DAIO Q3 2026 earnings call transcript, November 12, 2026

And good morning, everyone. I'm going to keep my remarks brief because while in many respects, notably margins and normalized performance, Q3 was a very strong quarter, the real story today is the completion of the VTech acquisition. And I want to get to Bill's discussion of that transaction and where the combined company is headed. So let me quickly walk through. the Q3 numbers and then hand it over. Net sales in the third quarter were $4.9 million compared to $5.2 million in Q2 and $5.4 million in Q3 of last year. Platform revenue was up both sequentially and year over year, but adapter sales were softer on timing. Third quarter bookings were $5 million, up slightly from Q2. Revenue mix shifted further towards capital equipment at 52% of revenue with consumable adapters and services at 48% of total sales. Gross margin was 58%, up 100 basis points from 57% in Q2. and up over 700 basis points from 50.7 in Q3 of last year. Margin expansion continues to reflect pricing discipline, the sale of several high-margin platform units, and improved operational efficiencies. Operating expenses were $4.9 million, which included approximately... $1.4 million in one-time expenses. Of these one-time expenses, over half, some $800,000 worth, were related to the M&A and financing activities in the quarter. This level of one-time expenses is directly attributable to the volume of transaction activity in the quarter of M&A and financing transaction in the quarter.

We simultaneously wrapped up our first private placement while advancing an acquisition, a second private placement, and a credit facility, all of which closed in October. A further 16% of expenses were tied to our ERP transition, particularly the unwinding of our prior ERP commitment, which had been entered into several years ago. And another 20% of expenses were tied to our ERP transition, particularly the unwinding of our prior ERP commitment, which had been entered into several years ago. was related to a non-cash adjustment of certain inventory reserves. Excluding these one-time items as well as the equity compensation, adjusted EBITDA was negative $71,000 compared to negative $563,000 in Q3 of 2025. Given our current gross margin profile, this implies an organic cash-neutral revenue in the range of $5 million per quarter. This is materially lower than we were where the business was a year ago. Operating loss was $2 million compared to $1.4 million in Q3 of 2025. The increase is driven by the one-time items. Net loss was $2.7 million. or $0.27 per share compared to $1.4 million or $0.15 per share in Q3 of 2025. The net loss includes $624,000 of interest expense, which, like the interest expense that we discussed last quarter, represents a non-cash distortion due to the very quick amortization of the discount on the June conversion. As well, the expenses also included a $75,000 of tax expense related to the dividend repatriation from our China subsidiary. Adjusted EBITDA, excluding equity compensation and one-time items, was negative $71,000.

Near break-even for the second consecutive quarter. Cash at the quarter end was $9.4 million, down from $10.8 million at June 30, reflecting operating cash usage in a quarter, including significant transaction-related expenses. There was no debt on the balance sheet as of September 30. as the convertible debentures had converted to preferred equity in July. Working capital was $14.7 million, up from $10.8 million in June 30, which included the $6.2 million of convertible debentures in current liabilities. Subsequent to quarter end, we closed the second $13.25 million private... ...placement, and put in place a $7.5 million asset-based revolving credit facility with Western Alliance Bank. That really concludes the financial remarks for the quarter, and with that, let me turn it over to Bill to walk you through the VTech acquisition and our strategic direction. Bill?

We've got a lot to unwrap. I'll try to plug in some notes along the way. We created a small review of the acquisition, but there's been also a beginning acute comments during the presentation.

First page is the safe harbor statement as we release every time when we do our earnings call. So brief history on last year when we reviewed what we felt were. A bunch of good fits for a pipeline of M&A activity, which we still have. Probably about an estimate of about an $80 million pipeline still available to pursue in the forward years. VTech was chosen as the first.

Clearly some of the markets. segments they serve, the diversification of their account base. The VTech and Data Rail has always been strong. They've actually been a vendor. Personally, being in the industry for 30 years, good names, solid operational. Operational efficiencies, but also just strong management team. Their location in Minnesota, obviously I'll talk about that a little bit as we get into later in the deck, the synergies and the opportunities for the business to accept manufacturing capacity and capabilities.

