Socket Mobile Inc (SCKT) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Socket Communications third quarter management conference call. At this time all participants are in listen-only mode.

Following today’s presentation, instructions will be given for the question and answer session. If anyone should need operator assistance at any time throughout the conference, please press the star followed by the zero on your phone.

As a reminder, this conference is being recorded today, Wednesday, October 22nd of 2003.

I would now like to turn the conference over to Tatia Meghdadi, Marketing and Communications Manager. Please go ahead, miss.

Thank you. Good afternoon and welcome to the quarterly conference call for Socket Communications for their third quarter ended September 30, 2003. Earlier today Socket distributed its earnings release over the wire service and also by email to all of you who have requested such distribution. Socket has also posted their release on their web site 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 web site on Friday. We also posted replay numbers in our press release for those wishing to replay this conference call by phone. The phone replay will be available for one week.

In just a moment, management will provide an overview of the results and then we’ll open up the line for Q&A. But before we begin, I would like to remind you that this conference call will include 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, including statements forecasting future financial results and operating activities, market acceptance of the Company’s products, expectations for general market growth in handheld computers, growth in demand for Socket’s products, expansion of the distribution channels for the Company’s products, and adoption of Socket’s embedded products by manufacturers of electronic devices. Management will also comment on gross margin levels, on and the sufficiency of expected cash balances and on the timing of the 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 and 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 availability of announced handheld computers, hardware and software, continued growth in demand for handheld computers, market acceptance of emerging standards such as Bluetooth and the related connection products, the ability of Socket’s strategic partnerships to benefit the business as expected, the ability to enter into additional distribution relationships, or other factors described in the Company’s most recent Form 10-K and 10-Q 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, Tatia.

Our third quarter revenue reached new record levels of $5.7m, up 53 percent from the second quarter a year ago and up 11 percent from the previous quarter’s record revenue of $5.1m. The quarter was our fourth consecutive quarter of growth and our third consecutive record quarter. We also returned our gross margins to our target levels of 50 percent, compared to 49 percent last quarter. And we further reduced our bottom bottom-line losses from a net loss of half a million dollars, or 2 cents per share, in the second quarter, to a loss of $272,000, or 1 cent per share, in the third quarter.

This number, when adjusted for non-cash charges including amortization of intangible technology, depreciation expense and preferred stock accretion, means that we reached our third quarter objective of achieving cash-positive operations for the quarter, attaining positive cash flow from operations of nearly $100,000. This milestone was achieved through the combination of revenue growth and tight expense management, and we expect to continue these trends until we reach our next target level of bottom bottom-line profitability.

Socket recognizes revenue on its product sales when the products sell out from its distributors, so sales revenue reflects the levels of our channel sales activities, not Socket sales into the channels. We believe this accounting policy is conservative and protects us from any adverse revenue impacts in the event our distributors should return product to us.

The largest driver of growth in the third quarter was from our bar code scanning family of products, where sales increased 37 percent over the second quarter and now represent 34 percent of our revenue mix, compared to 28 percent in the second quarter. Our CompactFlash In-Hand Scan Card, which plugs into a Pocket PC and turns the Pocket PC, tablet or a notebook computer into a one-handed bar code scanner, remains our largest selling bar code scanning product. We also experienced increasing demand for laser bar code scanning guns that attach via a cable to a notebook or Pocket PC. In addition, we began shipping in the quarter a bar code imager whichimager, which scans the more sophisticated 2D bar codes and takes pictures. And we began shipping at the end of the quarter our newest bar code scanning product, our Secure Digital form factor bar code scanner, which is designed to work with Palm Tungsten handhelds as well as Pocket PCs with SDIO slots and SDIO Now! operating system software.

We are pleased with the early reviews we are receiving on this newest SDIO bar code scanner, which is our first major product designed to work with both Palm and Pocket PC handheld computers. As we look forward to the fourth quarter, Socket has a very large pipeline of potential customers that are in various stages of field trials and software application development. The pace of our growth in the fourth quarter will be determined in part by the number of customers completing their field trials and deciding to proceed.

The economy has been a factor in the timing of spending decisions by customers. We are quite optimistic that the combination of our new imager and SDIO scanner, a slowly improving economy, and the productivity benefits of bar code scanning with a Pocket PC, will continue our growth momentum within this product family.

