big push. It's the reason why we developed the manual product line. We've got reps ready to set up orders in Q1 for our manual systems, which we should start to see next month and to get those manual systems both here in North America and China. I just came fresh off a trip from there, met with one of our largest customers that's a big supplier to BYD. We have new products coming. As a matter of fact, they brought up and asked for a solution just so happens, we're already working on it. And so they offered to be our beta client. And so that's in our pipeline for the second half. So a lot of exciting things across the board. But yes, those conversations are starting to now look at -- turn into purchase orders as we get into the end of Q1 and definitely into Q2. I mean there's a lot of -- and I think the tariff thing recently pulling that back, there's some pent-up demand back there. I can't tell you how much. I think that will have an impact and give us a little bit of a tailwind, but we'll see. But outside of that, the build-out of Edge AI, our existing customers, the solutions we're bringing them, the new plan that we have to be in all areas of data provisioning, the customers love the story.

Great. And then you mentioned you're a year ahead of plan since you took over, Bill. Can you just kind of give us some of the thoughts you have on 2 years ago, what you thought versus what you're seeing today, some of that why you're ahead of plan, what positive upside you may have seen that you might not have thought of a couple of years ago?

Yes, absolutely. It's a great question. And it's a hard thing to measure, obviously. But in year 1, there's always a significant amount of investment because you're going to have to maybe kill old contracts or you're going to have to swizzle the management team. You're going to have a bunch of onetime costs. We're paying for things that weren't fixed in the past 3, 4, 5 years ago, right? So a lot of that was really all in 2025. We're still investing in '26, but the investment right now is directly in new products. It's directly in areas that are going to drive revenue. So there's no more -- I would say the cleanup is pretty much completed. I would have thought it would have taken longer. But as I said, the tools we're using and the technology we're using to get there faster has paid huge dividends, and that's only going to accelerate. So yes, I think we're probably -- typically, transformations of this nature are 2, 2.5 years, we're a good 6 months ahead of schedule, could be more. But easily 6. So that's why we feel really comfortable with the revenue plan this year and get to where we've articulated.

Our next question comes from George Marema with Pareto Ventures.

So Bill, as you guys are moving into physical AI and kind of in-line programming, what are you replacing out there? What are you competing against? And just internally as a company moving into these new areas, what kind of changes in distribution and sales and marketing motions need to happen to fully realize this?

Yes. The great thing is we don't have to change anything. These are existing customers and some new logos that are large contract manufacturers that we call on globally. They're now obviously been tasked with new projects to build out the edge of the network, the products that fit that. There's one campus we went to 80 acres. And next to them is Google, Verizon, a bunch of other companies that have created products that they're going to build for this build-out. This is a massive campus, massive. And that's -- so it's really -- we're not changing channels. I mean we are handling more of this direct, George. I will tell you that's one of the things that -- look, the reps we've had in the past, the good reps and there's reps that, quite frankly, are old and tired. And so we've been revamping that slowly. We changed all their contracts this year. We're very specific in what they need to do. And if they don't, they know that we will go into these accounts direct. I want to make sure we control our revenue this year. And in the future, it's important. And there's no reason to -- look, nobody is going to sell your products with passion than the people that work for the company. It's just not. And so our team is very passionate about what they're doing. They're very knowledgeable. Most of them have been in this industry for quite some time, and that's the new blood we brought in. So people like Monty and Dean and others. And again, we're looking to add more sales resources through this year. So that's where the investment is going to be in revenue and growth. I hope I answered your question.

Yes. And then on the cash flow flipping positive, what kind of revenue do you need to achieve that?

Well, it's tough to say. I mean, obviously, we're reducing and optimizing the business monthly, honestly, and there's some significant optimization that's coming, some we've already done in Q1, which we'll talk about after Q1. Charlie, I don't know if you want to comment on that.

