Socket Mobile Inc (SCKT) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Socket Communications first-quarter management conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Wednesday, April 21 of 2004. I would now like to turn the conference over to Tatia Meghdadi, the Marketing and Communications Manager. Please go ahead.

Thank you. Good afternoon and welcome to the quarterly conference call for Socket Communications for their first quarter ended March 31, 2004. Earlier today, Socket distributed its earnings release over the wire service and also by e-mail 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 Website 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 a week. In just a moment, management will provide an overview of the results and then we will open up the lines 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 27-A of The Securities Act of 1933 as amended and Section 21-E of The Securities Exchange Act of 1934 as amended, including forecasts of future financial results, market reactions and operating activities. Such statements are based on expectations of the market acceptance of our products, increased supplies of handheld computers, growth and demand for our products, the potential for additional revenue growth, expectations regarding timing of the introduction and availability of new products, and expectations regarding our ability to control our operating expenses and improve our cash flow. 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 risks 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 handheld computer hardware and software, market acceptance of handheld computers and emerging standards such as Bluetooth wireless technology and 802.11 and our related connection products, the failure of our strategic partners to benefit our business as expected, disruptions to our business due to the general economy caused by external forces such as terrorist activity or natural disasters, declines in consumer or corporate spending on technology products or the other factors described in our most recent Form 10-KA and 10-QA 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 Kevin Mills.

Today, it is with pride we announce our first profitable quarter, and another record revenue quarter. Socket continues to grow its revenue in a consistent manner and today we are announcing our sixth consecutive growth quarter, fifth consecutive record quarter and our first profitable quarter. The credit for this track record definitely belongs to Socket's employees, who have worked hard to grow our business in difficult economic times. And we are happy to reach the very important milestone of profitability. In Q1, we increased our revenue to 6.7 million with growth across our entire product line. The highlight of the quarter was our barcode scanning products. Dave Dunlap, Socket's Chief Financial Officer, will outline the results in detail in a few minutes.

As we look at our handheld-centric business, we continue to see a strong market for our products, and we expect that the growth trends we have seen over the past number of quarters will continue. In data collection, we continue to see growth with our plug-in scanners in both the CompactFlash and S.D. form factors, in the Pocket PC and Palm arena. This growth is driven by an expanding development community that is increasingly the number of bar code-enabled applications on the market. In addition, we now list over 25 third-party applications on our website to help potential customers find complete solutions. But the best indicator of continued growth is that customers who have deployed our data collection products in their solutions are very happy with the results and are driving excellent productivity benefits. It is these excellent productivity benefits which are the true measure of the product, and are the main reason our growth trend will continue going forward. In today's environment, productivity is a key measure and technology that helps increased productivity is vital. To date, we have only seen the more advanced corporations deploy these solutions. And we believe that in every industry, companies watch their competitors closely and copy solutions that are helping them have an edge. We see our data collection products in this category of a competitively advantageous solution. We expect the strong growth in the data collection area to continue. I would describe this area as being in the early-market development stage. We have high expectations for this product category, and we expect that data collection will be our largest revenue category starting in Q2. The addition of our new cordless hand scanner later this quarter will further strengthen this category. The cordless hand scanner uses Bluetooth to connect seamlessly to a host computing device, making it possible to leave the Pocket PC clipped to your belt or in a position that is more convenient for the user while he or she scans the bar code that may be high up or otherwise difficult to scan with a Pocket PC. The cordless hand scanner was designed to work with Pocket Scan. Pocket Scan is Socket's widely adopted bar code development tool kit that is used to bar code-enabled applications. The cordless hand scanner is therefore able to instantly work with all existing applications in the market. The cordless hand scanner will also enable us to address other markets like the emerging tablet PC market, but more on that later.

The connectivity portion of our business looks like it will continue to grow in a similar manner as we saw last quarter. Even though there are more Pocket PC devices coming with built-in wireless connectivity, thus limiting the market for some of our plug-in connectivity adapter products, there are (ph) also (ph) more devices. So we are able to overcome this limitation by selling more of the connectivity solutions which are not built in. We are also increasing our revenue by utilizing the built in Bluetooth in the host device of an expansion mechanism for our external Bluetooth products. The external Bluetooth products continue to be an area of major emphasis, and they are enabling us to leverage the built-in Bluetooth in the device to provide solutions like GPS, cordless hand scanning, cordless stereo and modems, solutions that are not possible in many devices except via Bluetooth. In addition, we will continue to add more software elements to our connectivity solutions like, wireless LAN security, to help us maintain our growth in this portion of our business.

