Socket Mobile Inc (SCKT) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to your Socket Communications third quarter results conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

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As a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Karen Keating, of FRB Weber Shandwick.

Please go ahead, ma'am.

Socket has also posted their release on their Web site at If anyone still needs a copy of the release, please call FRB Weber Shandwick at 415-986-1591, and we'll get a copy to you as soon as possible.

A replay of today's call will also be available on Vcall.com, as well as CCBN.com, shortly after the completion of this call. And a transcript of this call will be posted on Vcall.com within a few days.

In just a minute, management will provide an overview of the results. And then we'll open the line up for Q&A.

But before we begin, I would like to remind you that during the course of today's call, management will be providing forward-looking statements within the meaning of section 27A of the Securities Act of 1933 as amended, and section 21E of the Securities Exchange Act of 1934 as amended.

This conference call will include forecasts of future financial results in operating activities. Such statements are based on expectations of the market acceptance of Socket's products, increased supplies of handheld computers, growth and demand for Socket products, the potential for growth in revenue in the current fiscal quarter, expectations regarding the timing of introduction and availability of new products, and expectations regarding management's ability to control operating expenses and improved cash flows.

Such statements involve risks and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements as a result of a number of factors.

These factors include, but are not limited to, the risk of delays in the availability of new products due to technological market or financial factors, including the availability of necessary working capital; Socket's ability to successfully introduce and market future products, Socket's ability to effectively manage and contain its operating costs, the ability of announced handheld computer hardware and software, market acceptance of handheld computers, and emerging standards such as Bluetooth and 801.11, and of the company's related connection products, the failure of strategic partnerships to benefit Socket's business as expected, disruptions to the business or to the general economy caused by external forces, such as terrorist activities or natural disasters; declines in consumer or corporate spending on technology products, or other factors described in the company's most recent Form 10-K and 10-Q reports filed with the SEC.

With that said, I would now like to introduce management.

On the line today are Kevin Mills, President and Chief Executive Officer; and Dave Dunlap, Chief Financial Officer. At this time, I would like to turn the call over to Dave Dunlap.

Please go ahead, Dave.

Thank you, Karen.

Third quarter 2002 revenues of 3.7 million and nine-month revenues for 2002 of 12.3 million represented increases of 22 percent and 40 percent, respectively, over the year-ago period. Our revenues for the first nine months of this year are approximately equal to our revenues for all of last year.

For the third quarter, compared to the third quarter a year ago, our connectivity product sales showed the largest increase, with our wireless Bluetooth plugin cards and our embedded chips and modules being the drivers of that growth.

Our margins for the third quarter were at our target of 50 percent, benefiting from new, lower-cost packaging we introduced a quarter ago.

We've held our headcount and operating expenses level with year-ago levels, despite our increasing revenues. And we've benefited from a change in accounting rules, the discontinued amortization of goodwill, at the beginning of this year.

As a result, we achieved our lowest quarterly operating expenses in over two years. And we intend to continue to tightly manage our operating expenses going forward, to maximize the contribution from revenue growth to our bottom line.

The only disappointment for the quarter was in our not overcoming our traditional third quarter seasonal revenue weaknesses in connectivity product sales - when, compared to the previous quarter, that happen (ph) when customers wait for new fall handheld models, and because of summer vacations.

We had anticipated that our expected entry into the Office Depot retail chain, originally scheduled for July, would generate increased connectivity product sales during the quarter. Instead, our entry into Office Depot happened toward the end of the third quarter, to give Office Depot time to expand their kiosk structures to their entire store chain.

Our fourth quarter will benefit. But our third quarter did not.

We also wanted to overcome the lower-plan (ph) volumes in embedded product sales, following a very successful rollout in the second quarter of the Bluetooth embedded bar code scanner and bar code printer from Intermec and O'Neill (ph). And we look to our expanding pipeline of bar code scanning opportunities to close that gap.

However, summer vacation schedules and the weak economy combined to delay a number of these bar code scanning opportunities beyond the end of the quarter.

These revenue opportunities are not lost; only delayed. And we expect that the pace of our embedded and bar code scanning businesses, our national retail presence, and the higher expected pace of pocket PC sales in the fourth quarter will put Socket back on a record revenue pace.

We also completed three significant steps to ensure the adequacy of our working capital as we prepare for growth. First, we completed a $1 million Series E preferred stock financing on October 3rd. So this cash does not appear on our balance sheet as of the end of September.

Secondly, we have renewed and extended our revolving credit agreements with our bank in the amount of $4.5 million, until July 15th, 2003. There were no amounts outstanding under this line as of September 30th, 2003.