Our connectivity product family, which is our largest family of products, is designed to connect the Pocket PC to wide area networks over mobile or [land]LAN lines, to local area networks through corporate entry stations or Internet hot spots, or over Bluetooth to other Bluetooth-enabled devices, such as the mobile phone or printer. Our connectivity product sales grew 12 percent in the third quarter over the previous quarter, and continue to represent 40 percent of our product mix. [A number of our]Several of our connectivity products contributed to our third quarter growth, with the largest increases coming from our modem and wireless LAN products. We believe that the pace of enterprise sales of Pocket PCs is beginning to accelerate with the introduction by Dell, Hewlett-Packard and the other Pocket PC manufacturers of lower lower-cost units, and with the upgraded features of the Microsoft Windows Mobile 2003 operating system. Today the largest connectivity needs of mobile enterprise personnel are a modem to connect back to the corporate network via telephone and a wireless LAN card to connect to the corporate network within the corporate premises or from the growing number of hot spots that are springing up in public locations, from airports to coffee shops.

Partially offsetting this growth was a moderate reduction in demand for our GPS Bluetooth Receiver, which is beginning to face more competition in the marketplace. Our Bluetooth plug-in card sales in the third quarter were flat with our second quarter sales levels. Most of our Bluetooth sales today are in Europe, where Bluetooth phones have been selling for two years, and summer is a traditional slow period because of European vacations. We expect the pace of Bluetooth card sales growth to resume this fall, with projected increases in the number of Bluetooth phones being sold in Europe and with the introduction of Bluetooth phones by the U.S. carriers. GSM networks in the U.S., represented by AT&T Wireless and Cingular, are selling Bluetooth phones today from Nokia and Ericsson, and Bluetooth phones should soon be introduced for CDMA networks, including Sprint and Verizon. All of these carriers offer high-speed data services which facilitate the downloading of email and accessing the Internet through a Bluetooth-enabled mobile phone.

In addition, we will soon be announcing additional standalone Bluetooth products designed to work with Pocket PCs that should help stimulate the use of Bluetooth technology with Pocket PCs. Socket has a worldwide network of distributors and resellers around the world, with about 40 percent of our business being international. Our largest distributor is Tech Data, which works closely with our largest reseller, Dell, who makes all of our products available to their customers on the Dell website. We are pleased that Dell recently added to their website our three newest connectivity products -- our Secure Digital form factor Bluetooth, wireless LAN, and bar code scanner. And their newest handheld computer, the Dell Axim X3, which is being introduced over the next several weeks, uses a secure digital slot for expansion connections. In a few moments, Kevin Mills will discuss our Secure Digital connection product program in more detail.

Our serial card family of products are designed to connect peripheral devices to notebooks or to connect multiple devices together. Our serial cards are a high-margin legacy business that sells principally into the notebook market. Serial cards were first introduced by Socket in 1993, and we believe that we are the dominant provider of serial cards. However, these markets have been traditionally flat, fluctuating within narrow ranges. Our serial card business in the third quarter declined a moderate 6 percent from the previous quarter, within its normal ranges, and represented 16 percent of our product revenue mix for the third quarter, compared to 18 percent in the second.

Our fourth family of products is our embedded systems products, consisting of Bluetooth modules and our interface chips whichchips, which we sell to other equipment manufacturers for products that do not compete with ours. Our embedded business is primarily a design win business, but is also a make-or-buy decision for a manufacturer. We are pleased with the number of design wins that Socket has received this year and that are expected to turn into recurring revenue as these products enter the market. We recently upgraded our embedded Bluetooth module and are continuing to add new features and capabilities in response to our customers’ needs. Our embedded product sales actually declined 25 percent in the third quarter from second quarter sales levels, and represented 10 percent of our third quarter revenue mix compared to 14 percent in the second quarter, reflecting lower manufacturing volumes by our customers over the summer.

At the moment, our revenue within this product family is primarily coming from two customers that currently have products in the market. With more than a dozen design wins for our Bluetooth embedded products and more than 25 customers designing in our interface chips, the potential for revenue growth within this product family is quite large. In a few moments, Kevin will discuss in more detail the dynamics of our embedded systems business.

In the third quarter, Socket’s gross margins returned to their target 50 50-percent levels as a result of cost savings from our converting during the quarter many of our products from our second-generation to our third-generation interface chip. This third-generation chip is smaller, uses less power, has more functions and features, and costs less to manufacture. We believe that this newest chip will also be a stimulus to our embedded systems business because of the improvement it brings to the market.

In addition to our chip cost savings, Socket is also focused on cost reductions for several of its other newer products that are beginning to attain higher volume sales, and we expect this ongoing cost reduction program to allow us to improve our product prices over time without major degradation of our margins.