Our external Bluetooth products, which today include our cordless serial adapter, our Bluetooth GPS, our cordless modem, which we introduced in Q1 and our cordless hand scanner, scheduled to introduce later this quarter, were designed and developed with a mobile worker using a PDA in mind and provides tremendous cordless solutions for people on the go. These products are also providing Socket with new opportunities outside our traditional market of PDAs. We are finding significant opportunities for these products in the tablet PC and notebook arena. And it is our plan going forward to service these opportunities with more focus and attention.

In Q2, we will be releasing a significantly improved Bluetooth pack (ph) for Windows XP, which will support our entire family of external Bluetooth (inaudible). The opportunities we see in the tablet PC arena are in the medical field and other mobile applications where a large screen is needed and/or the applications are not available or suitable for office PCs (ph). Many PC -- have many tablet PC solutions also need bar code scanning. The combination of a Bluetooth-enabled tablet PC and Bluetooth enabled scanner is a powerful one. Most tablet PCs do not have Bluetooth built in. So we can provide our Windows XP Bluetooth solution, which can be completely embedded into the tablet PC so nothing protrudes, to upgrade these devices and combining this with our cordless scanner, we can provide a complete and compelling solution. And customers want complete solutions. It is also an excellent revenue opportunity for Socket as we can deliver both elements of the solution.

We are seeing opportunity with our Bluetooth products in the notebook space, as well, like our announcement this morning with Stenograph. Stenograph is a leading provider of court recording machines. Traditionally, the stenographers set up a wired serial network in the courtroom so that the judge, prosecution and defense were able to have the transcripts in real time. The wired network is being replaced with a Bluetooth equivalent network. Socket worked with Stenograph to Bluetooth-enable their devices using Socket cordless serial adapter. But for the solution to be complete, the court reporter, judge, prosecution and defense also need Bluetooth. There's little possibility that they all have Bluetooth-enabled notebooks, as only 5 percent of notebooks ship with Bluetooth today. Our new Bluetooth solution for Windows XP provides an upgraded path to Bluetooth-enable these existing notebooks.

We are also seeing similar opportunities with our Bluetooth modem for some who have a phone jack in one corner of the room and their desk in the other corner and they want to avoid stringing cables (ph) across the room. The combination of our Bluetooth modem and a Bluetooth-enabled computer provides the complete solution. The bottom line here is that with the addition of our Windows XP solution, we are able to deliver complete solutions and expand the available market for our products to tablet PCs and notebooks. We believe this will help us continue to grow our connectivity and data collection businesses. (Indiscernible) arrange (ph) in (ph) these bigger markets with a strong reputation and the established PDA leadership position, and this will make it easier to penetrate these markets which are incremental to our existing PDA business. This change also shows how Socket remains focused on solutions and is willing to adapt its business to make these solutions complete and easy to use and deploy. A few short years ago, most of our revenue came from peripherals that plugged into small handheld devices like Pocket PCs. The majority of these plug-in solutions being in the CompactFlash form factor. We added a number of products in the S.D. form factor as that expansion mechanism was adopted. We further expanded into external Bluetooth products to enable us to support the increasing number of devices that supported Bluetooth.

In 2000, none of our revenue came from wireless products. In 2003, about 30 percent of our revenue had a wireless element to it, and we expect to further increase this to 40 (ph) percent this year. The message here is that we adapt well to change. We are finding more and more opportunity in the mobile computing markets, and we are willing and able to adjust our business in a manner that allows us to better serve our customers and increase our revenue. We expect this trend to continue as the mobile market increases and changes. And we are in an excellent position to service this opportunity.

On the embedded systems business, the revenue from our embedded Quick Blue Bluetooth modules and interface IC grew well and continues to represent about 12 percent of our business in Q1. We expect this business to continue to grow well in 2004 as the many design wins we have secured in 2003 are brought to market by our customers. We have little control over the timing of these new product rollouts but continue to see customers like Novatel Wireless, our largest interface ASIC customer, and Intermec, our largest Quick Blue module customer, winning business using products that have our technology embedded. This will drive sales over time.

In conclusion, Q1 was an excellent start to 2004. We are delighted to start the year as we mean to continue this with a profit. We see a strong market for our products and we see a great opportunity to expand our market by serving the tablet PC and notebook markets with our external Bluetooth products. I would now like to turn the call over to Dave Dunlap, Socket's CFO, for his review of our Q1 results and his remarks? Dave?