And third, we reschedule our note payments to Nokia Corporation, relating to our acquisition in March of Nokia's CompactFlash Bluetooth card business and technology.

So instead of making a payment in September of 700,000 euros, we paid 100,000 euros and will (ph) make monthly payments of 100,000 euros through November 2003 and a final payment of 500,000 euros in December 2003. We believe that we can raise additional equity capital, if needed. But we are expecting our operating results for the fourth quarter to at least achieve breakeven cash levels - which we would reach at around $5 million in quarterly revenue - and are looking forward to operations becoming a recurring source of cash for the company.

Our success in reaching profitable operating levels is very much tied to our ability to grow our revenues. So I want to take a few minutes to review our revenue opportunities with you.

First, from our connectivity products - which consist of our Bluetooth plugin CompactFlash card, our wireless LAN card, our modem, digital phone card and Ethernet card.

Socket's Bluetooth CompactFlash cards have been shipping since September of last year and continue to receive excellent ratings for our software's ease of use and the design, which is the only class one (ph) CompactFlash Bluetooth card in the market today that fits entirely within the CompactFlash slot (ph).

With completion of the transfer of Nokia's CompactFlash Bluetooth card business to Socket in May 2002, and with the coveted Nokia OK (ph) endorsement, our Bluetooth plugin cards have become our largest-selling product in Europe.

In a few minutes, Kevin Mills will discuss in more detail our Bluetooth program, and the opportunities that it presents.

We also continue to improve our connectivity products. For example, we are about to release the next version of our Bluetooth software that will add additional file transfer capabilities. All current Bluetooth card owners will be able to download this software from the Web at no charge.

With our wireless LAN card, and in recognition of the importance of security features to corporate networks, we are adding 802.1x security features to our wireless LAN drivers, which is the security standard for 802.11d products. And we continue to add phone cards for newer, higher-speed mobile phones to maintain connectivity with new phone models as they become available.

Our connectivity product sales tend to track sales of pocket PCs. They are traditionally lower in the summer quarter because of consumer and business vacation schedules and the public's history of waiting for new handheld models in the fall. And we are strongest in the fourth and first quarters.

Compared to the third quarter a year ago, sales of connectivity products are up by 50 percent, which exceeds the growth rate for pocket PCs during that same time period and reflects the benefit of the new products that we added in the second half of last year, including our Bluetooth, wireless LAN and modem card products.

Socket has developed a first-class worldwide distributor network for its product, with over 50 distributors that specialize in the sale of electronic products for mobile devices.

We also have an extensive e-tailing network, with well-known resellers such as Amazon.com, MobilePlanet and CDW, and have electronic product stores on our own Web sites in the U.S. and Europe.

It's the strength of our distribution network that provided Socket the opportunity to distribute, under its own label, the EMTAC GPS Bluetooth receiver announced this past week. We will continue to expand the connectivity products we have in distribution, where we believe there is good market demand.

And the placement of our products, and Office Depot's entire U.S. chain of 850 stores in pocket PC kiosks, will now provide Office Depot's retail staff with the opportunity to solution sell our accessories at the point of Pocket PC sales.

During the quarter, we also reported on the maturing of our embedded products and services business. Socket has a dedicated business unit focused on working with OEMs and developers to embed Bluetooth modules on our ACEC (ph) interface chips.

Today our embedded business unit has more than 25 design wins, with most of our customers' products still in the development stage.

Customers we have announced include Intermec and O'Neill (ph), whose Bluetooth-enabled bar code scanner and bar code printer launched in the second quarter; Electronics for Imaging, where their eBeam electronic whiteboard is being Bluetooth enabled; and Novatel Wireless, which recently signed distribution arrangements with IBM and with Toshiba for its Merlin C201 PC card modem for notebooks that has Socket's interface chip inside.

Reference platform designers, such as SyChip and bSquare, have also built our chips and Bluetooth products into some of their reference platforms. Our embedded business, as it matures, is expected to become a significant source of recurring revenues from an expanding base of third-party customers.

At the same time, we have created a network of companies developing products in need of Socket's connection technologies, through our Empowering Mobility program. And at last count, our membership in that program was over 900 companies. Kevin will talk more about that program in a few minutes.

Three years ago, Socket invented and introduced the In-Hand Scan Card, which combined a laser scanning engine from Symbol Technologies with a CompactFlash card. We added our scanning software and created a highly portable lightweight bar code scanner, when used with a pocket PC or tablet PC.