Socket is also tightly managing expenses, with our goal of keeping expense increases moderate to allow the benefits of revenue growth to go through to the bottom line. Socket’s manufacturing and distribution costs are well leveraged to benefit from growth. Most of Socket’s product components are manufactured by third-party manufacturers, and all of them have the capacity to significantly increase volumes without the need for additional investment by Socket in machinery, tooling or personnel.

Our distribution channels are also capable of increasing sales volumes without requiring major additional investment by Socket in sales and marketing personnel. In the second quarter our operating expenses increased by 4 percent, with moderate increases in research and development and sales and marketing, partially offset by reductions in general and administrative expense. We will continue to tightly manage growth in expenses until we are comfortably profitable. Socket has experienced minimal turnover in of its key personnel, and we continue to invest in the systems and procedures needed to facilitate cost-efficient growth.

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 August of a $4.2m common stock financing. The financing proceeds will be used to fund working capital fluctuations, particularly growth in receivables and inventory. Our current ratio at September 30, 2003 was a comfortable 1.7:1, including cash balances of $6.3m. Our shareholder equity at September 30, 2003 was $16.2m, up 31 percent from June 30th shareholder equity levels of $12.3m.

A portion of the financing proceeds are also being used to pay down our remaining note payable to Nokia Corporation for key Bluetooth technology and their Bluetooth notebook business that we acquired from them last year. Our note payable balance will be fully paid down by next April at the rate of 100,000 euros per month, and the obligation is fully hedged to protect us from the effects of changes in the value of the euro relative to the dollar.

Finally, let me mention some items of ongoing shareholder interest -- first, Socket’s trading volumes for its common stock. Socket’s common stock trades on the Nasdaq NASDAQ national market under the symbol SCKT, and our average daily share trading volumes are today around 350,000 shares. These volume levels and our improved share prices have incentivized investors in Socket’s previous financing rounds to convert many of their shares. As of September 30th, all of the Series E preferred shares issued last October have been converted into common stock, and half of the Series F preferred shares issued last March have been converted.

The accounting for conversion of Series D shares has included a non-cash charge to operations described as preferred stock accretion. And this charge, which was $79,000 in the third quarter, will not recur in future quarters because the Series E conversions have been completed.

Secondly, comments on Socket patents. During the quarter we were pleased to receive our second U.S. patent covering technologies Socket invented to allow removable memory to be inserted and removed from a removable input/output card while the card is inserted in a host device. This invention facilitates the simultaneous use of removable memory and input/output in a single-slot device, removing slot contention. We have built our combination card technology into an [indiscernible]ASIC that is available for sale, and we intend to license our patents as products using this technology come into the market. We have a dozen patents pending, and expect to build our patent portfolio over the next several years.

Now, I’d like to introduce Socket’s President and Chief Executive Officer, Kevin Mills, for his remarks. Kevin?

Thank you, Dave.

Q3 was another very positive quarter for Socket. Today we announced our third consecutive record revenue quarter. We have maintained this steady upward trend throughout the year, and also achieved the significant milestone of cash-positive operations in Q3. As Dave outlined, our growth in Q3 was attained from the strength of our bar code scanning product lines and the introduction of some new products. We also benefited in Q3 from the launch of new Pocket PC devices. The combination of these events enabled us to overcome the usual summer slump slowness and post our solid Q3 results. As we look forward to the remaining portion of 2003 and into 2004, there are a number of factors influencing our business, which I would like to discuss.

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 name and used for connectivity. Our Bluetooth, wireless LAN, modem, Ethernet and digital phone cards are in this category. These products are used primarily by [mobile] professionals who use Pocket PCs.

Our second category is our industrial and embedded products, which include our bar code scanning, KwikBlue [indiscernible] Bluetooth modules and mobility [indiscernible], which are used in the industrial section of the mobile computing markets.

The underlying technologies are the same in both categories, but the underlying business dynamics are quite different. I would like to start with our industrial and embedded products and how we see this business going forward.

The industrial and embedded business continues to be a very design win-driven business where we work closely with companies that are interested in incorporating our products and solutions into their products, and we benefit when these products are delivered to the market. In Q3 we made a number of significant design win announcements for our Bluetooth embedded solutions. We announced that both Symbol Technologies and HHP had both selected Socket’s Bluetooth for their devices. Both Symbol and HHP are large, well-established companies that are now beginning to deploy Bluetooth solutions to their customers. Both companies work in the enterprise mobile section and supply large organizations like FedEx and the U.S. Postal Service with solutions. These new design wins, coupled with our existing relationship with Intermec, means that Socket is now supplying Bluetooth to the top three players in the [indiscernible] markets.