Thank you, Kevin. Socket's revenue for the first quarter, ended March 31, 2004, reached a new record high of 6.7 million, an increase of 38 percent over the same period a year ago and an increase of 12 percent over our previous quarter. The quarter was Socket's fifth consecutive record quarter, passing through breakeven and reaching profitability for the first time in Socket's history. Albeit a small profit of $40,000, the first quarter as a profitable quarter marks a significant milestone for the Company. Our formula for this positive momentum has been expanding markets, new and innovative products, our reputation for quality and control of our expenses. As Kevin has described, we expect profitable growth to continue.

Socket's fastest-growing product family continues to be bar code scanning, which grew 24 percent over the previous quarter and 85 percent over the same quarter a year ago. At $2.4 million, barcoding is poised to soon become our largest product family. The dominant product in this family is our CompactFlash plug-in scanner, the enhanced scan card. However, our newest family member, our best SDIO scanner that we introduced at the end of September, has gained very rapid acceptance and is accelerating our growth in this product category. And we will begin shipping the cordless barcode scanner using Bluetooth wireless technology this quarter, which will further add to this growth. A major dynamic supporting growth is the pace of third-party productivity-enhancing software applications that are being developed. Our SDIO scanner works with both Pocket PC and Palm devices and the Palm developer community has been excited about and responsive to the bar code scanning data collection capabilities that are now available to the Palm community. Our connectivity product family at 2.6 million, grew 6 percent over the previous quarter and 34 percent over the same quarter a year ago. Our wireless products, including our Bluetooth and wireless LAN plug-in cards and our cordless stand-alone products, continue to drive the growth within this product family. The largest growth came from our SDIO Bluetooth plug-in card, as most Pocket PCs selling today now have an SDIO slot. And from our wireless LAN plug-in cards, reflecting growing corporate deployment and growth in the availability of Internet hotspots.

At the end of the first quarter, we recorded our first revenue from our newest Bluetooth stand-alone product our Bluetooth modem. The modem enables a cordless connection to your telephone line from up to 330 feet away from the telephone and should further add to our revenue growth in the second quarter and beyond. In addition, Pocket PC sales are growing at a rate of 30 to 40 percent a year. And the combination of market growth, increasing deployment of Pocket PCs by enterprises and new products are expected to maintain the growth momentum in our connectivity product family.

Our embedded product family, at $800,000, grew 17 percent over the previous quarter and 30 percent over the same quarter a year ago. We have approximately 38 customers for our interface chips and Bluetooth modules, of which 30 are still in the design and development stage with their products. The primary markets for these products are wide area network cards for interface chips, with Novatel Wireless being our largest customer in this category, and ruggedized (ph) industrial PDAs from 13 companies for our embedded Bluetooth capability, including symbol (ph) technologies, handheld products and Intermec. We are also seeing excellent industrial adoption of Bluetooth as a cable replacement technology, and companies such as Parker Hannifin that is integrating Bluetooth into its industrial valve, are working with us to commercially develop this technology. Socket develops and owns its complete Bluetooth solutions, both software and hardware, which is highly attractive to companies that wish to tailor their Bluetooth offerings to specific devices and to ensure that the technology will continue to evolve as the standard advance.

Our fourth product family, at $900,000, consists of our peripheral connection products. This is a legacy business going back to Socket's early days in 1993. We continue to be a dominant provider of cards to connect peripheral device primarily to notebooks. The business has been slowly declining over the past several years as notebooks have offered USB connections as a replacement for serial connections. However, with our introduction late last year of a cordless serial adapter using Bluetooth wireless technology, electronic devices for the serial port may now be connected wirelessly and the growth in sales of cordless serial adapters in the first quarter has stopped the revenue decline in this product family.

Our sales backlog at the end of March was 1.4 million compared to a backlog of 1.2 million at the end of December. Backlog consists of orders on hand that are shippable in the following quarter. Our gross-margin contribution on sales also increased in the first quarter to 51 percent of revenue, up from 50 percent in the previous quarter and 49 percent one year ago. We have an active cost reduction program that allows us to pass cost savings onto our customers while maintaining our margins. And we expect to continue to post margins in the 50 percent range. Managing our expenses has been important to our reaching profitability. Our headcount has grown about 10 percent this past year and our expenses have grown about 13 percent, which has allowed our faster revenue increases to contribute to our bottom-line growth. Our manufacturing and distribution structures are designed to benefit from growth. We manufacture our major product components with large third-party contract manufacturers where volume increases result in product cost savings. And we are not faced with capital equipment investments to support this growth. We have in place the personnel needed to manage our worldwide distribution channel of over 100 resellers and distributors. This channel can handle volume increases without us needing to significantly increase our personnel. The first quarter is traditionally Socket's most expensive quarter, including our annual audit and two trade shows.