Our bar code scanning sales were 25 percent of our revenue, or over $3 million last year, and account for 23 percent of our revenue for the first nine months of this year on a growing revenue base. The pipeline of interested customers and the average size of their pending orders continues to grow.

Although we have seen some slowdown in the decision processes resulting from the weak economy, and the process is a long one, usually involving the porting of software and capital decisions on hardware, in general, the productivity benefits for moving to Windows (ph) to e-based (ph) solutions for mobile scanning justifies the investment. And we expect this part of our business to continue to grow despite any weaknesses in the economy.

We have recently announced and demonstrated two new bar code scanning family products: an imager that will read a wide variety of bar codes and also record a picture image. This product was jointly developed with the manufacturer of the imager, Handheld Products, a Welshalon (ph)-affiliated company.

The second product, a Bluetooth-enabled bar code scanner, uses the laser bar code scanner from Symbol Technologies.

We also announced in July an expanded relationship with Symbol Technologies to work closely together to make both 802.11b wireless LAN cards for pocket PCs and mobile bar code scanning products available to a wider range of customers. This relationship continues to be successful. And it will lead to further broadening of our product line next year.

We value and work closely with a number of industry leaders in the bar code scanning industry, including Symbol, Intermec and Handheld Products.

Finally, our serial products, which are our highest-margin products, are worthy of a brief mention. Socket released its first serial card product in 1993. And we have historically been a major market leader in serial connection products for notebooks. As evidenced by our expanding chip business, our serial interface chips that are at the heart of our serial-based products get high marks for their high transfer speeds and low-power consumption. And we have been introducing in the third quarter faster drivers to further increase these transfer speeds.

In summary, Socket has been steadily increasing its distribution channels and brand name recognition, at the same time that it is expanding its products and broadening its markets. Socket is not dependent upon any one product, customer or technology for its growth, and instead expects to broadly serve the mobile device market as it grows and evolves.

That market that we directly (ph) connect to includes handheld computers, tablet computers and notebooks, along with portable bar code scanners and printers, and mobile data phones, such as the newly announced SmartPhone, with an SD slot - when an SD slot and SDONO (ph) software is added to the phone.

Through our embedded and OEM distribution program, we are becoming involved with many more products that work with mobile computers and phones, such as our distributing the EMTAC Bluetooth-enabled GPS receiver later this year, and Bluetooth-enabling devices such as the eBeam whiteboard transmitter.

There are many advantages for mobile device manufacturers, enabling the use of standards-based plugin connection products, including reducing the cost of their basic units, providing inexpensive upgrade pads (ph) as emerging technologies develop, and leaving the complexities of connection solutions to the connection experts.

We are also able to assist manufacturers who choose to embed instead of plugin. We believe that the mobile worker is best served by connecting devices that perform their individual specific functions well, such as connecting handheld computers and mobile phones over Bluetooth, or with our digital phone card for wide area network access; connecting handheld computers to a local area network, through our wireless LAN card or Ethernet plugin card; or connecting devices such as handheld computers and desktop computers or printers in a personal area network over Bluetooth.

Socket will continue to exert its leadership in creating and supplying innovative connection products to a market that we believe is poised for accelerating growth.

Now let me introduce Socket's President and Chief Executive Officer, Kevin Mills, for his remarks.

Kevin?

Thank you, Dave.

As Dave outlined, we continue to grow on an annual and year-over-year basis, even though we did not meet our overall revenue growth and bottom line results in Q3.

As I explained in our Q2 conference call, predicting Q3 is always very difficult, due to the combination of the summer slowdown and the heavy dependence on September. Couple this with the current economic climate, and it's a recipe for sleepless nights.

In Q3, we had two significant events we felt would offset the traditional Q3 weakness. Unfortunately, the two events - our retail rollout and our scanning deals - did not materialize as expected. These factors are the primary reason for the lower-than-expected results.

Let me (ph) talk about the two issues and explain why we believe they are timing related, and not reflective of the business going forward.

Our retail side (ph) rollout in Office Depot was delayed at (ph) the end of the quarter. A decision by Office Depot to expand Socket's presence from the original target of 200 stores to their complete chain resulted in additional display cases being needed. These display cases needed to be produced, which caused the delay, a short-term problem. But the issue caused Socket to receive no benefit from the product shipped to Office Depot in Q3.

We shipped a significant amount of inventory from Socket's location to Office Depot's distribution centers and store locations, which we do not count as revenue.

The positive news is that we are expecting to see good sales numbers from Office Depot as they get our product on the shelves the (ph) Christmas selling season.

