Socket Mobile Inc (SCKT) 2004 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Socket Communications third quarter management conference call. [Operator instructions]. I would now like to turn the conference over to Ms. Tatia Meghdadi, Socket's Marketing and Communications Manager, please go ahead.

Thank you. Good afternoon and welcome to the quarterly conference call of the Socket Communications for their third quarter ended September 30, 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 www.ccbn.com shortly after the completion of this call, and a transcript for 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 a week. Now 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 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 our products, expectations for general market growth of handheld computers, growth and demand for our products, expansion of the distribution channels for our products, and adoption of our embedded products by manufactures of electronic devices. We also comment on gross margin levels, on our 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 result anticipated in such forward-looking statements as a result of a number of factors, including, but not limited to, the risk of delays in 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, continued growth in demand for handheld computers, market acceptance of emerging standards such as Bluetooth and our related connection products, the ability of our strategic partnerships to benefit our business as expected, our ability to enter into additional distribution relationships or the other factors described in our 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 the management. On the line today are Kevin Mills, President and Chief Executive Officer, and David Dunlap, Chief Financial Officer. At this time I would like to turn the call over to Kevin Mills.

Thank you Tatia. Q3 was a very challenging quarter for Socket, but one that ended with us posting our best, however, small profit to date, and allowing us to record our third consecutive profitable quarter, which put us on track to report our first annual progress.

There were a number of unexpected events in Q3 that seriously impacted our revenue and our results for the quarter, namely our GPS product transition and the timing of new devices from Dell and HP. When we spoke at the last management conference, we were just finalizing our transition to a new GPS design. Our initial testing had gone well, we were expecting the transition to be smooth and trouble free. We had completed our in-house testing and had a number of units scattered around the world with beta testers, to verify that the real world results concurred with our in-house test results. However, in the real-world testing, we discovered a few minor problems, which we felt had to be fixed prior to product launch. Six weeks of additional engineering work were invested, but we were not able to resolve the problems to our satisfaction with our initial design. We therefore scrapped the design and did a complete redesign based on a different GPS module from a Swiss company called uBlocks. We re-did all our product testing and I am pleased to report that we are now shipping the uBlocks base design, and we are more than satisfied that this product meets the standard we expect from our product, and we are happy to deliver this Socket product to our customers.

This whole episode costs us several hundred thousand dollars in lost revenue. However, it also turned out to be a true test of our belief in the quality and reputation of Socket products. I do not believe a company would ever intentionally ship defective products. We found ourselves in a position that our initial product design had a few minor issues and we had received positive reviews from early units we sent to the press. Customers were asking for the new products and we knew only a few customers would ever experience the minor problems identified. We also knew that not shipping would impact our excellent growth record. It would have been easy to compromise, however, I am proud to say that we stuck to our principles. We took the short-term negative impact on our quarterly revenue acknowledged to ourselves and our customers that we had problems, took the time to fix the problems and now we are shipping a quality product and maintaining a reputation for delivering great products to our customers.

Based on our inability to ship GPS products for almost three months, we expect we’ll have to reclaim our position in the Bluetooth GPS markets by getting customers back over the coming months. But we believe that we will be able to do this based on our excellent brand name and by delivering the high quality products we now have in place.

Another unexpected event in Q3 was the transition of Dell and HP to new PDA model, which left the distribution channels empty for a few weeks. Obviously, we were aware of the upcoming release of new PDAs, which were expected to arrive in mid October. Since we had received early units and completed our compatibility testing on these devices well in advance of the new PDA launch date. However, what we did not anticipate was HP and Dell would run out of existing PDA inventory in mid September. September is the most important month for the third quarter and the impact of this transition was again several hundred thousand dollars. During transition, corporate customers have a natural tendency to wait for new models, once they are eminent, as they tend to be better than existing units and tend to be approximately of the same cost. But in this transition, they were encouraged to wait for the new models prior to deploying due to the inventory situation. This left an unexpected gap in PDA sales.

The long-term impact of these new models is excellent, as they are packed with more features and functionality. In fact, three new HP models have compact flash slots whereas only one of the existing HP models had a compact flash slot. This means Socket's compact flash products will have more opportunities to be sold with these new devices. However, a new round of corporate end-user testing will be required for companies prior to deploying these new devices to their mobile professional. This type of delay typically has a short-term impact on us and we feel there is sufficient time to overcome this in Q4.