In addition, our general and administrative expenses in the first quarter included the cost of defending a patent infringement lawsuit initiated last year by Khyber Technologies against our bar code scanning products. During the quarter, we filed a summary judgment motion for dismissal of the lawsuit. We should hear from the courts this quarter in regards to that motion. We do not believe we infringed the Khyber patent. But should we not prevail, we believe that we can enter into a satisfactory licensing agreement with Khyber. The quarter was cash positive, with our cash increasing from 6.4 million at December 31 to 7.7 million at March 31. During the quarter, we entered into a new working capital revolving credit line of $4 million that expires in April 2006. And we drew 3.5 million against that line at the end of the quarter.

Our balance sheet strong with a current ratio at March 31 of 1.7 to 1 and no long-term debt. We held our inventory balances level with year-end balances, despite our revenue growth. During the quarter, we paid down approximately $260,000 of our remaining note payable to Nokia Corporation that was entered into in March of 2002 when we acquired from Nokia key Bluetooth technology and their CompactFlash card business. The final installment payment on this note was made this month.

Our Series F preferred stockholders from our financing last March have converted 68 percent of their preferred stock into common stock, mostly prior to the end of last year. They have until March of 2006 to complete the conversion. At March 31, 2004, the remaining Series F preferred stock converts into 879,000 shares, which will add about 3 percent to the 30 million common shares outstanding.

We also announced during the quarter our decision to select Moss Adams as our independent auditors. After careful evaluation by management and Socket's board and audit committee, we concluded that we could obtain a quality audit at a substantially reduced cost by changing from an international to a regional auditing firm. Moss Adams is the tenth largest CPA firm in the United States with a substantial SEC practice, and we are looking forward to working with them this year.

Our annual meeting of stockholders will be held at the Company's corporate offices in Newark, California, located in the San Francisco Bay Area, on Wednesday, June 16, 2004 at 9 AM. Common and preferred Series F stockholders as of the record date of July 19, 2004, will be receiving proxy materials about the middle of May. The proxy will be filed with the SEC by the end of April.

We are now ready to open the conference call to questions. I will turn the microphone back to the operator.

(OPERATOR INSTRUCTIONS). David Jarrett, Stonegate Securities.

I wanted to know if you wanted to provide any guidance for the rest of the year, obviously on revenues and profits. But also I wondered what your thoughts are on where you think your R&D costs are going to be over the remainder?

We are not providing guidance for the rest of the year. We expect the trends we have seen over the last year to continue. As regards our R&D budget, they will remain relatively flat. We have done a good job over the years of developing products without having a very high R&D budget. We will assess the opportunities going forward, and we will carefully select what projects to move forward with. But the general plan here is to grow the revenue based on the existing products and we will continue to add new products. But we intend to keep our R&D budgets relatively flat going forward.

And Dave, I think in terms of general costs, you recall my comment that first quarter is generally our most expensive quarter.

Yes.

We don't have any plans for significant additions of people or expenses. So I anticipate that you will see our expenses remaining moderate to reasonably flat to perhaps slight increases as we go through the balance of this year. So the key for us is to follow the formulas where we are seeing growth continuing. As you know, we have been trending upwards; the growth last year on sales was 32, 33 percent. The rate that we this year, quarter over quarter a year ago was 38 percent. Our objective is to continue to grow that increase and as we do so, a higher and higher percentage will go through to the bottom line.

Steven Soconose (ph), Pershing Asset Management.

Congratulations, gentlemen, on a good quarter.

Thank you.

I have three questions. First of all, your margins on your revenues in the wireless area, can you give me a rough idea of what they are?

I would say that the margins in the wireless LAN area are probably our lowest. I don't have the exact number off the top of my head. But I would say they are probably in the 40 percent range.

That's correct, yes.

And this is an area where we feel we have to continue to add software elements to our solution to increase our margins to our target of 50 percent, and that work is still ongoing. And until it is deliverable, we will have I think a lower margin in wireless LAN than in other areas.