The second issue was bar code scanning sales. We were expecting favorable results in Q3 from our bar code scanning product line. We entered the third quarter with a few key deals that were already past the evaluation phase, and we expected to see these deals roll out over the summer.

Unfortunately, due to the poor economic conditions, some of these rollouts were delayed. Predicting the timing of bar code scanning deals has always been a challenge. And this is truer now than ever, since capital spending projects are easily delayed or postponed.

The rest of the business performed as expected, experiencing a slight seasonal slowdown. Some areas, like our serial-based products, did better than expected.

However, the real sales highlight of the quarter was Bluetooth. We saw excellent sales of our Bluetooth in Europe over the summer months. Bluetooth sales in Europe represented almost 50 percent of the total revenue for Europe in Q3. The demand was driven by people using their notebooks and PDAs and conjunction with their Bluetooth-enabled mobile phones to connect to (ph) the Internet. This is something we predicted would happen a long time ago. And as the elements of the solution have finally arrived, mobile phones with Bluetooth and GPRS and services have been turned on, we are seeing acceptance and success of our Bluetooth products.

The success rates vary across Europe. For example, we have seen our Bluetooth sales in Finland skyrocket - home of Nokia and of the mobile phone.

We are - we are hoping to see the success in Finland duplicated across Europe and in the U.S. in the quarters ahead, as operators activate their GPRS networks and more people understand the benefit of a Bluetooth solution.

In terms of key events in Q3, there were many. I would like to outline the significance of some of these and the expected impact over time.

We announced we have (ph) a large number of design wins for our HIS chips, our (ph) PCMCA CompactFlash interface ACECs (ph). We have over (ph) 25 design wins. These design wins take time and effort that enable us to leverage our enormous expertise in the area of interface technology, and (ph) will become a tremendous source of long-term revenue for Socket.

Many of the design wins are with companies that are using our ACEC (ph) in the wireless modem space, like Novatel wireless, who recently announced deals with both IBM and Toshiba. As these wireless models are deployed, Socket will get incremental revenue.

We all (ph) to announce in Q3 that our Empowering Mobility program has swelled to over 900 members. This program was designed to bring companies, developers and bars (ph) that are serving the mobile community market together so that problems can be solved. In today's complex world, we need good cooperation between different companies, because sales can only happen after the problem is solved, or the solution is improved.

As a result of our program, we are seeing our products being designed into various solutions by developers, bars (ph) and integrators, which we believe is an excellent long-term revenue growth strategy.

In the barcode scanning arena, we continue to see a very strong business and growth potential, despite the delays we saw in Q3. In Q3 we added two new products to service this market. The announcement demonstrated a combination laser, barcode, scanner and Bluetooth product. There is a single complex latch card with both Bluetooth and barcode scanning capabilities.

We are seeing strong acceptance and demand for portable mobile printing in the barcode scanning market. The combination barcode scanning and Bluetooth product allows us to support customers, who need both scanning and Bluetooth printing (ph), but have only one available expansion slot. Both technologies can be operated independently and simultaneously.

We also announced and demonstrated the world's first compact flash 2-D barcode imager. This product allows us to read both linear, your standard barcodes found in supermarkets on many consumerable (ph) products, but also supports numerous 2-D barcodes. There are various 2-D type barcodes, ranging from the PDF 417 codes found on many driver licenses, to the maxi-dot codes found on UPS packages. The imager can read all these codes. And in addition, it can capture an image, which is very important for applications where a signature or picture needs to be captured as proof of delivery.

We expect to ship software developer kits for the new imager in early November, and expect imaging to be an excellent source of revenue in 2003.

These new products combined with our already very healthy pipeline of barcode scanning sales should ensure we'll continue to have a solid and growing barcode business in the quarters ahead.

There are a lot of things happening at Sockets in the mobile connection arena, but I would like to take this opportunity to focus for a few minutes on Bluetooth, and to provide a 30,000 foot view of Bluetooth, and how we see it developing over the next 12 to 18 months, and our position in it all.

Over a year ago, Socket published a white paper on Bluetooth. In it we explained that we see a world with a Bluetooth enabled PDA in the center, and multiple connected devices around it. We explained that we expect the mobile phone to be the catalyst for the market, and the driving reason you would get a Bluetooth device in the first place. But, that once you had your Bluetooth device, you would add more devices to your cordless environment.

This is exactly what we see happening today. We see the Bluetooth phone driving the market, and people are Bluetooth enabling their PDAs and notebooks to use the Bluetooth form (ph). Once they see the power of Bluetooth in the mobile environment, they are anxious to Bluetooth enable all the peripherals and eliminate more cable.