They say trouble comes in threes. The third unexpected event was our largest distributor in the UK went through a reorganization and re-capitalization process. Again, the long-term impact is positive, as the new capital structure makes them substantially stronger, but there was some short-term impact as we did see our business in the UK decline by several hundred thousand dollars in Q3. So, to say Q3 was eventful is certainly an understatement. Despite these three issues, all of which have been addressed and positively resolved, we were able to report a profit for the quarter, a true testament to our determination.

Now for some positive events in Q3. Barcode scanning continues to grow extremely well. We recorded record revenues in our barcode category, as we continue to see deployments move ahead, particularly in the early part of the quarter. In Q3, we announced an alliance with Siebel, who is a giant in the CRM community. The Siebel decision to support pocket PC is very significant for the entire mobile computing world in that Siebel has recognized in many cases mobile professionals cannot use a notebook, but can use a smaller device like a pocket PC.

Siebel developed a mobile CRM client, which allows mobile professionals to access their CRM information with a small instant on pocket PC device. The action of Siebel, which we believe will be followed by others, legitimizes the pocket PC platform for corporate CRM customers. From Socket's point of view, Siebel is recommending our scanning solutions as part of their authorized hardware solutions, which will drive sales of our scanning products with the deployment of these mobile devices.

We have discussed many times the application of the mobile sales representative, who needs these samples with a doctor (ph) and the need to create ability along with accountability. We have seen many dedicated applications written and deployed, which help drive our barcode-scanning sales. Siebel's ePharma products is an industry standard product that not only allows the medical sales rep to track and trace the samples, but also allows them to enter relevant information into the customer's record, concerning the details of their visits, follow-up action, etc.

In addition to Siebel, we continue to make excellent progress with our developer community. This week we announced the formalization of our Strategic Vendor Integrator Program or SVI. Under this program, we offer enhanced services and support to qualified SVI partners, so they can deploy solutions that include our state of the art products. Today, we have 52 developers listed on our Web site, who have expertise in a number of different vertical applications and who are tremendous(inaudible) these vertical applications by understanding the particular nuances of their industry and providing software that serves their customers’ needs in that market segment.

We expect the number of developers to continue to grow, as we continue to service them with new products and better software. All of these developers use their proprietary developer kit to build their application that supports our barcode scanning products. The developer community continues to be a significant asset to the company and we continue to enhance and improve our programs to support them. In Q3, these developers sold our cordless hand scanner, our CHS, for the first time. We provided an updated version of Socket scan that allowed them to easily integrate the cordless hand scanner into existing and new applications. The response to the CHS has been extremely positive and we had a significant number of field trial tests underway with deployment being scheduled. We remain very excited about this product and itsit’s potential.

We also started to deliver our RFIDSCK, which again provides a migration path for our developers to this new exciting technology. RFID like barcode scanning is very much driven by developers, as it is their applications to determine the overall productivity and usefulness of these solutions. In the case of RFID, our Socket scans offer support to all existing Socket barcode scanners and our RFID reader, making it easy for developers to develop and deploy RFID at their customer's request without the need to rewrite their applications for this few technology. This is extremely important to developers, who have limited development resources and need to leverage their time.

Overall, the barcode scanning, data collection business continues to perform very well and we feel very comfortable about this. It continues to grow despite the unpredictability associated with the timing of deals. We feel that our continuous focus on developers who would both grow the business and allow us to smooth out the lumpy nature, as we continue to put more and more deals into the pipeline.

On the connectivity side of our business, we experienced a decline based on the challenges already outlined. But as I stated we believe we have overcome these three issues and should see growth in Q4. In addition, we continue to see the Bluetooth and to some extent the wireless LAN products transitioning to a more industrial than add-on after market driven business. Our Bluetooth is already well established in the industrial sector as evident by the continued growth in our Embedded Systems Group, and we expect that trend to continue. As an increasing number of pocket PCs now have Bluetooth built in, the opportunity for add-in Bluetooth products is somewhat limited. Having Bluetooth built in to PDAs is great, since we now offer a wide range of cordless peripherals that PDA users can take advantage of for expansion. We are seeing new opportunities in the notebook and tablet areas at Bluetooth, especially for customers who want to use our external Bluetooth cordless products like the recently-announced cordless hand scanner. The percentage of tablet PCs with built-in Bluetooth remains low. We are also supporting the many customers who would like to have a single supplier for both sides of cordless solution, as barcode scanning and Bluetooth remain competitors.