Okay. Secondly Novatel, what percentage of your overall revenues does Novatel represent? And what type of growth trends have you been seeing from the business from Novatel.

I believe that Novatel represents something in the region of about 6 percent of our overall revenue. And this is a business that we are leveraging based on doing ASICs that we need for our own products. So it's really incremental business. We see that Novatel is doing well and we are happy to support them. I would not like to speculate on what I think their revenue will be, because obviously, by divulging too much on how many ASICs we might be selling them, people could incorrectly or correctly calculate their potential revenue. So I prefer guidance from Novatel to come from Novatel.

Okay. And my last question is, if you can provide some comments on the adoption of your products in the medical industry, what you're seeing out there in the marketplace, what type of opportunities this represents? And do you expect for this to be a large contributor to your future revenues?

Sure. What we are seeing strictly on the bar-code side of the world is that more and more medicines are both dispensed and tracked using bar codes. We have done particularly well with medical sales reps and other people who are tracking medicines based on bar code information. We expect that trend to continue. There is unit-dosed bar codes coming that will require nurses or medical professionals to scan the unit dosage of a medicine prior to giving it to a patient, etc. A lot of these are still in development. And I think our expansion into the tablet PC market is in line with what we expect to happen in the servicing -- the requirement in the medical profession. We think that this is an area that will really benefit from the controlled, that bar-coding can provide, and we want to be part of the solution going forward.

Peter Mint (ph) Fleetwood Research.

First of all, congratulations on a very important milestone of becoming profitable. I know that's very positive for all of us.

Thanks, Peter.

I have some question about the margins. A little follow-up on some of the questions that just came before. I guess in talking to you guys over the years, we always worried that margins might decline, maybe because of decline in some of the peripheral products, whatever. But yet you've been able to maintain the 50 percent margin range. Does that mean that we can expect that the -- we are going to be able to maintain that going forward? And is the peripheral product business now going to be sustained? And what's happening in that area?

Yes, I think that our model worked very well based on 50 points of gross margin. That is the target we will try and maintain going forward. And I think we have a long history of maintaining that type of level. I think as the numbers get very large, then you are left with a situation where you may be increasing your contribution by lowering your margin. I don't know that 50 points is magical. But the goal of the exercise is to deliver earnings per share. I think that we will stay focused on doing this (ph). We control our expenses and we grow our revenue. And I think we are in the stage still as a small company, where 50 points is required to make it work. Assuming that we can continue to grow into a larger company, you know, it might work equally well at 46 points. So I think that going forward, I mean certainly this year, I would expect to maintain the 50 point level.

Okay. And one follow-up on the medical field, in that market, you said a little bit about going through medical reps whatever. Can you give us a little bit more idea -- I mean that's a obviously a different and difficult market to go into. Are you going after nurses, are you going after administrators, or doctors or how are you trying to tackle this market?

We're really tackling it through the software developers, right? In each category, different companies own and control the software application. And we work with those software developers to bar code-enable their applications. And once those bar code-enabled, the sale of the application also drives a sale of a scanner.

Let me give you an example. Companies like we will say Siebel or SAP or Oracle, writes software that is used by medical sales reps. We in turn are working with those type of companies to bar code-enable those applications. And as those applications are rolled out, we benefit. Really, scanning is an application-driven sale. And we don't make applications, but we have with our bar code scanning tools and our products been able to convince a greater and greater number of software developers to include bar code scanning to improve the overall productivity of their solution.

Okay. Thank you. Keep up the good work.

Brian Swift, Security Research Associates.

Yes. You know, nice to see good sequential growth in the topline there.

Thank you.

During the quarter, you announced a deal with Skye Tek in the RFID area. Could you comment any on what your plan is there, when you might see some significant revenues coming out of -- not just Skye Tek but out of RFID?

Sure. The agreement with Skye Tek is to basically leverage RFID technology into our line of products. We believe that RFID is still, I would say very early, in the very early stages of being deployed. And we expect to see a number of field trials and test deployments happening this year. So we really don't see a lot of revenue. We would like to get a software developer kit out in the middle of the year, so that just like with our bar code scanning before us, we are able to RFID-enable the applications that are used to control and drive businesses, whether they be in the logistics or medical or support side of the mobile computing market. And then I would expect in 2005 and 2006, you will see product in the market where you will be able to use RFID to track, process and basically improve processes and productivity. In our current plan, we have no RFID revenue in 2004.