In my view, the best fit for this company for data rail for the transformation that was needed for the business and we needed a significant transformation across the board and really all factors in how you would measure a business from a KPI standpoint. I'll get into the VTech business. There are three distinct divisions. The division I knew... Very well and personally was the VTech division, which did a lot of packaging for semiconductors, both automated manual systems, supplies. They also have services as part of that group. Royce was an acquisition they did back in the middle of the 2000 decade, I think around 2010, 11, somewhere in there. That was a test platform. Which tests die, essentially. Post wafer manufacturing, you cut the die and then it gets sorted. And it can go directly into tape and reel or other packages or just sorted in other media. That was an acquisition that's been very beneficial for VTech. Mitch and the team have done a great job of integrating. into their automation. So if you think about what DataRow does, we build automation around a programming platform. That's our IP. They build automation around Royce, which is their test platform. So this greatly expands our markets that we can serve across the semiconductor supply. Which is really the vision I had for DataRow going back two years ago. Certainly was focused on the programming side of things. But as I started to look deeper at VTech and its capabilities and the markets it served, and some of those customers overlap with what DataRow provides as far as programming with it.

So it actually made even more sense as we started to go down the path and have the conversations. What started earlier this year, probably around the beginning of March, is when we reached out. They were not in an auction process. They were by myself and the team as an asset that made sense to bring into DataRow. And as we started to get... To know the management team and leadership, it was pretty clear that bringing these two companies together would strengthen not only the business itself in the domains and really reduce our concentration, one of which we'll get deeper into in a few slides, but overall give us in the coming... A&J programming, that was certainly an asset that personally I was targeting just because of my experience in growing programming services business. A&J has been in the industry for well over three decades. I've known the leadership there, and not personally, but knew of them. They've always had a great brand in Silicon Valley. They did a lot of work for Silicon vendors and large OEMs, and they've been a staple of the Valley for, like I said, well over three decades.

MPI, quick turnaround, and pre-production work. Like I said, if you talk to... Any customer that they serve, you'll get nothing but glowing remarks about their reaction time and their ability to meet customer demand when needed.

Also, the revenue is approximately double the overall revenues of the company. So, like I said... It gives us scale and scope, not only in capabilities and operationally give us scale and scope, but also gives us scale and scope from a revenue perspective as well. Why VTech? As I said, I've mentioned some of this already in the previous comments. This accelerates our program. As you know, as some of you may be aware, I announced Doug Adams coming on as our global operations, all customer-facing activities, which includes, but mainly, programming services. Doug was my COO at Source. We successfully resorted. Source to a $100 million services company over 20 years, and that was all done organically without any acquisitions. The opportunity in the marketplace is larger than it was back when we were running Source before we sold it to Abnet. You know, silicon, programmable silicon continues to increase in growth rate. Within a lot of different domains in the industry, I calculate from 2001 to now. The amount of programmable silicon, as far as devices, as far as unit volumes, has doubled. We see flash-based microcontroller on the Internet of Things, which I know... has been talked about for well over a decade, but when you look at autonomous anything or robotics, which I'll announce an opportunity that turned into an actual purchase order in Q4, pretty excited about a new logo we just landed, the amount of programmable silicon continues to grow. Automotive is...

It's still soft. I mean, it's, you know, we're toeing the line and making sure that we stay above board and we don't burn any cash or burn that much as we grow through this, but the expansion now has really started to begin outside of automotive, although we did land three new logos this year in automotive, so we won't end. We'll turn around at some point. Obviously, as the geopolitical issues start to fall to the side and gas starts to lower, that will only benefit our core customer base. I think we're in a great position as far as our diversity, and VTech definitely strengthens that.

...as a service. It's something that's very much needed in the industry, but it's also something that is very important to OEMs. These discussions will most likely...