Yes, obviously, we can't give -- we're not giving specific guidance on revenue, but we believe between the upside on revenue and the cost containment and the cost reductions we can implement that we are pretty comfortably. And you can see what we did last year. You can sort of project from that and say if the 2 lines are moving in opposite directions, both in a positive way, there's a point at which they cross pretty close to where we were.

Okay. So perhaps back half '26, you can flip it.

I think that's probably a reasonable type of...

I think that's fair.

Our next question comes from David Marsh with Singular Research.

So your predecessor was pretty heavily focused on electric vehicle market. You talked a lot about that. And we are starting to see some new products come out and start to take a little bit of market share and starting to see that evolve a little bit. I just wanted to get a sense -- I mean, is that -- clearly, you guys are focused on new and different markets. But can you talk a little bit about activity in that market specifically? And if that's something that's still a revenue driver for you guys?

Oh, yes, absolutely. Automotive will still remain a pretty strong market for us. Obviously -- actually, some of the customers we talked to, I'll give an example, a large German automotive company, Tier 2, actually had told us at Productronica, this was in November. And they had said, we're not going to buy any CapEx for all of 2026. Well, we just presented to their larger team down in Mexico. And after we presented where we were going, so they want us to actually present to their global tech council next month because they were so impressed with the places we're taking our technology and solves a lot of problems that they've had on their board to figure out how to manage data provisioning. Data provisioning because there's so much content in cars and other products, it's a larger conversation nowadays. It was still 52% of our bookings last year. So it still remains a strong market. The customer I was talking about for beta-ing are -- one of our new solutions is an automotive client. And they're the provider -- one of the largest providers to BYD, which is an EV company. So no, none of that changes or stops. If anything, we're trying to bring new solutions to them, which we are, that will gain more market share for us, but also provide them solutions that they don't currently have today. So kind of that expands the -- it's kind of a market expansion as we drive these new solutions. So no. And in the other case, we're looking forward to that meeting, but the person who actually said that they weren't going to be buying any CapEx is actually on that council. So we're looking forward to that conversation. So -- but no, I will tell you the strategy we have is spot on and it's crystallized and the customers are 100% nodding up and down.

Got it. And the agreement with IAR, I mean, it's really -- it seems like a really tremendously positive step for you guys. I mean are there other agreements that you could potentially look to ink with some other folks that might be able to provide you those same types of opportunities? I mean I know you have a pretty long history with some of the major electronic component suppliers out there, you had similar conversations with any of those that you might be able to allude to?

Absolutely. And that's -- I'm a big fan of partnerships, like real partnerships where both people win. And IAR, that took a year, right? These things do take time. The great thing about IAR is this was a company that was fallen out of favor with Data I/O. And it actually started at an embedded conference in Nuremberg, Germany, and I'm with my team and they're like, I'm walking towards their booth. I like where are you going? I'm like, I'm walking over there. They're in security, large company, we should partner with them like you do know that is -- the company bought Secure Thingz, and we had fallen out of favor with them. So I walk in, "Hey, I'm Bill Wentworth." They're like, well, they don't really like us. I said, they don't like you. They don't know me. So walk into the booth, right, completely oblivious and start up a conversation. The first guy I run into actually worked at Arrow before he joined the company, and we knew all the same people. So it broke the ice right away. We had a conversation. That conversation led to this agreement. And look, people like Monty Reagan, our VP of Sales, drove this relationship for the last year and ended in this result. They have a huge algo library. We have one. You combine those 2 with a frictionless solution, we will be the choice in security. I mean I know that might be a bold statement, but their software development kit is one of the best in the industry, if not the. But your point to, can this lead to other relationships? Yes, because guess what? Their relationships are with semiconductor companies. So as our relationship grows, I'm sure we'll get opportunities with their relationships because as we've created this collaboration, the one thing I say in partnerships, look, we won't both always win. And it's okay. But I'd rather have a ton of at bats than none at all. And so that's the type of real true collaboration partnership you want. And yes, David, we're going to look for more and more of those. Absolutely. It's how this company will grow organically and take share.

