April 30, 2010

I have the good fortune to meet with many Data I/O shareholders each year during visits to financial conferences or on their own turf in cities such as New York, Boston, San Francisco, Monterey, and Chicago.  Their questions are interesting, insightful, and sometimes challenging. They cover the landscape from general strategy to the competitive environment, to manufacturing efficiencies, cost and expense structures, and even accounting methods.  Even the more personal questions like, “When are you going to retire?” are fun.  I genuinely enjoy this part of the job because it allows me to stay connected with our investors and to understand their goals for their investments in our firm.

Over the past three years, through improvements in the company’s business model and efficient use of working capital, we have built our cash reserves from under $3M to nearly $16M.  This has naturally led to a recurring question, particularly from some of our smaller shareholders, “What are you going to do with the cash?”  Many of the shareholders have strong opinions.  They range from “the company should declare a cash dividend”, to “the company should repurchase X number of shares” to “the company should never buy back stock because the market is rational; the price is what the stock is worth.”

We are very pleased to have the $16M in cash on the balance sheet.  When Lehman Brothers collapsed in September of 2008, we knew we were in for difficult times.  The electronics industry went into the most severe downturn I’ve experienced and we had no idea when the economic convulsions would stop.  Even today with a great turnaround underway, there are clouds on the European debt horizon with unknown consequences.  So you, our investors, should feel much more secure to know that we built cash all through the downturn.

You should realize the greatest long-term gain from your investment in Data I/O stock as we deliver revenue growth quarter after quarter and year after year combined with sustained improvements in the leverage of our financial model.  To do that we are investing prudently in programming solutions while at the same time developing new businesses that are less prone to the seasonal and cyclical trends that limit our financial performance.  You saw evidence of that progress in the recent first quarter financial results coming from the sale of new software. 

The primary use of our cash is to grow the company, organically in our existing and new business initiatives, and as the right opportunities emerge, through relevant acquisitions.  Beyond that, the directors do consider a full range of issues with respect to the amount of cash we accumulate and how it is invested.  In their deliberations, they consider our lack of access to reasonable debt markets, the need for further balance sheet improvements, and the myriad of issues related to the repurchase of shares or paying a cash dividend including their short and long term implications.

Your directors are also committed to ensuring that the interests of the long-term shareholders and management remain aligned.  The importance of that is obvious.  For example, we have all seen companies buy back shares and gain a temporary surge in share price that allowed management to exercise stock options and lock-in substantial gains.  The stock price later retraced and the long-term shareholders were arguably no better off than before, and typically bitter.  As Jesse M. Fried, co-director of the Center for Law, Business, and the Economy at the University of California at Berkeley and a long-time critic of share repurchases says, “There is no reason that companies should be able to trade against their shareholders.”

As the only public company in this market space, any statement we make is followed very closely by competitors.  In some areas we have innovation that must remain closely held prior to introduction.  In other areas of investment, such as security and process control software, we have non-disclosure agreements in place with our customers that don’t want to be identified and don’t want others to know what our solutions do or how they do it.  Over time, we will be able to share more information with you as our plans come to fruition.  I’m very much looking forward to that opportunity.  In the meantime, I want to thank you for investing in Data I/O and look forward to the opportunity to meet personally.

Sincerely,

Fred Hume

President and CEO of Data I/O Corporation