Socket Mobile Inc (SCKT) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Socket Communications, Incorporated Second Quarter Management Conference Call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the "" followed by the "0". As a reminder this conference is being recorded today, Wednesday July 23, 2003. I would now like to turn the conference over to Tasha McKnaudy (ph.), Marketing and Communications Manager. Please go ahead.

Thank you. Good afternoon and welcome to the quarterly conference call for Socket Communications for their second quarter ended June 30, 2003. Earlier today Socket distributed its earnings release over the wire service and also by emails to all of you who have requested such distribution. Socket has also posted their release on their website at www.socketcom.com. A replay of today's call will be available on ccbn.com shortly after the completion of this call and a transcript of this call will be posted on Socket's website within a few days. We have also posted replay numbers in our press release for those who are wishing to replay this conference call by phone. The phone replays will be available for a week. In just a minute, management will provide an overview of the results and then we will 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 we 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 and Exchange Act of 1934 as amended. This conference call will include statements forecasting future financial results and operating activities, market acceptance of our product, expectations for growth and demand for our products, expectations for expansion of the distribution channels for our products, expectations for the stabilization of growth margins on revenues and the timing of introduction and availability of new products. 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 including but 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, our ability to successfully introduce and market future products, our ability to effectively manage and contain our operating costs, the availability of announced hand-held computer hardware and software, continued growth in demand for hand-held computers, market acceptance of emerging standards such as Bluetooth and of our related connection products. The ability of our strategic partnerships to benefit our business as expected, our ability to enter into additional distribution relationship or the other factors described in our most recent Form-10K and 10Q reports filed with the Securities and Exchange Commission. 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.

Thank you Tasha (ph.). We are pleased to report continued positive momentum in Socket's revenue growth. Our second quarter revenue improved on the record levels of $4.9m that we achieved in the first quarter reaching record quarterly revenue of 5.1m of 11% from the second quarter a year ago and of up 4% from the previous quarter. Compared to the previous quarter, we held our gross margins to 49% and reduced our bottom line losses by half from the net loss of $1m or 4 cents per share in the first quarter to a net loss of $0.5m or 2 cents per share in the second. Included in our second quarter totals are non-cash charges consisting of the amortization of intangibles, depreciation expense, and preferred stock accretion of $400,000. Higher revenue in combination with the 5% reduction in operating expenses resulted in these improvements. As we look forward to the third quarter, we believe that the dynamics of our business will drive through the revenue growth, while we maintain our margins and hold our expense level.

Let me talk briefly about these three expectations. First, revenue increases; Kevin Mills, Socket's President and CEO will in a moment talk in more detail about the dynamics of our business that are driving our revenue growth. We have benefited from the introduction by Dell in the fourth quarter of 2002 of its lower cost Axim pocket PC for a $199 and $299 and we will benefit from the decision by Hewlett Packard to replace [sleds with slots] on their newest iPAQ hand-held computers increasing the number of slots we have available to fill. In the second quarter we also experienced some sales slow down prior to the introduction on June 23 of new pocket PCs utilizing the pocket PC 2003 operating system. But sales since the launch date have been robust. As we described in our press release, we continue to add new products such as our bar code scanning imager, our smaller [firm] factor secured digital products and our new Kwik Blue Bluetooth modules. We have also announced a number of design wins with our embedded systems customers, many of whom are expected to move their products into production in the second half of this year. As a measure of this potential for growth, orders received by Socket for chips and Bluetooth modules for delivery in the third quarter are already at 84% of the total revenue we've recorded for these products in the entire second quarter.

Second improving margins; our third generation interface chip is now being deployed in our products and will shortly be available to our chip customers. These chips are more highly integrated, faster, less power consuming and less expensive to manufacture than the chip they replace and our margins in the third quarter will benefit from this change. Our target margins remain at 50%.