On the wireless front, we continue to invest in this area. We announced we began shipping our wireless LAN utilities with our 80211 B cards in Q3. This software makes it easier and more dependable for users to connect and understand the status and quality of their wireless LAN connections, which is an issue especially with customers in a mobile environment who have become dependent on wireless LAN as a means to stay in touch. We are receiving excellent customer reviews on the wireless LAN utility, which we believe enhances and differentiates Socket solutions from other offerings on the market. We expect the wireless LAN markets to follow a similar trend as the Bluetooth market and over time, we expect our focus to be more on the sophisticated and complex corporate and the embedded portion of the market and less on the add-on market. We expect the software we are developing to enable us to become experts in this area and provide us with the flexibility to meet the varying needs of our customers. Especially as security becomes an ever increasing element of the wireless solution. The transition will take time and during this time, we expect to have numerous opportunities for revenue growth as we move forward.

The other element of our business namely the Embedded Systems Group continues to perform well as the many designs wins we secured enter the market, which positively impacts our revenue, as it is the trend we expect to continue. Our legacy serial business continues to maintain its revenue and has been a little more robust than forecasted and is one of the key reasons behind the slightly higher margins this quarter.

In conclusion, Q3 was a very challenging quarter, in which we were forced to deal with a number of unexpected issues. We worked through them and they are all now resolved and behind us. I think in business just as in sports unexpected things will happen. The important thing is that you minimize the impact, which is what we did in Q3. The issues we encountered certainly did impact our revenue and our growth record, but did not impact our profitability, as we remained cost conscious and focused on our business. Our focus going forward is to remain profitable and restore our revenue growth. Something we are confident we can achieve in Q4. It will enable us to complete our first profitable year, as well as position us for even stronger growth in 2005. With that I would now like to turn the call over to David Dunlap, Socket's Chief Financial Officer for his comments on our Q3 results.

Thank you Kevin. Socket's revenue for the third quarter ended September 30, 2004, was 6.2 million, an increase of 10% over the same period a year ago. We are particularly pleased with the continued growth in our family of bar code scanning product which grew 42% and 62% respectively for the three months and nine months ended September 30, 2004, compared to the same period a year ago and grew 15% over the previous quarter.

In the third quarter, the combination of increased gross margin 52% compared to 51% in the previous quarter and lower operating expenses 3.1 million compared to 3.4 million in the previous quarter allowed Socket to bring its break even point down to 6 million and record a profit of $89,000, its third consecutive quarter of improving profitability. Our higher gross margins are due to product mix. The drop in revenue came from our lower margin products. The third quarter is also traditionally our least expensive quarter where we are between audits, have fewer trade shows, and have more employee vacations which reduce expenses in these categories relative to other quarters.

We also experienced lower legal cost with the settlement of a patent infringement lawsuit in July, and the lower revenues triggered reductions in our variable market development fund and variable compensation program that fluctuate with revenue attainment. Kevin mentioned several reasons for the decline in third quarter from 6.7 million in the second quarter to 6.2 million in the third. First by holding up the release of our new GPS Cordless Receiver until it met our stringent standards, we created a temporary supply shortage in a distribution channel that is being corrected with shipments this month. Secondly, the primary effect of one of our major European distributors going through a bankruptcy pursuant to a sale was a reduction in sales activity during various stages of that transition. Our distributor is now back in business and fully operational. The third and perhaps greatest impact on revenue was the slow down on orders that typically happens right before a pocket PC model changeover. Both Dell and Hewlett Packard commenced model changeovers towards the end of the third quarter and are completing that transition in the first part of this quarter. All the models have actually been in short supply, meaning that some of our bar code, scanning, and connectivity product customers have needed to retest or qualify their solutions using new models and others have simply waited until new models became available.