We see this happening in the auto ID marketplace, where mobile printing over Bluetooth is driving our business with Intermec and O'Neill (ph). But, based on the success of mobile printing over Bluetooth, opportunities like dialup networking are now becoming available.

We see this with electronics for imaging who are Bluetooth enabling white boards in conference rooms, so that information written on a white board can be shared electronically with people who have Bluetooth enabled PDAs and notebooks.

We see this with Microsoft's recent announcement of a Bluetooth enabled keyboard and mouse. Not only will this provide a cordless keyboard and mouse for the customer, but it will also Bluetooth enable their desktop. This will help broaden and educate consumers on the value of Bluetooth, since there are hundreds of millions of Windows users worldwide.

We expect to continue to see more and more Bluetooth enabled devices coming to the market over the next few years. And we intend to leverage our position in the mobile market place to bring the right products and technologies to our valued customers. Making all this work together in a way that is easy and simple for customers is where Socket will continue to add significant value.

In Q3 Socket announced one new Bluetooth product - our SDIO Bluetooth card, a new, small -- card that will allow Socket to address the many thin PDA devices that have an SDIO slot only. The SDIO Bluetooth card will work in the new Windows-powered Smartphone devices that are SDIO capable, which Microsoft announced yesterday.

The SDIO card will provide the same functionality, using the same software and connection wizards as our compact flash card, but will do so in a smaller phone factor (ph) package.

Our recent announcement with EMTAC and Transplant Computing for the Bluetooth enabled GPS will enable us to deliver our first Bluetooth enabled external peripheral. And by external, we mean it does not plug directly into the PDA or computer. But the combination of a Bluetooth compact flash or SDIO card, and a Bluetooth enabled GPS receiver will act in a way that provides the GPS information to the PDA or other mobile device without burdening the PDA with the hardware, much less (ph) we are doing with the mobile phone connections today.

We see enormous opportunity for Socket in the whole Bluetooth arena. Our retail brand of products group and our embedded systems groups are leveraging our investment in Bluetooth. From the beginning we have taken the approach of solving the connectivity problems associated with adding Bluetooth radio into multiple devices. We have all the technology pieces to the complicated problem of making Bluetooth work. This includes hardware, software, both low-level stacks (ph) and user-interface, and we are in a position to provide the complete solution, or to provide the necessary pieces to a partner to complete their solution. So, Bluetooth is and will continue to be an excellent opportunity for Socket as these solutions are deployed.

In summary, we've been working hard to develop the technologies and know-how to really support the mobile computing market. To date, we are recognized as world experts in the mobile connection field. Our leadership position is recognized by many partners, like, Nokia, Microsoft and Intermec, to name a few. The overall strength of the company and our long-term prospects have never been brighter.

In terms of the short-term outlook, we expect Q4 to be substantially stronger than Q3. In Q4, we should see the benefit of our products in retail during the busy Christmas season. Our barcode scanning business is expected to benefit in Q4 from the deals that did not close in Q3, coupling this with our existing pipeline. These two factors alone will ensure a solid growth quarter for us, and put us into the $5 million range.

There are some other events that will also benefit us, like the arrival of some less expensive PDAs. Today, pocket PCs are too expensive for many people. We know of units coming from Dell and others that will achieve the much more attractive price point of 299. We believed this will stimulate the PDA market. Our ability to determine the launch and availability of these devices is limited, and therefore, we have to remain cautious.

In Q4, like Q3, we will continue to manage our expenses so the benefit of the increased revenue will go to the bottom line. Our goal is profitability, and I would like to assure you that every step has been taken to achieve this in the shortest possible time.

I would now like to open our call for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone keypad. If your question has been answered, or you wish to remove yourself from the queue, please press the pound sign.

Our first question comes from John Buckner (ph) of GKM. You may proceed.

It's John Bucher with Gerard Klauer.

OK. Hi, John.

Question. Did you have any greater than 10 percent customers in the quarter?

We have - as you know, we use the general distribution channels, and Ingram Microbe (ph) traditionally handles in excess of 20 percent of our products. But, that's the only customer that is in the above 10 percent category.

And then, could you provide an international revenue mix, like domestic, international - and if you can do it by country if there were significant countries?

Yes. I don't have the information here to do it precisely by country. In general, our international sales are running in excess of 40 percent of our total sales. I haven't made the calculation, but we'll have that information in our 10-Q for precise --, and I could provide it for you separately if you'd like, John, within the next day or two.