We estimate that the combined market share in the [OIDindiscernible] markets is greater than 80 percent. Bluetooth is gaining a lot of traction in the logistics and [indiscernible] markets, primarily because the benefits of long-lasting cordless communications are well understood and enable valuable productivity improvements.

It is also worth mentioning that all three companies have been supplying wire LAN connectivity for many years and are experts in the wire LAN arena. And in there's many situations Bluetooth is being used as a complementary technology, strong evidence that Bluetooth and wire LAN address different needs and can happily coexist.

The main business drivers in the [indiscernible] market segments are mobile printing applications and wide area communications over Bluetooth-enabled phones. In a number of solutions, both Bluetooth and wire LAN radios [indiscernible], are being deployed in the same device, with a wire LAN being used for in-building communication and the Bluetooth for other out-of-building communication and cable [indiscernible].

We also announced that Topcon and Tripod, leading providers in the surveying arena, also selected Socket’s Bluetooth solutions. In both cases, Bluetooth is being embedded to improve the efficiency of the surveying process [indiscernible] by removing the cable between the measurement instrument and the handheld device used to record the measurements. As many of these devices are used in harsh and environmentally difficult environments, the where cables are even less practical. , Bluetooth is bringing excellent productivity improvements.

Today we have seven companies embedding our Bluetooth solutions in their handheld devices in a total of 13 different models[indiscernible], and in the coming quarters we expect more design wins, both from handheld manufacturers and other peripheral makers.

[Indiscernible] had a tremendous amount of up-front work built into these design win activities, and as yet, Socket has received little benefit in terms of revenue. The revenue from these efforts will happen as these companies roll out their devices. Typically, we expect to lag one to two quarters between the design win and anything that’s any significant [indiscernible]. We therefore expect to see some benefit in Q4, but the majority of the benefit will come in 2004 and beyond.

In Q3, Socket also announced a new member of the mobility IC family. The new single port mobility IC, or MSC mSP for short, adds some needed strength to this sector of our business and provides more flexibility for our customers who need a lower cost [indiscernible]ASIC with a reduced function set to meet their price performance requirements. We began supplying samples of the new IC to potential customers in Q3 and already have some designs underway. We expect the majority of the revenue from this new single-port mobility IC will happen in 2004.

Finally, in the industrial embedded category is our family of bar code scanning products. These products continue to grow in popularity as more and more software applications are deployed for Pocket PCs and other handheld devices. To date, the primary revenue driver in this section of our business is our laser-based In-Hand Scan Card, and we see strong upward momentum as deals continue to close and companies slowly increase their spending on mobile solutions.

We began shipping a new product within the ISC family in Q3 -- namely, our imager -- which reads the most [indiscernible]sophisticated bar codes used on driver licenses and from some [indiscernible] - and medical and logistical applications. This product is just beginning its life cycle, and currently applications are being written to take advantage of the new capabilities. We see this as a strong revenue driver going forward.

The last and most exciting development in the bar code scanning arena is our most recently announced scanning product, the Miniature miniature SDIO Scannerscanner. This product, which is now shipping, brings a new low price point for bar code scanning and works in the Palm family of handheld devices as well as the Pocket PC. The product has been designed to work with our Socket scan software for Pocket PCs, and therefore any developer who has developed for our family of bar code scanning products can expand the reach of their applications using the smaller SDIO scanner in a smaller device with SDIO slots.

On the Palm side, we are just beginning with the developer community, but based on the initial reaction, we believe that this product will be an excellent revenue generator as applications are written and deployed.

So, in summary, the embedded business has never looked healthier, and we expect it to be a large contributor to our revenue in 2004 as the design wins we now have are deployed.

On the branded connectivity side of our business, we also have a lot of favorable dynamics, starting with the launch of Pocket PC 2003 of Windows Mobile, as and Microsoft has renamed us. [indiscernible]. The launch of the new operating system and products helped us grow our business in Q3. New machines from HP, Dell, Toshiba and ViewSonic are better from a number of points of view, including being lighter, brighter, faster, and the Windows Mobile operating system is better suited to in corporate deployment as it addresses some of the security concerns associated with wireless access, all of which are important for corporate clients and for Socket.

However, the significant improvement for Socket has been the increase in available expansion slots. Simply put, the greater the availability of expansion slots in handheld devices, the bigger the business opportunity for Socket. Today, the vast majority of our Pocket PC plug-in business is based on the CompactFlash form factor.