The new model transition a year ago took place at the end of June and we experienced the strong following growth quarter in the third quarter of last year. if the new model rollout completes smoothly we expect our revenue pattern in the fourth quarter will be a similarly positive one. Our backlog at September 30, 2004, meaning orders received as of the end of the quarter that are expected to be shipped in the following quarter was 1.5 million, the same as that of the beginning of the quarter.

Our bar code scanning products continues to be our strongest growth driver. In the third quarter, bar code scanning product revenue represented 44% of our total revenue and grew 15% over the previous quarter and 42% over the third quarter, one year ago. The pipeline for bar code scanning orders continues to grow as more enterprises move to improve productivity by capturing data using bar code scanning. The most popular bar code scanning products are compact flash enhanced scan card, a laser bar code scanning product, and our SDIO plug-in barcode scanner which is an imager-type barcode scanner we introduced a year ago. There are also a number of trials planned that are underway with our Bluetooth cordless hand scanner. The cordless product is ideally suited for medical and other bar code scanning applications that require a very small lightweight bar code scanner and it works well with PDAs, tablets or notebooks.

Our peripheral connection serial card revenue also increased moderately representing 16% of our third quarter revenue and growing 7% over the previous quarter and 17% over the same quarter one year ago. Our peripheral card business is a legacy business focused primarily on notebook users. Our addition earlier this year of a cordless serial adapter has helped change the revenue direction of this product family from moderate decline to moderate growth.

Our embedded products and services revenue representing sales of our interface chips for use in third party products such as wide area network cards and Bluetooth modules for use in third party products such as ruggedized industrialized PDAs was 14% of our third quarter revenue. This business can be lumpy reflecting the timing of orders for third party products thus a decline of 19% from second quarter level, but was higher by 51% than revenues in the third quarter one year ago. We've got our longest lead time for orders in this product category and our embedded product orders in hand today for shipment in the fourth quarter already exceed the revenue from the third quarter.

Our connectivity product family showed the largest revenue decline for the reasons previously discussed. In the third quarter connectivity products represented 25% of our revenue, a decline of approximately 32% and 31% respectively from the previous quarter and same quarter one year ago. We continued to improve many of the products in this family. We introduced new WLAN software a few months ago that make it much easier for the user to find and log into a network and we continue to improve the security features that enable the software to interact with corporate security controls. Our Bluetooth software for notebooks was recently substantially upgraded and works with all of our Bluetooth cordless products including our modem, GPS receiver, and cordless hand scanner. Our newest GPS receiver, which is now shipping has improved functions at a reduced cost and is offered in both Europe and the United States.

Finally our most recent accessory product, a rechargeable battery pack, is scheduled to begin volume shipments in November. One of the biggest concerns of heavy users of electronic products is running out of battery power while on the go. We are offering a charger that is very slim and lightweight, but powerful enough to supply power to the batteries of many devices including handheld and notebook computers, MP3 and DVD players, Smartphones, Blackberries, and all of our cordless products. The charger continues Socket's tradition of offering products designed for the user of mobile electronic products and as with all of our products it is designed to be small and lightweight, rugged, and easy to use.

We are quite positive about our return to solid revenue growth by our connectivity product family. Gartner continues to report increasing deployment of pockets PCs by enterprises and with the completion of model changeover of pocket PCs nearly completed combined with Socket's new and improved products, we expect revenue from our connectivity products to rebound in the fourth quarter and beyond.

One final comment on our expectation is that we can contain operating expense growth at moderate levels while growing our revenue. Socket is highly leveraged in both its manufacturing and its distribution activities. We engage large third party manufactures to manufacture the major components of our products and then do final assembly and test, packaging and distribution from the US. Growth in our business allows us to achieve product cost saving by running the manufacturing lines longer and spreading the line’s set of costs over more units. In addition, higher volume purchasing of component parts tends to reduce the unit cost of these components, improving our gross margin and our bottom line. And by outsourcing our major components manufacturing to third party manufactures, Socket can grow its revenues without requiring any major capital expenditures for new manufacturing equipment.