Third, holding expenses level. Socket uses third party manufactures to build its component parts and most of its products are distributed worldwide through an outstanding group of electronic products distributor. Accordingly Socket has the ability to increase its manufacturing and distribution volumes without greatly increasing its head count, which is our largest single expense for [both] requiring major capital investments. In addition, we've benefited in the second quarter and are benefiting in the third quarter from having completed several major product development projects, which have reduced our total research and development costs for these quarters. We are committed to minimizing our expense increases to allow the benefits of revenue growth to move to the bottom line. Comparing our second quarter revenue to our first quarter revenue, we experienced growth in three of our four product families. Our connectivity products represented 40% of our revenue for the quarter. Our bar code scanning products represented 28% of our quarterly revenue. Our embedded products and services represented 14% of our quarterly revenue. Our legacy serial peripheral connection products sustained a modest decline and represented 18% of our quarterly revenue. Socket continues to have a broad and well diversified product line of hand-held centric mobility friendly products. We define mobility friendly as easy to use and consuming low amounts of power to preserve the battery life of the devices they are connected to, which differentiates our products from many others in the market.

Now let me turn to Socket's balance sheet. We've continued to strengthen the balance sheet, improving our working capital with the completion in March of a $2m [Series F] preferred stock financing. Our receivables are up, reflecting higher sales in the second quarter and our inventories are down reflecting better timing of the purchase of our inventory components with actual sales. We continue to reduce our note payables with Nokia that is being paid in installments of EUR 100,000 per month for the purchase of Bluetooth technology and Bluetooth business a year ago in March 2002. And that note is now less than $1m after giving effect to offsetting hedged assets. Our cash balances at June 30, 2003 were $3.3m which is an adequate cash balance with our usage of cash for operations now rapidly approaching breakeven levels.

Finally, let me briefly comment on additional items of interest to our shareholders. First, Socket's strong positioning as the leading supplier of connection products for the hand-held market and our improving operations and balance sheet have resulted in higher average daily trading volumes in our stock this past quarter with the volumes today averaging as reflected on Yahoo, 144,000 shares per day. Our [Series E] redeemable preferred stock that we issued last October has been converted systematically into common stock by the holder and is today 98% converted removing the possibility of future redemption. We have asked our Series F preferred shareholders last Friday by declining [effective] to registration statements that registered the underlying common shares and we expect our higher average daily trading volumes to facilitate the absorption of any shares that these holders may wish to sell in the future.

Second, we received on July 1 notice that patent infringement lawsuit was filed against Socket by [Cyber] Technologies claiming that certain or our barcode scanning products infringe a U.S. patent that they hold. We have not yet been served with the lawsuit and are presently in the early stages of reviewing the merits of their claims. We believe that we can enter into a commercially acceptable licensing agreement with [Cyber] should that be warranted. Third in our desire to help investors became more familiar with Socket, we've engaged the independent research group to write a comprehensive research report on Socket. That report which is expected in mid-August will be available to the public. Finally, Socket held its annual meeting of shareholders on June 19, 2003 and I'm pleased to report to Socket's directors who were reelected for another term and the appointment of Ernst & Young as the company's auditor for 2003 was ratified. Now I'd like to introduce Socket's President and Chief Executive Officer, Kevin Mills for his remarks. Kevin.

Thank you Dave. Q2 was another very positive quarter as such. Just like in Q1 we are again reporting a record high revenue number and we continue to make good steady progress in this difficult economy as Dave outlined our branded connectivity business and our industrial and embedded business skilled in Q2. I would like to outline the dynamics we see influencing our business in the second half of the year. As many of you are aware, we divide our business into two categories namely our branded connectivity business which includes all the products sold under the Socket's name that use connectivity. This includes our Bluetooth, wireless LAN, modems, Ethernet, digital phone card connectivity products. These products are used primarily by mobile professionals who use the pocket PCs. Our second category is our industrial and embedded products, which include our scanners, Kwik Blue Bluetooth modules and mobility IC interface A6, which are used in the industrial sector of the mobile computing markets.