They're out talking directly to OEMs. And one of the main reasons is the protection of their IP. A lot of cases, what's getting imaged into these parts is their intellectual property. And given the geopolitical situations around the world and the challenges, security is becoming... More of a...not a need, but a mandate. And we'll be talking more about that during this quarter and some announcements around a security platform that we're working on to acquire as well. The consolidation of the supply chain. We have a team over at a big trade show called Electronica in Germany. There was a customer, a potential customer that our sales team ran into where they manage old dye or old technology. Some of that technology gets programmed, but it also needs to be cut and packaged. And the interesting conversation was already out of the gate with VTech and us side by side. And looking at us as a holistic supplier, their comments were pretty immediate and pretty on point as far as the value that we can bring to them as a supplier. So already conversations we're having in getting into new businesses, but also the connection between what DataO does and what VTech does is pretty strong. And very evident and very clear. Access to larger high-growth markets. VTech has been playing in AI, Photonics. Obviously, that's a very large market. Systems are booked out through Q2 already. Photonics is... It's really the only way you can reduce, not the only way, but one of the major ways to reduce power and reduce heating and increase cooling needs for data centers and as far as GPUs go. That is a big market. It's growing.

Some that are only three and four or five years old, some of those clients are VTECs clients. So photonics is a big area of growth. They've been in aerospace and defense for a while, satellite communications, they're doing work for Tesla.

We've been working on the humanoid robotics division called Optimus. So we had a demo system in there over the last couple quarters. They placed their first PO two weeks ago. We are awaiting a PO for another one to three more systems this quarter. We are very excited about that opportunity. The amount of programmable technology, especially microcontrollers, is pervasive through this technology. These are one of the areas that we've talked about growing into that, autonomous driving and other parts of the technology supply chain that's starting to. It's really driven by AI. As much as the negativity that's been around the AI swirl in the last couple of weeks and actually last several months, without AI, you can't bring these things to life. So as much as we will go through some turbulent times and obviously pricing and semiconductors. Lead times have gone out. This will shake out like every other technology inflection point we've been through, such as O-1 and other recessions we've been through in this industry. I've been through most of them. This will shake out, but the people that will come on top are the people that have a robust, resilient business, which is why this acquisition is going to happen. This acquisition is so important to us at this time, given that we have multiple different markets we can serve, which will insulate us from being so focused on the mainstay of data rail for the last decade.

So this does bring us... ...a significant amount of relief and resiliency to the business and allows us to focus on multiple different domains with solutions that we have today and also in the future. I do want to make a comment that we continue to invest in our core platform. We do have some new products being rolled out in Q1, which we're pretty excited about. And those products also not only help our core business and help our customers produce more faster with better technology, but this also will have a process business. This will also help us drive better margins and services as we build better automation alongside VTech. That's one of their expertise is automation will help us drive better margins and also be able to service customers that probably better service rates than they get today from the current. From a financial upside, like I said, this is a credence to the business. It does double our revenue. And I think you'll start to see those numbers first way through the end of Q4. As far as the acquisition, these are some of the highlights on page 5. I don't know where we are on the slide deck, but on page 5, that's where we're at now.

Basically, this is a transformational acquisition. Like I said earlier, the company has been struggling to grow for a couple of decades. It really needed a big change. It was something that's been on the roadmap for a little while. It's not an easy thing to execute. And so bringing people like Doug... ...and myself and Monty, who have well over 100 years of experience in programming services, we've opened up, I can't tell you, countless sites, probably a couple dozen worldwide over the years of our experience. And it's not an easy thing to do. And so, yes, we could... If we could have done it organically, it would have taken longer. The acquisition among the many highlights that it adds in value as far as the business goes financially and the diversity in domains and customers. But it gives us some significant opportunities. Already, and we're already talking to existing customers of Data.io about moving to an OpEx versus a CapEx model. We had a conversation with a large CM the other day where they wanted to rent a machine for about six months. And instead of renting the machine, we offered programming services and they were very... Being able to offer that opportunity to them because they just...obviously this is new and had no idea, but they said that's much more beneficial to them. It costs them less. They don't have to install the machine. They don't have to run electrical and air. You know, and this was just for a quick six-month opportunity. But if we service them well, then...