We have seen this business increase as more CompactFlash slots became available. We received a good boost when Dell began shipping their Axim X5 in December, which included a CompactFlash slot. And in June more CompactFlash slots became available when HP decided to include a CompactFlash slot in their new 2200 Series device. Toshiba and ViewSonic also have devices with CompactFlash slots. These decisions, coupled with our excellent position in the Pocket PC market, has have helped us grow our revenue throughout 2003. We expect the number of CompactFlash slots to continue to grow as more units are shipped, and we expect to continue to benefit from the increased number of available CompactFlash slots.

However, the exciting new developments that we feel will really help us maintain our strong revenue growth momentum is the addition of the SDIO slot. SDIO slots are becoming increasingly popular. The SDIO form factor, which is about half the size of the CompactFlash form factor, is better suited to the slimmer devices that are now hitting the market. For many months we have been working closely with manufacturers like Dell and HP on the Pocket PC side and with Palm to ensure that SDIO peripherals will work well for customers. After some initial [indiscernible] problems, we feel that SDIO is poised for success. Dell, who recently introduced the Axim X3, which supports SDIO, is [listing] or recommending Socket’s family of SDIO products -- namely, wire LAN, Bluetooth and SDIO scanners. Likewise, we are receiving very positive feedback from the [indiscernible] community on the SDIO scanner, and expect this product to do very well in the [indiscernible] economy.

Since the beginning of the year, Socket has been investing in the SDIO form factor. This investment began with our work with the Secure Digital Association, the governing body that creates the specification and framework that make it possible to achieve an acceptable level of compatibility between devices and plug-in cards. Socket has made significant R&D investments in the SDIO products and associated software. However, in Q3 the total SDIO revenue we generated was less than 5 percent of our card revenue, which is saying . [Indiscernible] we are just beginning to the very reasonable [indiscernible]. We expect the SDIO form factor to continue to grow in importance, and we expect it will be adopted in most handheld devices, including Smartphonessmartphones. It will take some time, but we believe that just like [memory] to date, SDIO will become a de facto expansion form factor and will represent greater than 30 percent of our revenues in the not too distant future.

Socket’s understanding of the handheld markets, its close working relationships with both [indiscernible] mmanufacturers and Microsoft, plus its willingness to[indiscernible] take a leadership position and enables Socket to get ahead of the SDIO market and to have a family of SDIO peripherals ready in time for the launch of new devices that support the SDIO form factor. Socket will benefit from the growth of the SDIO market, both with the products we are now shipping, as well as new and innovative products we bring to market in this very small form factor.

So, 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. We It remains a struggle [indiscernible] to predict the exact timing of deals and events, but we feel we have enough momentum going into the fourth quarter to be confident that we will be able to post solid results in Q4. We expect to close another record year for Socket, as we have already reached $15.7m in the first nine months of 2003, which is almost equal to our total record revenue of $16.3m for 2002. We expect our business to continue to strengthen in 2004 as the impact of the design wins we’ve achieved this year start to take effect on our embedded business and the benefits from the family of SDIO peripherals also begins to contribute to our existing revenue base.

We continue to see solid revenue opportunities for our existing add-in peripherals as corporations and individuals add functionality to better tailor their devices to their specific mobile solution needs.

We are continuing to work hard to maintain our focus in the handheld market, and we remain confident that the Pocket PC market will remain strong and continue to provide an excellent opportunity for Socket to grow its revenue and improve its operating results.

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 do have a question, please press the star followed by the 1 on your push-button phone. If you are using speaker phonespeakerphone equipment, please pick up the handset before pushing the buttons.

One moment, please, for our first question.

Mr. [David Sturman][ph], please state your company name followed by your question.

David Sturman with Gateway Research. I just wanted to focus - obviously the connectivity end of the business - things are moving along according to plan. It sounds as if tThe embedded industrial segment is taking a little longer for these design wins to convert. I just was wondering if you could give a little more flavor on what’s the at play there in terms of getting some of these folks to go ahead and move forward with some of the design wins?

Well, [indiscernible],I guess the hard part of this design win business is that we don’t have final, I would say, control over the timing of the rollout of their product. Most of the companies we’re working with are rolling out their products in Q4 and therefore have only purchased, I would say, initial quantities. In many of these cases, David, you know, we’ve spent six, even nine months, working with these companies and they’re rolling out products like Symbol’s rolling out the 8800 Series of products with our Bluetooth embedded. They have a large customer base and this is a highlighted product that they will be selling to many customers around the world. And I think we just have to be patient and wait for their sales teams to get in gear, with the understanding that we will benefit as these products roll out.

And I think, as Dave mentioned, we have somewhere in the region of 25 design wins right now, and I think that will layer nicely into our existing revenue base as we go forward.