Okay. So what kind of opportunity can it be, a year or two or three years down the road?

We think it's very substantial -- sizable. It's hard to put numbers on it because it depends on how well it's adopted. Our view is that certainly on higher ticket items, it is a very, very powerful technology. And we can see it being deployed in clothing stores, also as (ph) a (ph) security mechanism as well as a tracking mechanism. We see it being deployed maybe in cars and other higher ticket items. We don't see it being deployed at the grocery level for quite some time. So we think it is a substantial business opportunity. I think it is too early to put a number on it.

In the embedded systems area, do you see -- you mentioned you have 38 customers but only -- it looks like only a handful of them that are actually generating revenues. It's just coming from one customer. What kind of visibility do you have on -- over the balance of the year of getting some traction out of more of these design wins?

I think our visibility is -- it's still -- I would describe as poor, in that it takes a long time for people who make specialized devices to get new products in the market. Then they have to be tested and field trials and then eventually they are deployed. The deployments are typically large. We have a lot of people doing prototypes and field trials. But ultimately, it's the customers that determine what technology wins and doesn't win. I think we're seeing in general that Bluetooth is now well understood in the industrial sectors, where it is beneficial and where it is not. And we feel quite optimistic about the potential for Bluetooth, particularly in the industrial side in the next 12 months. And we will benefit from that. And I think following the education of users on the industrial side, I think you'll see a new adoption in the consumer side. But you know from a visibility point of view, we can't earn until if you will the train pulls out and we are not driving the train.

(OPERATOR INSTRUCTIONS). Michael Davis, Strategic Communications.

Good solid quarter, gentlemen. I wanted to ask, on the conference call roughly two years ago, I think it was Kevin allowed that about critical mass for this company was about $40 million in sales. Have you changed your mind on roughly that number, or is that --?

I would say maybe it's gone up to 45 but no more.

Okay. Now looking at your operating expenses for the last quarter, which were a little under 3.5 million -- and I know there's some extra expenses in there for litigation and other things -- but what kind of -- roughly, what kind of sales level would that number support?

I don't fully understand.

I mean, I am saying with the expenses at 3.5 -- your operating expenses at 3.5 million, what kind of growth in sales can you sustain without having to raise this number significantly? Am I making sense?

Yes, you are. But again, I think that this is -- if you look at -- let me answer it the following way. If you look at our expenses when our revenue was 10 million a year, our expenses were about $3 million a quarter.

Right.

So we increased our revenue by more than double, then we increased our expenses by about we'll say 20 percent, 16 percent. And that's because the model is based on us having to manage the channel that we sell to and having to manage the suppliers that supply to us, that manufacture our products under our guidance. I think that we could double the sales, would still have our expenses less than 4 million. I don't know if that answers your question.

Yes, it does. Obviously ,it does. What I'm really getting at is, a normal technology company -- we've talked about this in the past -- 20 percent margin, something like the normal numbers when on R&D and percentage of sales, and sales and marketing and the SG&A. That's what I'm pushing for. And because I kind of want to update my numbers. So --

Yes, so again, if you just take your numbers and you look at kind of -- you know if you say 46 million, if we had expenses on an annual basis of about 16 million, you know 48 to 16 is about 30 percent. And that will be double and your number will be $4 million a quarter. So that's why we believe that the model works well when we are in the $45 million range.

That clarifies it a great deal. I mean, I can live with that. I just -- having been through you know, I guess this is my sixth year following your company, I am just -- I just want to make sure I haven't been blindsided here. And we're -- I just see all the improvement and solid quarter after solid quarter. I want to make sure that there's a bear there.

I think there is.

Yes, okay.

All right, thank you, Michael.

Thank you.

David Wanetick, Gateway Reports.

Very nice quarter, gentlemen. I just wanted to drill down a little bit into the bar code segment. Can you give us a little bit more color on the growth rates of some of the products within the bar code segment, in particular the SDIO product, what kind of growth you're seeing from that?