In Q2, a number of positive things happened irrespective of the pocket PC markets, starting with the launch of pocket PC 2003. Our Windows Mobile 2003 as it has recently been renamed. With the launch of Windows Mobile 2003, came a few significant events for Socket the first one being that HP has reintroduced a Compaq Flash slots into their new 2200 series device. This is significant and very positive for Socket. This is the first time an iPAQ has incorporated and embedded CF slots since the acquisition of Compaq by HP. Prior to the merger, HP and Compaq had different expansion philosophy. HP with its [Tornado] series included a standard Compaq Flash slots in all its devices, which made it easy for the customers to add functionality. And As a result, Socket's products all were sold well on the HP platform. Compaq on the other hand with this iPAQ series did not include any built-in expansion slots but used an expansion adjusted strategy. This strategy enabled users who wanted to expand the functionality of their devices to accomplish this by adding in sleeves to their pocket PC which included an expansion slot. However, there were a number of disadvantages for the customer. Mainly purchasing the jacket-added cost but more importantly] the jackets may [inaudible] and often resulted in the iPAQ becoming too big for the pocket or purse users intended to carry with it. This resulted in expansion being less convenient for iPAQ customers and subsequently not as popular. Unfortunately, for Socket, the iPAQ had the line share of the market and therefore a significant number of iPAQ customers were never potential Socket customers as they did not have the expansion jackets. The new HP iPAQ 2200 includes a standard Compaq Flash slots as well as an SDIO slot. This is excellent news for HP customers as it allows them to add functionality like wireless LAN and scanning without increasing the cost or physical size of their device. Obviously, you will believe this is also excellent news for Socket as the [easier it is to expand these devices, there are number of people who are. HP will be listing a number of Socket's Compaq Flash products on the website for resale in the coming year. These changes bode very well for a branded connectivity business. The second part I was referring the launch of Windows Mobile 2003 is the inclusion of SDIO slots in many of the new devices. SDIO slots enable expansion via small SDIO cards; SDIO is thinner and approximately half the physical side of the Compaq Flash slot. The small physical size is ideal for newer slimmer devices that are coming to market. Socket again in a new leadership role in the SDIO markets; already has a family of three products in this new formed sector. We expect to see demand for SDIO products beginning in late summer as the new devices come to markets. Socket's current SDIO includes Bluetooth, Wireless LAN, and scanning and Socket will de leverage all of its existing software and distribution strength in bringing these new SDIO products to markets.

Another item worth mentioning in the SDIO arena is Palm. Palm is also incorporating the SDIO slot [to some effect] in their devices. For first time in Socket's history we will be able to service a portion of the top customers with expansion products. Our initial intent is support Palm customers with our SD scanner products which we expect to happen this quarter. We are starting in the Palm market with our scanning products because we have a truly unique offering and will not face competition. We are still somewhat cautious about the opportunity in the Palm economy since we believe Palm could bring competing add-in products to markets and Socket will have a difficult time competing against Palm in this space. Finally, and probably the most important dynamic we see in the market today is that the pocket PC manufacturers are more focused on solution selling than they have ever been before. Their cost customers continue to look at the pocket PCs as a possible solution for the mobile workers. And they are asking the HP, Dell, Toshiba, [inaudible] to solve the real world problems. Often these problems center on connectivity and data collection. As a result, our relationships with host of manufacturers have never been stronger. Device manufacturers continue to see our products as part of the solution. Our product provides them with the flexibility they need to meet customer-specific requirements using a combination of add-in cards in their standard product. Today we are very busy training their sales staff and doing joint costumer visit. We strongly believe the solutions our costumers want and solving problem lead to strong long-term revenue growth. So, overall we feel very good about the pocket PC market. We see an increasing number of built-in Compaq Flash and SDIO slots. First, we expect the benefit from the opportunity to serve Palm costumers. The adoption of an industry based slots across all these devices makes it substantially easier for customers to expand there devices, customize them to meet their need and solve their problems. This results in a win-win situation for the host of manufactures for Socket and for the costumers. We see the positive momentum in the pocket PC market today enabling us to overcome the traditional summer slowness and have a solid Q3.