Okay, and just one other question. Going into 2004, on the connectivity side, - on the Pocket PC platform, it’s now been about three months since the new Windows, the mobility - the Microsoft platform was rolled out. I guess that was June. And I’m just trying to get a sense at this point of where that is relative to expectations in terms of the ramp with the Dells and everything else, and what you’re seeing going into 2004 with that platform.

Well, I think we saw a stronger summer than we traditionally see, due to the Pocket PCs. They’re currently being evaluated by corporations, and I think that we actually see a lot of strength and a lot of mobile applications coming. And I think that, you know, Dell’s entry with another lower-priced, smaller device is just nothing but goodness. And we’re very confident of the Pocket PC markets. Based on our estimates, I think right now Pocket PC must be up to about 35 45 percent of the total available market.

Our next question is from Mr. Ron [Coby][ph]. Please state your company affiliation, followed by your question.

Ron [Coby] with [Coby] Capital. Congratulations, David and Kevin, on your cash-positive quarter.

Thank you.

Thank you.

What do you see happening in the medical device market, and what other markets do you see opening up for Bluetooth in general and your company in specific?

Well, I think, you know, Ron, if we look at Bluetooth, what we’re seeing is that it’s particularly strong in the embedded - in what we call the industrial embedded sector. , aAnd that covers, you know, medical type applications or applications where a worker has a handheld device. It’s replacing cables, . Iit’s lasting all day. W, we’re able to print, . Wwe’re able to access information. It just takes time for it to roll out. Generally speaking, I think it will be very strong in any outdoor activity where people are needing information or needing to interact with another device like a mobile printer. I would say to date we’ve been a little bit disappointed with Bluetooth on the retail side, primarily because the education hasn’t been done. I think we see that in the industrial embedded side, where people understand the benefits, the benefits are truly there and really increase productivity.

So we actually see a lot of opportunity for Bluetooth. We’re at the industrial embedded show. We have guys like Parker Hannifin rolling out products with Bluetooth in them in industrial valve automation, etc. So I think this stuff will go in lots and lots of places and essentially replace [IR] in most cases in the industrial [indiscernible].

Ron, our judgments right now are that industrial will actually embrace Bluetooth probably faster than even the commercial side is doing, but there are some drivers coming along that will help the commercial side. One is the introduction on particularly the CDMA networks, - Bluetooth phones, because - today Sprint and Verizon don’t offer Bluetooth. And AT&T Wireless and Cingular, who have Bluetooth phones available for their GSM networks, have been so busy with the rollout of their new GSM network, particularly AT&T, that they really haven’t spent a lot of time on consumer education. So we expect as Bluetooth phones become more widely available in the U.S., that consumer education will start and people will find how easy it is to capture email and get to the Internet and - as well as to interact directly with other devices that are Bluetooth-enabled.

As we move down the road over the next couple of years, other parts of our - of this industry will incorporate Bluetooth in ways that will help consumers all want to adopt it. For example, the automobile industry, as it’s moving towards more and more hands-free driving capability, will [cause] the car to connect with a Bluetooth phone. They’re expecting that the driver or the passenger will have a Bluetooth phone. And so there’s no longer a need for two phones, and therefore most people who will need to do hands-free driving will likely own a Bluetooth phone. And once they start down the path of having Bluetooth, then it’s easy to start adding applications and it will get fairly widespread use.

Well, I’ll give you some quick feedback. I have a friend of mine who is a well-known semiconductor analyst on Wall Street. He - I talked to him yesterday and he said he just got a Bluetooth phone and he’s absolutely in love with it, and thinks Bluetooth is going to be a huge industry.

And the second thing I wanted to ask you guys, are you going to be at the Bluetooth of Americas conference in December?

Is This isit the one in San Jose?

Yes.

Yeah, we’ll be there.

Okay, great. I’ll look forward to seeing you there. Thank you for - thank you for your information, I really appreciate it, and congratulations again.

Thank you very much, Ron.

Our next question is from Mr. Brian Swift. Please state your company affiliation followed by your question.

Yeah, Security Research. I think you answered the embedded part of my question, but maybe you can give us some - what you think are some of the drivers that will take place as far as the development of SDI in your - you know, -- in other words, because you’re saying it’s going to go from hopefully 5 - less than 5 percent to maybe 30 percent of sales. From an application standpoint, I mean, you talked about some of theother companies that are putting slots in, but could you give us an idea of your product pipeline of what you have coming out that will be using the SDIO slot?