On the distribution side, Socket distributes over 80% of its products through general distribution channels and has in place the infrastructure to manage its worldwide distribution channels. Sales volumes through these channels can be increased without needing to make major increases in the personnel managing that channel. So except for a small portion of our revenue that we return to our distribution channel for advertising, the increased contributions from sales can flow through to the bottom line.

Our balance sheet at September 30, 2004, included cash of 5.9 million, a current ratio of 1.8 to 1, equity of 16.8 million and no long-term debt. Cash was 6.4 million at the end of the last year. During the nine months of 2004, we have used cash of about $500,000. We generated positive cash from operations of about 300,000 including working capital changes. Increased our outstanding bank line balance, which we draw at the end of the quarter by 400,000, and received equity capital from the exercise of options and warrants of $200,000. We have used $500,000 in cash to complete repayment during the first four months of this year due to Nokia Corporation for the purchase of technology and a product line business in March 2002. We purchased some $300,000 of property primarily office and test equipment and tooling, and we purchased the technology patent covering our bar code scanning products in July for $600,000. Note that over 1 million in cash usage has been for non-recurring requirements, including completion of our note obligation and the patent purchase.

In addition, our inventory balances were higher than normal at the end of September due to the effects of lower revenue and preparation for higher sales volumes in the fourth quarter. Our inventory balances are returning to more normal levels in the fourth quarter as our sales pick up. By maintaining profitable operations we should continue to generate positive cash flow each quarter.

Finally, I wanted to comment briefly on the topic of Sarbanes-Oxley. Socket has in place all of the good corporate governance practices called for by Sarbanes-Oxley and we post on our web site many of our corporate governance policies including our code of business, conduct, and ethics and the charters of Socket's Board Committees, particularly the Audit Committee that oversee our corporate governance practices. We have always elected to file our financial reports on the accelerated filers schedule and as of this past June 30, 2004, we have now become an accelerated filer. We are actively preparing for an audit of our internal controls that will be part of this years' annual audit. We have also set the date for next year’s annual meeting of stockholders. The meeting will be Thursday, April 21, at 9:00 a.m. at the company and proxy materials will be distributed in mid March. We are now ready to open the conference call to questions. I will turn the microphone back to the operator. Let me get the attention of the operator. Operator?

Thank you sir. At this time we will begin the question and answer session. [Operator Instructions]. Our first question comes from Richard Siracusa, please state your company name followed by your question.

Yeah, that is Advest and I have two questions. If you add into the nine month figures the lost revenue from the three problems that you addressed in the third quarter, you would be back up to that 35% year-over-year growth rate, so can I assume that you are going to stick to that 35% growth rate target.

Yeah, I think that it is always dangerous to add in what you don't have, but I think that the impact of the problems probably amounted to a million dollars.

Right, which brings you back to that 35% area year over year.

Correct.

Okay, so we are sticking with that target.

We also expecting Richard that, with GPS when you take a three months gap in supply we need to re-trigger the purchase thing so, there may be a ramp up process although orders are coming in quite substantially now for that product and it is available, so we are hopeful that we will be back to the previous rates and then because we now have a new GPS product in the market, we think the market reception is going to be quite good.

Okay, and secondly with the recent engagement of (inaudible), I just wonder if you could shed some light on what Socket is hoping (inaudible) achieves for the company.

One of our primary objectives has been to increase the exposure of Socket to our institutional investment community. Socket has been successful with increasing institutional investment in the company from the 1%-2% level at the beginning of last year to 6%-7% today, but those levels are far below what we believe we should ultimately be achieving and so we are looking to open doors and call Socket to the attention of institutional investors and as we grow we believe we will become attractive to more and more of those types of groups.

Have they laid out an agenda of road shows, type agenda or schedule?

Yes, we have been visiting with institutional investors on a regular basis. Once each quarter generally the week or second week after earnings release, we spend the week on the road and we’ve made other trips for specific visits to other locations around the country, so the next week we’ll be in New York city and Boston. This last year we have been to Chicago, we have been to Dallas and we have been to San Francisco and some of the other cities on the West Coast. We are going to continue to expand the outreach, as you know we are also participating in financial conferences. This quarter we participated in the Roth Capital Partners Conference in New York City. We expect next spring we’llbewe’ll be at the AA Conference in Monterey and we will be at others so, we are going to try and keep the company as visible as we can to those who are making investment decisions.