Looking a little further ahead, we expect the introduction of Windows Mobile in June will make the year-end sales much stronger as we will not have to cope with product transitions during the busy year-end sales period as was the case for the last few years. A combination of all these factors will enable us to post good numbers in Q3 and Q4 and reach our goals for the year. On the embedded and industrial business, we also saw growth in Q2 and we expect to see continued growth in Q3. The dynamics of the embedded and industrial business are very different from our branded connectivity business despite the fact that the underlying technology is very much the same. The embedded group covers three areas namely our mobility IC interface AC, our Kwik B lue Bluetooth module, and our broad spectrum of Bar Code scanning products. All three areas are very much driven by design-win and have long sales cycles. Just as we've spend many months working with companies that want to design our technology into their devices or solutions and then our sales success is dependent on their success in the marketplace. Generally, our design efforts are performed under a fee-based contract are under product purchase commitment, and in many cases under a combination of these two scenarios.

Our mobility ICs are a topic I want to discuss in little greater detail in this call. We recently started shipping the third generation of our mobility ICs. This chip was designed primarily for our own products so that we could meet the small size and low product features we need in our products. Socket has developed its own interface basic chips since its inception. This high technical skill produces silicon that is the core building block in our family of products and provides us with both cost and space advantages that we need for a long-term success in this market space. Developing these mobility ICs interface A6 is a complex and expensive process. It typically takes several quarters and well over $0.5m investments. And as result not everyone has the expertise or skill levels of this type of work. [Talkative] leveraging is expertise and know-how to support non-computing customers with Compaq Flash elements of their product. We are leveraging this expertise with a growing number of customers. Customers like Novatel Wireless who very recently announced with the standardized on the mobility ICs across their entire high speed wireless wide area modem cards serving both the CDMA and GSM markets. Our mobility ICs are low-cost, low-power and also available in small equipment packages. Novatel is one of many customers in this category and we expected this portion of our business to continue to grow strongly as more and more customers bring their product to markets. Our Kwik Blue Bluetooth Module business is also looking very solid. Even though sales did not change significantly in Q2, we expect Q3 to be stronger as many of the products incorporating our Kwik Blue solutions are currently in the final stages prior to launch, and our customers are anxious to get these new products to market for the Q4 selling season. Ultimately, the success of the Kwik Blue modules will depend on the successful sales of the mobile devices they are incorporated in. We continue to work with strong and reputable companies that are likely to have solid sales with their products once launched. We continue to be very optimistic about the Bluetooth opportunity especially in the industrial embedded space with the productivity improvements we are seeing with Bluetooth deployments are excellent.