Yeah, I mean, I - just in general with thatSDIO, you know, I mean, the benefits are basically the physical side. The applications are often the same. But, again, as these devices are used more and more, size is a big criteria in deploying applications. Having a small, easily, highly portable device that lasts all day really changes the economics as well as the connectivity productivity benefits of such a device. What we’re able to do in SDIO right now is both wire LAN and Bluetooth and the scanning. There are some other plans, but I prefer not to disclose these. There are some challenges in the SDIO space, particularly with making mechanical connections to this very small - it’s only a 2.1 mm thick device.

So we have solutions that get over most of these, and what we’re really seeing is that mobile devices are expanding, whether it be into Smartphones smartphones or smaller handheld devices, and that the SD form factor is ideally suited to expansion because of its small physical size. It doesn’t take up a lot of space but does provide the additional functionality people require to get connected.

Brian, the industry itself will cause people to move to SD by simply the decisions on the part of the manufacturers to use SD slots instead of CompactFlash slots as they move forward into future models. And we can do the same things with SD that we can do with CompactFlash, so we’re not limited to just these three products. But the advantage of lower cost and of less real estate being taken up are very significant advantages that should drive the use of SD widely.

It was also interesting to us, and we’re very pleased to see how quickly manufacturers adopted SDIO Now! software. Socket has been involved with the SDI development for several years, and one of the things we recognized was that Microsoft was going to not be able to produce operating system software to support SDIO as rapidly as the industry would otherwise be ready. And we were instrumental at working with companies like BSQUARE to create the operating system software that’s now been adopted widely by virtually - by most of the Pocket PC manufacturers. And that’s probably moved SDIO into the marketplace at least a year faster than it might have been there otherwise.

So we’re - as we did with CompactFlash, Socket remains at the forefront of how technologies are evolving in terms of mobile communications, and SDIO is moving along a very rapid path at this point.

Yeah, maybe one other quick kind of piece of information. I don’t know if people know this, but SD now in terms of memory is the number-one 1 form factor for memory expansion in the world. Earlier this year it surpassed CompactFlash. So - and the distance between SD and CompactFlash continues to grow greatly.

Can I ask another question relating to the embedded side?

YeahYes.

Can you give us a little bit more color on - I mean, you mentioned, you know, Symbol and Intermec and others in the…

[Photo] ID space.

…in that space. You didn’t talk about NovAtel Novatel on some of the other ones. Can you give us any kind of an idea of the product rollout of these customers in terms of what was last quarter, what you see coming out this quarter, to kind of give us an idea of what kind of momentum? Because I was a little surprised that the embedded revenues were - were actually, you know, down sequentially to that extent, so…

Yeah, and I think that’s - certainly we can give you a little bit more color on that. I think, you know, as Dave mentioned, our largest customer is NovAtel Novatel and obviously we can’t divulge any of their product plans, but they’ve been going through a number of transitions in moving to UMPS and other types of technologies. And it just happens that they have a little bit of a slowdown. I think on an annual basis all these things come out, but most of the phones are sold in the fourth quarter and the summer months are not just as strong. Likewise, for the guys like Intermec and Symbol and handheld products, products are not as, you know, strong in the summer months, and generally people don’t roll out new systems and new devices in the summer months. So we effect - we felt the effect of that.

But we work closely with these guys and we know that long term we’re going into more and more designs and they're are incorporating our stuff into more and more products. So we’re not overly concerned by the minor fluctuations. The numbers are still relatively small. I don’t have the exact number, but we were somewhere in the range of probably $600,000 of our revenue. So the movement of our shipment of 30,000 chips basically can affect that in the quarter.

We are expecting to see nice growth in the embedded space, Brian, in the fourth quarter.

Okay. And your breakeven level looks like it’s slightly above $6m?

I think that’s fair, yeah. Today we’d break even at around 6.1 or 6.2.

Okay. Is - do you think you can have enough growth to achieve that in the December quarter?

We’re working hard on it.

Thank you.

Thanks.

Our next question is from Mr. Peter Mintz. Please go ahead with your questions, sir, after stating your company affiliation.

Okay, Barrow Street Research. Good afternoon, gentlemen, good quarter. This is, I think, was the first time you’ve beaten most estimates, definitely mine, so congratulations on the quarter.

Thank you, Peter.

I just wanted to follow up a little bit on the Bluetooth over CDMA. I know maybe it’s just because I’m a AT&T Wireless customer, but I thought most of these services were switching over to GSM, and that is predominantly where Bluetooth is going to be deployed. Is that not true? And if it is or if it isn’t, does it make any difference to you whether it’s going to be GSM or CDMA? Does that have any impact on you guys?