It may continue. So those are the opportunities that now rest at our feet that we can now be aggressively pursue. It's extremely exciting. I can't tell you. It's great to be back in the programming services industry and business. And the opportunities that DataRail creates just by being the market position we're in should allow... ...to significantly grow the A&J programming business. We certainly, based on bringing these two platforms, we've become a much more strategic supplier to the semiconductor supply chain with VTech and its capabilities, with stronger, more diversified revenue profile across the different diverse industries that are in and customers. significant long-term, near-term cost synergies, those have been activated. We should have probably a good 50% of our synergies actioned in the next 90 days. And like I said, we raised about 22, or Charlie mentioned we raised $22.5 million. For this acquisition and for both capital, we sit really well in the balance sheet compared to our past. We have a pretty good cash balance, and that's been building our ebb and flow probably in the first 60 to 90 days. But we expect growth on the cash balance sheet to continue to grow. We'll be starting sometime in Q1 and continue to grow throughout 2027. And let's see, lastly, season leadership team. I can't speak enough about Mitch and the team he's built over there. Extremely solid. There's a lot of things that they can help us with on both. Like I said,

automation and engineering and just having that scale and scope. They've got available capacity. So as we grow into the services business, they need to build more machines. They have capacity there for us to grow into. That was another benefit of the acquisition. It pretty much has clicked everything. Every box you would want doing M&A. And M&A is hard. I recognize that. I've done enough of it. Some of the leadership team has had a lot of experience or some experience in doing M&A. It's difficult to, right out of the gate, get value from M&A. I can already see it within the first three weeks. This is one. Those ones that actually 101 does equal two, or I would say three in this case. Let's see. Next page. Business transaction summary, Q3 combined pro form. Would they give you an idea of kind of the combined numbers, just some basic KPIs, but, you know, if we were combining Q3. We would be looking at a $10 million quarter, backlog about 8.8. As you see in the quarter, we've been able to do a great job operationally here at Data.io by booking and shipping in the same quarter. So you'll see the booking and shipping numbers be very similar as we really have fine-tuned, and a lot of it's been through communication. And also better preparing our account executives for the information needed in order to ship things on time and make sure that the systems are configured the right way and the teams worked really well together to get that done.

So we'll continue to probably book and ship a lot of what we book and ship in the quarter, except when we get larger. long-standing committed orders over multiple quarters. Q3 EBITDA on programming services very sit today in that high 50 range, but I would expect programming services for us over the long term to probably increase by 100 or 200, 300 basis points. And why I can say that with some confidence is that at source, we ran in the high 50s pretty consistently. And even after we saw that with the back office tax, we still ran in those high 50s. Now, owning the equipment, obviously our costs are less. So I'd expect that to generate. And you can expect kind of programming costs, about 30 to 40 percent of that is the cost of the equipment, depreciation, sockets, maintenance, software contracts, things like that. So we should pick up some basis points, a few hundred basis points. on the margin for programming services. And obviously as we create new solutions that have a high velocity of throughput, that will also help margins increase as well. And the consideration for the business, we paid 23 million. Three million of that was actually taken by the family office in That shows the conviction, and I want to thank the folks through this entire process. It was great working with Bill, Carroll, and team. And they, I can tell you, are very excited about the future of the business. And it was great working with them.

There were some challenges getting there. But the great thing was, I think, on both sides, we both wanted to see this field work because we knew the benefits for both the employees and the shareholders alike would be highly beneficial. And we never lost sight of that. So thanks for the entire team and all the advisors at work. And any of you that are listening, I want to thank you. And I'll see some of you in New York the second week of December. I think I'd like to conclude at that time. And thanks for taking the time as early this night as possible. But really appreciate that. Time and all the people that were involved in this. It was a fight worth fighting. And I think you'll see nothing but great things coming forward. And we still have a lot of other things we're working on to grow the business and bring more value to the company and our customers. At this point, I'll hand it off to Jordan, I believe.

to assemble our roster. And our first question comes from Craig White from Devon Capital. Please go ahead.