[Operator Instructions] Our next question comes from Casey Ryan with WestPark.

Great update. We've kind of picked over the bones here in this call.

You got to get first in line.

I didn't realize it was going to be such a bum rush tonight.

I love it.

Yes. No, it's fantastic. Well, so one question just about the gross margin dip, I think, obviously, tied to revenue, we all understand that. But what do you think is the rebuild? Is it sort of over all 4 quarters through the year? Or can it bounce back a little faster to that? And is like 51%, 52% kind of the right normalized rate in some normal quarter down the road?

I'll let Charlie take that one. He's been studying hard.

I think it will sort of be through the course of the year, though not necessarily purely linear. I think it will come back a little bit faster than -- again, it is tied to volumes, a big part of it at least. And there's a mix shift issue. So there's some of the new products that we're going to be selling, particularly in the back half of the year, higher margin, that will help certainly. Again, we're not giving firm guidance, but I think that if you sort of look at historical levels, that's probably a reasonable starting point. And then mix will play a big part.

And great question. Margin is always on everybody's mind. As we build more value in our software, one of the things that we've done and we'll be releasing, you'll see probably a release next month of a piece of software that really brings a tremendous amount of value. We've been demoing it already with customers. This is the other thing that's gone really well with these customer visits, and they see the value. But what it's going to allow us to do is increase our attach rate on our software for on our equipment. And as you know, that's highly profitable revenue. We have -- I would say our attach rate is probably at 20%, 30%. We should be able to double that throughout the year. And that's a significant boost.

It will both increase the attach rate and the retention rate. So we're looking at boosting, not only helping the gross margin, but helping the overall margin profile of the company and then having sort of a repeated -- contractually repeated revenue source.

Because a lot of times, they would buy these interesting. And this is -- look, the programming industry, I know, has been in it for a very long time. And look, we take advantage of the rules that they didn't have in place, like we would get a software agreement and then we would use it on other machines because they just weren't that sophisticated. It's happened in this industry. There's a way to close that off. And it's one of the things I said, look, we should not have a customer running our equipment without a software contract. I want to get it to the point where none of them can, and they shouldn't be, honestly, because it's not good for their business and induces risk, especially because one of the things we're going to build in our software stack is the ability to do things like have security built in, like recognize illegal handshakes between our equipment and their network because we don't know where that security breach could have came from. And these are things that are very important to IT departments, CIOs, chief security officers across the board. It's been something that's been ramping up over the last 12 to 18 months anyways. So as we build more value in our software stack, it will force them to have to have their machines under contract, which -- it's one of our initiatives this year.

Right, right. Okay. And then just one quick question about the concept of maybe some acquisitions to maybe to add services. Beyond being accretive, are you sensitive to the size? Like is there sort of a minimum size that like you're thinking about? Or is geography relevant? Like does it need to be a U.S.-based service sort of for...

Yes, it's a great question. It's a little bit of both, honestly. Geography, that to me is definitely strategic, right? I mean we do have obviously a significant operation in China. It would be good to derisk that a little bit in Asia, right, because Asia will continue to be a strong market. And it's a market, quite honestly, we're weaker against our competition. So my goal is to strengthen that, right, especially with our new products, but also with a footprint. So that's important. In the U.S., certainly easy to do transactions in the U.S. So those are not only geography friendly, but also strategically friendly as well. So services is a very fragmented industry. I know I was in it for a long time. It's as fragmented as ever. So there's opportunity there. And so we're going to take advantage of that.

Both Bill and I have experience doing international transactions as well as domestic. Obviously, there's complications that come with international, but there's also opportunities that come with international because we are comfortable trading where other people might not want to walk.

We have time for one more question before concluding the call. We will now take Howard Root, retail investor.

I'll keep it real short after delay. But 2 little quick things. One, Bill, when you stepped in, you really had 2 sets of challenges. One was the market, the other was the product, kind of the platform in that it wasn't integrated. You didn't talk anything about the product status. Has that work all been done to integrate automatic and manual programmers?