But, I believe we'll be in the 40 percent range for international, and that breaks out about two thirds of that to three quarters of that comes from Europe. And we have one quarter to one third that comes from Asia.

So, we're in the worldwide selling in over 40 countries around the world - all the major countries in Europe and the Pacific Basin, we have distributors who represent us, so our sales are truly international.

We are, obviously, seeing stronger demand in northern Europe, and particularly in Finland and Sweden for Bluetooth connection products than we are in the rest of Europe.

Yes. And I think in Asia, the barcode scanning is of particular interest. So, each region has its own products that tend to be stronger than others. But, internationally, both - those are the two products that seem to do the best.

And then you mentioned greater than 25 design wins. I'm wondering if you could provide a breakdown as to how many of those are Bluetooth-related design wins, versus PC card ASIC (ph) design wins, and other categories of design wins, too, as appropriate.

OK. Within the ASIC (ph) design wins, we typically work with people who do not have competitive products. Most of the design wins right now are in the wireless modem space where they're using our interface technology in a PC card phone factor (ph) to do either 1X (ph), or PT (ph), or GPRS (ph) type products.

And we also have a number of compact flash design wins in the GPS arena. And those two areas probably take up the bulk of the opportunity for HIS (ph). We have a number of smaller projects for hearing aids and various other types of instrumentation.

And in terms of Bluetooth design wins, our primary design wins have been in mobile printers and in the handheld terminals that are used by industrial workers, and supplied by people like Intermec, Symbol, et cetera - those type of units.

So, we are seeing a number of design wins. I did mention we have design wins for electronics for imaging that are Bluetooth enabling, white boards. And I think that where we really see our strength is when the number of peripherals that want to talk to a PDA is in the 100,000 range. There really needs to be an expert who advises these companies, and more and more companies are coming to us to get their Bluetooth solutions, because this stuff really is quite complicated.

John, our number of 25 customers - I think if you go back to our press releases, it's just associated with our chip business. And in addition, we have a number of additional customers that are working with us in the Bluetooth module area.

And when do you expect your SDIO Bluetooth card to be available?

We'll have it available in the late November timeframe. The issue with SDIO is that you need a complete solution. And not only do you need the SDIO card, but you also need software that supports SDIO.

A lot of the units that are out there today that people have SD slots in do not support SDIO. So, in order to prevent disappointment, we've been working with B-Squared (ph) for the last, I would say, six months to make sure there is software that allows hot swappable cards to be inserted and removed from devices, so that the user has a good experience.

That software and our cards will be available together at the end of November. And getting that software, I would say, the correct shape has been the delay. There is a number of devices, like we announced yesterday, the Smartphone that will support SDIO devices and have the appropriate software.

But, we will have it available for Q4.

And the final question was about the - in the Bluetooth related design wins, what sort of expectations should we - you know, if you look out at the next quarter, you know, what sort of pay should we expect design wins for mobile printers, handheld terminals, other Bluetooth enabled types of products - what kind of ramp up are you expecting over the next quarter or two?

Well, I think that in terms of design wins, we probably have five to 10 more design wins. The timeline between the design win and rollout of the project varies greatly. And I think in Q2 we reported that we sold 20,000 pieces to a single application, which was the Schwann (ph) deal.

We have a number of deals in the pipeline. Our expectations for most of these are actually for Q1 and Q2 of next year. But, that can change as people decide to go and spend end of year budget money. But, these are long-term deals. A lot of the designs are going in to handheld terminals which have a useful life of six or seven years in the field. So, once you get designed in, you get the business for quite some period of time.

For our own internal planning, John, we're assuming that the embedded products and services business in the fourth quarter will be similar to what we did in the third quarter, and I think that's a conservative number. There are some nice upsides there. But, we do show some, in our own planning, some very significant growth expectations for the first part of next year.

And it's all a function of when products are gonna move into the production phase. We're relying on estimates from the customers we work with. So when products and whether products get to the markets are things that we don't directly control. But, as you can see from those we have announced, we're working with many large organizations that have a good track record of serving these markets. And we're expecting as these products come into the market that there will be a number of them that will be well received.

Thank you for taking the questions.

Thank you, John.

Our next question comes from Ronald Craven from Socket Communications. You may proceed.

Yes, sir.

Kevin (ph) or David, what was your mix on your retail level right now? In other words, how is your Fry Electronic distribution channel going? And approximately how many stores have you completed the distribution in the quiche (ph) and everything in your Office Depot, please.

OK. Fry's Electronics has approximately 20 stores which we service, and we see our weekly sales vary from, I would say, three to five products per store, per week. Office Depot has 850 stores, and we don't expect a number quite that high in Office Depot, but you can see that the - when you multiply even a small number by 800, it turns into a good number pretty quickly.