Dave, I don't have those numbers in front of me. Do you want to --

Yes, SDIO has really -- the shipments have started quite rapidly. In the fourth quarter, we did some $400,000 worth of business, which was the first full quarter. And we have about doubled that total in the first quarter. I don't have the numbers broken down as to the net revenue because some of that will have wound up in the channel and will defer revenue recognition. But it's coming out initially very rapidly as a new product. We're seeing the same effect with our wireless LAN SDIO product. It seems like it has just taken a quarter or two. As you know, Pocket PCs that began shipping late June with the Pocket PC 2003 operating system, many of those now and almost all of them have an SDIO slot. And it seems like it's taken a couple of quarters for people to start using the SDIO. But we're now seeing much more rapid adoption of SD, although CF continues to be our largest category of form factor within our products. But that gives you an example. We expect the SDIO scanner because it is a less expensive scanner than the CompactFlash in-hand scan card, and because we've extended its use to the Palm community -- for both those reasons, I think we will see it as a rapidly growing product.

Okay. And the 10 percent of additional workforce that you hired recently, where are those people being allocated? What jobs are they filling?

I think that is over the year, right, not just recently. That was 10 percent year-over-year, which I think equates to around eight people. And I would say that we probably have four of them in operations helping with just equipment and shipments. And then one in sales, one in marketing and maybe two in engineering. I'd have to go and check exactly. But we haven't added a lot of people.

Richard Siracusa (ph), Advest Inc.

You had mentioned, I think -- you measured your backlog from quarter to what can be shipped the next quarter.

Yes.

And I'm wondering if you have a measured backlog for what can be -- for the remainder of the year compared to last year?

I think the answer is that most of the backlog log is generally shippable within a quarter. The longest-leadtime items are -- that we ask (ph) for orders for us are typically eight to 12 weeks. And for standard products, of course, the leadtime is not a problem at all. And as a result, we generally don't require customers to give us orders beyond that eight to 12-week period. So almost everything we have in backlog is shippable in the following quarter.

Okay. Now with regard to the topline revenue growth, what is your targeted growth rate? What are you hoping to achieve, percentage-wise, topline?

We are trying to basically grow the Company in a reasonable manner. I think that we have seen the last two years, 30 percent year-over-year growth. I think that's a sustainable level, and that we grew at 38 percent in the first quarter. So again, it's an ever-changing situation. But I think that a number in the 30 percent, in that range is reasonable, and something that obviously we can manage. But you know, we are not trying to provide guidance. I think that the market is growing and we are working hard to grow.

We're sometimes asked the question from the other direction -- are there any constraints on our ability to grow. And generally our manufacturing because it's with third-party manufacturers have plenty of capacity to increase their production as long as they have reasonable leadtimes for adequate supplies. And our distribution channels can run much higher volumes through those channels without any difficulties. So on the upside, if we do find that the order rates are picking up, we believe we can adjust very nicely to that.

Okay. And my last question, and I'm kind of like a newcomer to Socket, and I am not a technological wizard, but in the R&D area, you guys seem to be doing a phenomenal job, ahead of the curve, you are a small company, growing compliments from companies such as Microsoft. And I am wondering, can you give me a little insight as to how you are doing this in the R&D area?

Other than we work hard and we have, I think, done a good job of focusing our resources on the PDA market, which is a complicated but small, relatively small area. And based on that expertise, I think we are now in a position to leverage a lot of the work we've done over time as we attack other areas like the tablet PC and notebook market. I think that you know we are hard-working and we are keeping our head down and doing the right thing.

Longevity is a factor too. You'll see with both Socket's management team and the same is true for our employees, that we have a large number of employees who have been with the Company in excess of six -- from six to ten years and even longer. And if the ability to have that built-in reservoir of knowledge and experience and then when we are consistently building our products so that the products are compatible one to the other and it helps with that level of experience for people to be able to do amazing things very quickly.

Right. Okay, thank you.

Mr. Mills, there are no further questions at this time. Please continue with your closing comments.

Thank you, very much. So in closing, I'd like to say that we are happy to have reached the very important milestone of profitability. We will achieve this by continuing to deliver innovative products and by growing our revenue by servicing the ever-changing mobile computing market. We plan to continue this growth trend by increasing our product offerings and increasing our available market. I would like to thank our employees for their persistence, our shareholders for their patience and finally, I would like to thank everyone who participated in today's call. Good day.

Ladies and gentlemen, this concludes the Socket Communications first-quarter management conference call. If you would like to listen to a replay of today's conference, you may dial 1-800-405-2236 or you may dial 303-590-3000 and enter the access number of 576972. Once again, if you would like to listen to a replay of today's conference, you may dial 1-800-405-2236 or you may dial 303-590-3000 and enter the access number of 576972. Thank you for participating. You may now disconnect.