Not really. It doesn’t really have any impact. We would actually prefer CDMA because the networks are is substantially better for data, and the 1X goes the [fast][ph], always [indiscernible] 155 kbs. But generally speaking, most people don’t even know the technology that their phone is using right today and they don’t care, and we don’t either. What people want to do is to get connected, and the phone is an ideal way to do this. I think that, you know, the phone companies, as David has pointed out, have other things on their agenda. And as they switch to look at data connections, I think Bluetooth will be high on their list, and we know a of phones is coming that will support the CDMA network.

Again, for most users, whatever carrier you’re currently - you currently have, they have your phone number and you want to use them, and then ultimately you don’t care what the background technology is.

Okay. Let me ask another Bluetooth one related. Obviously there are differences between YWi-Fi and Bluetooth, but there are also some overlaps in them in terms of applications. And I guess I’m wondering - you know, there’s been such a strong growth in YWi-Fi. Is that any - in any way taking away anything from Bluetooth or are there just so few overlaps that it really doesn’t hurt it at all?

They’re very different and there’s been a lot of confusion on this. I think one of the ways you could look at it is that, you know, we would consider wireless to be more like your mobile phone, kind of a - you know, that’s one thing that you have, and cordless like to be your cordless phone at home, and there really isn’t any overlap. We see the same thing with wire LAN and Bluetooth. Bluetooth is primarily being used for cable replacements and, I would say, leveraging existing devices you have. YWi-Fi is an infrastructure that covers buildings and hot spots, and it’s - they’re very different. And just because both of them happen to be wireless, there’s a tendency to say they compete. We’re seeing very little overlap, and most of the applications that we see today - I mean, even in the industrial space with guys like Symbol, companies are deploying both radios in the same device because they do different things.

Okay. Just, Dave, a couple - just quick questions on the numbers. It looks to me like you’ve been pretty stable on the margins and costs for the last several quarters. Can we expect that to be the pattern going forward? And the final part is, what are is the actual number of shares outstanding now? It looks like it’s increased fairly significantly in the last quarter.

We can expect to continue to target to reach the 50 percent margin levels, so I’m expecting those numbers will remain stable. In terms of shares outstanding, at September 30th we had 28.9m shares. There’s another 1.3m shares that were - are still subject to conversion from Series F outstanding. When that conversion completes, that would make - take us up to about 30.3m shares. So - but today it’s 28.9.

Okay. All right, great. Thank you.

Thank you, Peter.

Ladies and gentlemen, at this time if you do have a question, please push the star followed by the 1. And as a reminder, if you are using speaker phonespeakerphone equipment, please pick up the handset before pressing the buttons.

Our next question is from Mr. [Steven Trapotis][ph]. Please state your company affiliation followed by your question.

SGT Investments. My question is really one of a competitive aspect. Business Wire carried an interesting story on Monday about [Side Ship] announcing a ViewSonic would add a [Side Ship] 802.11b [indiscernible] card to their offering of Pocket PC accessories, and I just wondered how you saw that competitive aspect? That’s a problem for us, perhaps.

No, not really. First of all, we have announced deals with [Side Ship] ourselves. We’re working closely with them, and it’s not competitive. I think that the work [Side Ship] has done on the [SDIO][ph][indiscernible] form factor is something that we’re trying to leverage by adding our software know-how as well as our distribution channels to get these products in the market. So this is not a competitive situation at all.

Thank you very much.

Our next question is from Mr. Jack Buckman. Please state your company affiliation followed by your question.

Buckman, Buckman & Reid. Good afternoon, gentlemen. My real question is on the dilution of the shares, and I know that we had done that offering, you know, several months back. Is it anticipated that there’s going to be any more, or is that 30.3m shares, you know, probably going to be the top of where we’ll be for at least the foreseeable future until we have…

We’re comfortable now with our working capital levels going forward. We believe that we have sufficient working capital to take us through the - at least the end of next year. And so there are no current plans for doing any additional financing.

Okay, thank you.

Once again, if there are any further questions, please push the star followed by the 1.

It does not look like there’sthere are any more questions for you. Please continue.

I’d just like to take this opportunity to thank our customers, our shareholders and employees for their continued support, and to say we look forward to reporting our annual results on our next conference call in February. So I’d like to thank you for participating in today’s call, and wish you all a good day.

Ladies and gentlemen, this concludes the Socket Communications third quarter management conference call. If you would like to listen to a replay of today’s call, please dial 303-590-3000 or 1-800-405-2236. They will ask you for a PIN code. Please enter 556219.

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