In terms of the rollout with Office Depot, obviously, we do not merchandise at Office Depot. They have a kiosk-type structure and display cases that they're rolling out across the country. As I explained, the expectation was there would be 200 stores that were targeted, and they went back and decided to do all 800.

I would say that if you go into most stores today, they are in the process of building and getting the product out into stores. We do not see yet sales numbers that indicate that they have the product out. We would expect that the products will be in the stores by the end of this month. And it does take some time. So, I don't really have an exact number to give you as it regards the weekly sales, other than they have been small because people have had to ask for the product to get it from the back room, and it hasn't been in the displays so far.

Office Depot is actually combining a reorganization of how they're selling pocket PCs and accessories in the kiosk structures with the rollout of our products. So, we're somewhat dependent on a store-by-store basis with where they are in terms of that reorganization.

The other factor, because of their delays, our products went into the stores right in the middle of the back to school selling season, and many of the stores were simply too busy to get the products immediately out. But, they traditionally have a few weeks between the back to school and the fall, Christmas holiday-type selling season, which we're in now. And we've been given assurances by Office Depot that products are rolling out onto the shelves this month.

OK. Thank you, gentlemen.

Thank you, Ron.

Again, ladies and gentlemen, if you have a question, please press the one key on your touch-tone keypad.

Our next question comes from Peter Mintx from Barrow Street. You may proceed.

Yes. Good afternoon, gentlemen.

I'd like to delve back into the Bluetooth market a little bit from more of a macro, and then somewhat of your perspective. I know Kevin (ph) was talking a little bit about the market in general, but I don't remember any specific figures, or the growth rate. I remember that there was very strong projections of like 130 percent compound growth to 20 million chip sets in 2002, versus 2001. And, you know, continuing that pace for the next couple of years. Do we still see that pace continuing? And what's happening in the U.S. in the market in general? And also, you know, what about Bluetooth for Socket in the U.S.?

OK. A number of questions in there, Peter. Let me try and address them.

In terms of the overall Bluetooth market, I don't know that the projections are substantially changed, and then what they were before. I think a lot of Bluetooth has been designed in to products, but is not necessarily used.

Things that drive the market are obviously Bluetooth phones, because the number of mobile phones that are sold dwarfs most other consumer items.

So, we are seeing Nokia and Erickson certainly delivering good numbers of Bluetooth phones. I don't think that they are in the plus 10 percent of mobile phones, yet. But, even a number about 10 percent would represent 40 million Bluetooth phones.

In terms of what we see with Bluetooth for the U.S. - Both Singular and AT&T have started selling Bluetooth enabled phones that are capable of supporting high-speed GPRS connections. Most of the phones are being purchased today, I would say, because they're cool phones, and not necessarily for the Bluetooth or GPRS features.

We're seeing that change now that people do have the devices. AT&T completed their nationwide rollout towards the end of September, beginning of October, and our understanding from them was California was the last place to be turn on, and that got turned on about a week and a half ago.

So, we do expect to see Bluetooth sales in the U.S. starting in Q4. Currently, I would say that 85 percent of all of our Bluetooth sales are outside of the U.S. And that's primarily because there are no phones driving it.

The other areas where we're seeing a lot of adoption of Bluetooth is in the auto ID or route accounting space. We know of deals going down to Bluetooth enable everything from vending machines, to various printers, et cetera. And again, as I explained in our call, what happens with Bluetooth is once you start using it, it's very compelling, especially in a mobile environment. And the tendency is to Bluetooth enable more, because of the whole power of the solution.

So, I think we're still very bullish that Bluetooth is on track. I think chips are being sold. We're working closely with chip suppliers, like CSR (ph), and I think people are understanding the power of this stuff.

I personally don't have an exact number on f the projections, but I think that they're still very healthy at the chip level, and we're certainly seeing the benefit at the application level.

Peter, the Bluetooth plug-in products in the third quarter for us was over half a million dollars, which is about 14 percent of our revenue for the quarter. So, Bluetooth itself with just Europe as the primary market at the moment is already becoming a significant product within the whole connectivity product area. The connectivity product area in total for the quarter was about 35 percent, which is historically how we've been running over the last several quarters.

OK. It sounds like the market dynamics remain strong.

Let me just - one follow-up question more financially related. Just looking at your numbers, the current G&A is under two million annually, and that's been declining all year. R&D is under about three five, and it's also declining all year. Obviously, you're not gonna keep declining forever. Have we pretty much stabilized at this level? And to what revenue level can those, you know, two components of operating costs stay relatively stable?