Good. Thank You.

Thank you, our next question comes from Brian Swift, please state your company name followed by your question.

Security Research, I understand from the balance sheet that your inventories are up, but from your end how much would that relate to the issues you described as, you know, the three areas that kind of caught you by surprise versus just building in anticipation of, you know, of a strong --

Well, I would say Brian, first is that we had expected September to be stronger than it was and most of the inventory relates to I would say scanning products that we expected would come in and be available towards the end of the quarter. Our traditional pattern is that about 42% of our business is done in the last month of any given quarter, and in September, we probably had 35% of the business, so we were a number of percentage points lighter, and this really relates to the transition. Basically Dell ran out in mid to late September, and we didn't see any deployment. We expect that to be corrected and that will ease up the inventory issues.

I think almost the entire increase is related to the shortfall. Our inventory commitments with our vendors generally have the sufficient lead times. We have limited ability to adjust the flow of inventory in a one or two month period, beyond that we can adjust, so we have adjusted our deliveries for the fourth quarter to bring them in line with our fourth quarter expectation, so we clearly do want some of that inventory for the fourth quarter, but we do expect that overall inventory balances will begin to come down in the fourth quarter.

And you did say you expect the embedded business to pop back up again in December quarter.

Yeah, current orders Brian for embedded are already in excess of the revenues that we have in the third quarter by a couple of $100,000, so obviously from there it will depend on what additional orders come in, but just by shipping the orders we already have on hand, we will see a growth in that area.

And how long do you think the corporate qualification of your connectivity products will take.

I don't think it will take a long time, I mean, the products are generally available now. The launch was basically for different people and different models at different times, but the main launches were around October 12, devices are getting in people's hands. I would say as we speak most of the stuff is just a cursory check because we know all of our products have been tested and approved by ourselves and others with the new platforms, but people just want to see it for themselves. We expect the business would pick up strongly in November.

Thanks.

Thanks a lot Brian.

Thank you ladies and gentlemen, if there are any additional questions [OPERATOR INSTRUCTIONS]. Our next question comes from Michael Kim, please state your company name followed by your question.

Zero-three-three Asset Management. Good afternoon gentlemen, two questions on the quarter. Can you talk a little about what the pricing trends look like across your business category that materially changed from the previous quarter and also if you had seen any impact in terms of market share as well and as the competitive landscape changed at all and did that have any impact on the connectivity business in addition to the transition that you spoke of earlier? Then I have a follow-up.

Okay, well I think overall we are not seeing what I would describe as tremendous pressure on our pricing. We continue to reduce our costs and reduce our pricing in the markets as we go forward. Generally what we like to do is to continue to add value through software and typically we are able to hold our pricing reasonably well. I would say on the connectivity side the biggest impact we are seeing is that the percentage of units that have Bluetooth, and to some extent wireless LAN built-in continues to increase, and therefore that as an add-on business comes under more pressure, but having said that we are finding an equal number of opportunities in other industrial areas to offset where people don't have the volume to build dedicated models with wireless, and not wireless, and generally need to build one type of model and provide options to users to add Bluetooth to add wireless, LAN etc. So overall we see in the connectivity a trend towards industrial, more away from add on. On the scanning business we are still very much driven by add on scanning in conjunction with Dell and HP, and the other business is the legacy serial business, again it's a legacy business, there is not a lot of change, we're happy to serve it specifically, it's doing well.

We are really not in a position to comment on trends in the market, and we see the pocket PC market to be quite healthy, obviously the departure of Sony and changes over at Palm hasn't had a large impact as we were not servicing that market, and going forward we will be servicing the Palm market with our scanners, so we will be in a better position. We saw today that Sharp is exiting the PDA market with Linux, we never sold any products into that segment, so it doesn't really have any impact on us, whether that segment exists or doesn't exist.

Would it be fair to say that, you know, your market footprint is very similar to what HP and Dell have?

Yes, and pocket PC in general. We continue to expand and particularly into the tablet space, where this is basically a market increasing event for us. We are really very strong in what we would like to call mobile computing, which up until now has primarily been pocket PC, but we are seeing more and more tablet-based applications where people are web centric, and need a larger screen, but the application is generally the same.