Yes. Yes, it has. And so that software, we now can run both our manual engineering units and our automation units on the same software. There's still some cleanup to do, especially in the handler side of things, but we're probably 3 months away from cleaning that up 3 to 4. But as far as that integration, yes, that unified platform is what we talk about a lot with customers because that platform, again, is also will be used in services and at tests when we get there. So fully integrated, fully compliant, forward compatible with algorithms. Obviously, we still got a -- we do have a legacy product that we're going to start to migrate from. That also is a revenue opportunity in the next 2 to 3 years and starting this year as we start to get customers to migrate to our LumenX platform. So that's the thing. We're out talking to customers that have been with us for quite some time, talking about kind of where FlashCORE is today, how long it's going to be along and that we need to start migrating to LumenX. So that will also be a revenue boost for us over the next 2 years.

Okay. Great. And then in terms of cash flow, just to follow-up. I mean, you ended the year a little under $8 million in cash. Near-term positive cash flow you're saying, but that looks like second half of the year, not first half. And then you're talking about the acquisitions and then you've got the shelf that you filed out there. Obviously, the stock being depressed to use that as a currency is dilutive. Can you do the acquisitions and run your business without issuing any more shares in order to accomplish that? Or is that going to be -- you're going to need a financing here in order to accomplish what you want to do?

I know. If you want to take it...

Yes. I mean there are alternative sources that we're exploring, and we're building some -- we have -- I have some relationships as is Bill to look for nonequity sources of cash. Would there be -- I'm not going to say that there wouldn't be any component of equity in the transaction, but I wouldn't expect it to -- I don't think we're looking at a wholly equity type of acquisition. And then some of it depends on the scale. We're looking at a couple of different things. They are of different sizes. The size obviously plays some role in how much would be...

And how the deal is structured, too, right? So there's been a lot of different options on deal structure. There are some that are very favorable to cash. Like you don't need much of it.

Yes. There's a lot of -- there's a couple of different permutations, but I don't think you're going to look at us just issuing stock for a company. I don't think that's what you're going to be seeing.

Okay. And the reason for doing the shelf registration?

I'm sorry?

The reason for doing the shelf registration.

What was the reason for -- yes, for the shelf.

Well, it is to have that flexibility. I mean there's not many public companies that don't have some kind of shelf registration because it affords you flexibility if there is -- if an opportunity that's sort of uniquely strong comes along. And as I said, I don't think that we're looking at not -- we may blend some equity component into some of these acquisitions. So we would need some flexibility to issue stock. But I don't -- again, I don't think we're going to see 100% stock.

No. Definitely not.

Yes. [indiscernible].

Sorry, Howard, you broke up there. We couldn't hear it.

I'm saying there's no near-term -- there's no present need or desire to tap into that shelf.

No, no, we're not going to just issue shares right now.

No.

That's not our plan. Operator, is that our last question or...

They all hang up.

Did they? Hello?

Yes. Bill, would you please...

Ladies and gentlemen, at this time, we've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any closing remarks. Bill Wentworth, Chief Executive Officer.

Thank you, operator. I really appreciate everybody jumping on -- the people that jumped on the call and really appreciate the questions. I can't tell you that's far better than reading a script, and I get to talk from the heart and where we're going with the company. I'm very proud of this team. And I'm really looking forward to this year. It was a tough, tough 2025. But those things are never easy. But I can tell you the lack of anxiety that's happening right now, granted, we still have a lot of work to do. And that pace will not stop. If anything, I would expect the pace to up. The team is ready for it, and we've had a lot of meetings over the last week or 2, getting people prepared and the team prepared for what we're going to embark upon this year and into '27. So thank you again, all of you for your time. I'm always available for a conversation. Jordan knows that. So if you want any additional conversations, please reach out to Jordan. Happy to talk about the business anytime. Thank you, everyone, and have a great day.

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.