Well, our general expectations for the fourth quarter with our operating expenses is that we will maintain the status quo in terms of our headcount, which is the biggest single driver in cost, and that the main difference in the fourth quarter is that we have yearend fees, like audit costs that we need to absorb. So, we'll see some very small increases overall in our operating costs, but really quite small. Our intent is to hold things level, and we believe we can do that even with a rapid revenue growth pace that we're seeing currently happening in this quarter, and expect will continue to happen as we go through the quarter.

So, the benefit of that growth should go right through to the bottom line with moderate increases of 100 to $150,000 over our current levels.

OK. Can that be maintained, like, above the $20 million revenue level, too?

Well, we can't maintain it forever, but the answer is that the growth that we will add will be in two categories as we move into next year, and we want to get profitable first, and then we'll start to allow our expenses to grow moderately where the business would benefit from that. And the two categories are - obviously, you need some workers to help pack out and ship a higher quantity of merchandise. Our operations teams will increase and customer service teams will increase modestly.

And then, there are a few areas where we could clearly benefit in terms of additional product marketing management, some additional engineering help to work with customers in design activities. These are the sorts of things that we will add as the business can support it.

Yes. But, in terms of an overall model of our business, Peter, what we're trying to achieve is to hold about 50 points of gross margin as we get larger. We would like to have about 12 percent of that set aside for R&D, about 14 to 15 percent for sales and marketing, and maybe four to five percent for G&A.

So, in terms of dividing up your gross margin, we believe that we should be spending about 30, maybe 31 percent, and trying to bring about 19 percent down to the shareholders. That's the model we're following.

As you can see, even though our sales went up or down, because of the way we sell in a leveraged way through distribution, it doesn't affect our cost significantly as with other companies.

OK. That's it. Thank you.

Thanks, Peter.

Our next question comes from Mike Davis from Buckman. You may proceed.

Yes. Hi, gentlemen.

I think I hit the button - I wasn't in queue - by mistake. I got back very late from a meeting in Boston, and I'm unfortunately later than I thought. So, I haven't been able to go over the numbers. But, I just will notice that - I noticed that your costs, I think, again, you must be commended on that. And certainly, what your answer to Peter was certainly reassuring. And in this climate, I thought the sales were very good.

Anyway, I'm sorry I don't have any intelligent insights at the present moment, but I thought it was a very good quarter.

Let me take your comments and just have a chance to emphasize our remarks. We believe that the revenue that we're down from the second quarter are a temporary problem that will be restricted to the third quarter. And that, in addition, with the strengthening of our balance sheet, we're really looking to ensure that we maintain adequate working capital for our operations and for growth.

And some of the ratios that we're continuing to manage against include our current ratio; at the moment, we're better than 1.1 to one. We'd like to stay at those types of levels, and our tangible net worth ratios, which we want to retain at about a million and a half dollars.

So, the decisions on the levels of financing that we completed, and obviously our bank line is now in place through July of next year is there to help us with growth, because as our receivables and inventory go up in response to growth, that working capital that's available through the bank line goes up, as well.

So, all of these factors are a part of our plan to ensure that we get through this period, and also are keeping one eye on the opportunities that are presented by growth.

Right. Well, anyway, there are very few companies that have shown the growth that you've shown in the top line through this very difficult period. So, we have to keep all that in - and I expected a down quarter sequentially in terms of the sales. It wasn't necessarily a surprise. I know you did your valiant best to try to keep the number up, but there's only so much you can do, especially in today's climate, and also the sort of jockeying for position with PDAs. It's just been a longer and much more difficult task than I think any of us anticipated. But, I just thought it was very good.

All right. Thank you very much.

Thank you.

Gentlemen, it appears there are no further questions.

OK. Well, in closing, I would like to say that the first nine months of 2000 we have reached the revenue number for the entire year of 2001. I'm sorry; I should say for the first nine months of 2002, we have reached the entire revenue for 2001. So, we are growing well, even in these difficult times.

In the first nine months, our revenue increased by 40 percent, and we also reduced our expenses by 10 percent in the same period.

So, we're working hard to continue this trend and provide you with profitable operating levels. We believe we will reach cash flow positive operating levels in Q4, and this will put us securely on our way to profitability.

We very much appreciate the continued support and patience of our shareholders, and we look forward to delivering good news and good results on our next call.

I'd like to thank everyone for today's conference call, and wish you all a good day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect.

Everyone have a nice day.