Finally, in the embedded industrial area is our scanning product]. This business continues to grow as bar codes are used more and more in everyday life. Our bar code scanning products enable us to -- Bar Code enable Bar Code PCs and other handheld devices. Our primary focus is the white collar worker who needs to occasionally read Bar Code in the course of their job. The solutions required by the people like pharmaceutical representatives who needs to capture lot numbers for sample they are providing to doctors and who are already using a pocket PC to manage their schedule. We also see adoption of the occasional scanning business in medical services, used car sales, sales force automation, [traffic] tracking, and in other sectors. We continue to see new applications all the time and we have 100's of vertical applications developers about using our software to implement customers-driven solutions. We shift our new enhanced scan imager in late Q2, but the revenue benefits will really begin in Q3. The imager needs more complicated pediatric 417 cloth that appear in many state [library] licenses as well as other 2D cloth like [data metrics] which is used in the medical environments. We also expect to ship our new SDIO scanner in Q3. This is a very revolutionary product from the size and cost point of view and as far as we know this is the first commercial deployment of a bar code scanner using this extremely small and cost effective solution. The SDIO scanner can be used with very small and slim devices like the HP 1940 and the View sonic B35 as well as the Palm's Tungsten series. The other exciting aspect of this product is the extremely low cost -- price points I should say. Cannon traditionally has been relatively expensive but this product will have a recommended price of $2.99 and will be available for a less than that through our standard distribution channels. We believe this product will have a profound impact on the market for occasional scanning and, obviously we are anxious to see the impact of this product in the large Palm economy as such a product has not been available to Palm owners before. We've already provided early ST scanners to developers so that applications can be developed and early feedback is good and we remain very excited about the potential for scanning in the mobile markets. Well in summary, we continue to have a great deal of positive things happening here at Socket. We continue to work hard and we are pleased with our performance in these difficult times. It remains a struggle to know the timing of deals and predicted events exactly, but we feel we have enough momentum going forward to be confident that we will be able to reverse the traditional Q3 slowdown and post another solid quarter. We expect our business to strengthen substantially in Q4 as we entered the traditional busy season and expect to finish [other year] strongly. I would now like to open the call for questions.

Thank you sir. Ladies and gentlemen at this time we will begin the question-and-answer session. If you have a question please press the "*" followed by the "1" on your push button phone. If you would like to decline from the polling process, press the "*" followed by the "2." If you're using speaker equipment, you will need to lift the handset before pressing the numbers; one moment please for the first question.

Our first question comes from Will Lyance (ph.) with Westminster Securities (ph.). Please go ahead.

Hi gentlemen. Congratulations on such a good quarter. What -- typically you speak about the fourth quarter being strong and that’s obvious why, but when does that start showing up in your numbers? Would that show up in the third quarter or are orders typically delivered in the fourth quarter for the fourth quarter?

No. We see two benefits towards the yearend. We see that people who have budgets and need to deploy solutions typically have saved some of their money through the year and decide to deploy and we benefit from that. We actually benefit probably more in the beginning of Q1 from sales of pocket PCs and other devices that have been delivered to people, I would say as part of Christmas gifts and other holiday events.

I see.

Typically, their is two aspects to the business, in the consumer side or individual side people generally would buy a peripheral 30-60 days after they get the host device. In the corporate deployment sector as those are usually done by the corporation and are deployed together.

And then our chips will actually will perhaps lead the face of selling because the [whole] set of buying our chips are going to be producing their products and when you buy the chips in late third quarter in order to produce some for the fourth. So we actually have benefits that will precede as well follow when the pocket PC themselves are being sold.

Yeah. So I think that the seasonality is that Q4 and Q1 are our best quarters; Q2 and Q3, we have to work hard at that.

As a follow up if I may, what in your sort of internal projections -- what are you looking at in terms of 2003 growth in sales of the devices that ultimately what your devices are at SACH 2 particularly the PDA market?

Our internal estimate is that we felt the pocket PCs would go about 25% this year. And I see that the market itself and IDC put out a report this morning to say that the number of units continued to decline, but in these two dynamics for the markets one is the Palm centric and the other is the Pocket PC. We actually see the Pocket PC strengthening and we've seen that for quite sometime and therefore I think the net affect is that it's relatively flat down, but the sector that we are looking at which is the Pocket PC, I think it is actually being growing.

Yeah, I already see [huge] numbers like 39% compounded to annual growth rate in some of their other reports and then -- and even in the reports that they just issued, they are quite bullish about their Pocket PC growth in the second half of the year, particularly as some of these newer units come into the market.

I see; thanks very much.

Pleasure.

Ladies and gentlemen, if there are any additional questions please press the "" followed by the "1" at this time. As a reminder if you are using speaker equipment, you'll need to lift the handset before pressing the numbers. Our next questions comes from Michael David (ph.) with M L Davis Financial Services (ph.), please go ahead.

Well gentlemen, it is very hard to find fault with those numbers. Given the economic climate that were in, I do have that -- there is a lot of buzz about the removable memory and I wondered if you might discuss some of the dynamics of this -- longer-term dynamics and what it might mean to Socket and the devices that Socket will connect to?

You are talking about the removable memory patents we have?

Right.

The patents cover the idea of removable memory. We filed these patents back in '99, primarily because we felt that there would be a single slot in this device and you would compete between I/O and memory. With the addition of the SDIO, we have basically stalled on bringing products to markets. Now that devices are getting smaller again and going back to one slot, we believe this is a very valuable patent and we will, as the market improves, we will add products that have both memory capabilities and I/O functions in one. We are cautious about the timing because the investment is substantial, but we really have a very solid patent position to protect the IP rephrases around this all-in-one device, if you will, that plugs in and gives you both, may be Bluetooth functionality as well as additional memory, which we feel we require the things like GPS where you need somewhere to store maps as well as Bluetooth functionality to connect the external peripherals.

And then Mike we filed approximately a dozen patents now that most of those that revolve around this particular area, so we do have a solid patent portfolio in the works, although the process of getting it through the patents [inaudible] processes is a several year process. But one has been granted and you can look to Socket for announcements as we have additional patents grabbing down the road.

Thanks right] they can dip patterns on all kinds of this business procedures which anybody can think of -- I would think that this is got to be very meaningful and very big to Socket and I was just really interested and it seems to me that and this is something that's not new to me because I think I did right up on that a couple of years ago, a special piece on it, but I just wanted to flash out what this might mean in broader terms and other industries, other devices that you have already covered some of that but I -- there is just an awful lot of loose talk about it and I just think that it doesn't necessarily serves Socket well to have people misinformed us to what this really means; I know you really can talk about it in great detail but anyway I’ll just leave up there.

Alright thank you Mike.

Thank you.

Our next question comes from Eric Roberson (ph.) with Spencer Draft (ph.). Please go ahead.

Hi gentlemen a quick question, if you back out the non-cash charges after the quarter what will be the net operating loss?

Okay we had half a MIllsion dollar net loss applicable to common shareholders of the three categories of non-cash charges which we identified, which were the accretion of preferred stock, depreciation, and amortization of intangibles. It was about 400,000 of that total, so the difference would be about $100,000 of loss that would be remaining related to cash related item.

Thank you.

Mr. Mills there are no further questions, please continue.

Okay, we have just one another question that someone rolled in, which I would like to go and state. The question relates to what other short-range wireless might be available beside Bluetooth and how that might affect us? Generally, we keep a very close eye on all new wireless technologies and typically for any company to deploy whether it be Ultra white Band (ph.) or Zigby (ph.) or one of the [inaudible], they typically go through the first stage where they are putting it in a Compaq Flash or Expansion Card and more and more of those opportunities are coming to us. We don’t feel that any of these technologies are right for our markets, but we do monitor this closely and we will adjust that position as we feel these technologies improve.

In my closing remarks, I would just like to say that Q2 was another solid quarter for us and we are happy to have reached the $10m mark for revenue in the first half of the year and we are confident we will grow beyond the record revenue we had of $16.3m last year. We are working hard and we continue to be excited about the opportunity in the mobile space and we expect to increase our revenue and improve our operations in the second half of the year. We very much appreciate the support of our customers, shareholders, and employees, and we look forward to our next conference call in October. And I thank you for participating in today's call and wish you a good day. Thank you.

Ladies and gentlemen, this concludes the Socket Communications Incorporated second quarter management conference call. If you would like to listen to the replay of today's conference, you may dial 1800-405-2236 or you may dial 303-590-3000 and enter the access number of 546223. Once again, if you would like to listen to replay of today's conference, you may dial 1800-405-2236 or you may dial 303-590-3000 and enter the access number of 546223. Thank you for participating. You may now disconnect.