And are you going back to the competitors, are you seeing any Taiwanese participants or any other swarm of players out there trying to come up.

We always see competition, the issue isn't competition, it's how you deal with it. I think that particularly on the scanning side, we strongly believe that the strong development tools and the ability to easily integrate this additional functionality into applications is the key to success, and we worked very hard to have a large developer community that we service and look after very well, I think that's one of our key strengths. We continue to look after these that add value every quarter, and I think that gives us a lot of protection.

I think on the connectivity side, yes; what we generally see is we see people enter the market thinking that it is a fairly easy market, usually overproducing, dumping some units into the market which I would say upset the short-term balance and then exiting, and then things get back to normal. We've seen this in wireless LAN through last Christmas where the prices actually got down to $29, but then once they have exited, things recover where you can make a reasonable profit by providing such products. This is something we just have to deal with but I would actually say the trend is less than before not more.

Ad one of the strengths Michael is the diversity of Socket's products. We’re really the only company that is providing a very broad product line, which means the impact on any one particular technology or products in any particular quarter is not going to be highly material to us more likely than not.

Yes, okay, fair enough. And looking ahead to the fourth quarter, you know based on your early accounts about the recovery of these three areas that had, you know, posing challenges in the third quarter, can you guys take a stab at providing some kind of revenue guidance to get sort of back to where you were in the first half of the year or you know sort of punching through that level, or a little bit north of that?

I think that we are happy to say that we will continue to grow and get back towards the levels we saw earlier in the year, and depending on how strong it finishes, but to some extent it's like asking us who is going to win the game tonight between the Yankees and the Red Sox. If you tell us that, I will tell you our number; we don't know we are working hard at this, and I think that we will see good growth and we will get back on a growth track now that we have got these issues behind us.

You know, the underlying trends of course have been 33% in each of the last two years over the previous year, and we have grown 26% when you measure in the three quarters. That trend through the second quarter was 35%, and if these issues hadn't happened as we talked about it early in the questions we would have still been in that below 30% range. We are expecting that that's the general trend you are seeing in the pocket PC market as well. So but again, ultimately it is tied to as well the timing of deals, we’ll be interested to see if once pocket PCs begin shipping again if there is now pent-up demand that allows the customers to begin deploying them at a faster rate for the fourth quarter, and maybe even into the first, in which case we could see a pick up in our growth rate, but a lot of it is timed to how well that pocket PC transition completes and people move into the next phase, but the general trend of growing at about the 30 plus percent levels we expect to certainly continue.

Okay and then on the embedded side, I don't know if this is the right way of looking at it, but do you report a backlog number or a book-to-bill, or what the shippable backlog is, trying to match along those line?

Well the overall backlog number of a million and a half, you know, includes the orders that we have in for the embedded area. And of course we’ve received orders since the beginning of the quarter that have added to that total which reflected my comments that the orders we have today are more than the revenue that we reported last quarter. So a portion of the 1.5 million is related to the embedded business, and probably a bit more than half of that total because we ask that we have the longest lead times on our embedded products, and we ask therefore for forecast, and ultimately that turns into orders.

But when do you see sort of the inflexion point in that business, you know, a bit sort of tracking along, you know, close to a million dollars or million dollars, you know last few quarters, is there a step function in that, you know, we should look at or are you looking at more of a linear growth rate?

I think it is more of the step function, but we don't know when this is, I think that right now particularly on the Bluetooth side, it is a case-by-case, where deals, each deal customer is given on the industrial handheld side, do you want Bluetooth or don't you want Bluetooth? What we saw on the pocket PC is that percentage continued to increase. We expect on the industrial side at some point, it will start to increase rapidly, we just haven't seen that yet.

We also expect that there will be large deals coming from the sale of the pocket PCs, that our Bluetooth products are built into. A good example is the second quarter of 2002, which was the first order for our Bluetooth modules that was built into the Intermec 700 series PDA, and they completed an order for--with one customer which was Schwann with their frozen food delivery system that entailed both Bluetooth enabling a printer as well as their PDA, the total of 20,000 units to us. It was more than half a million dollars from that one order, and so we expect that pattern will happen from time to time, particularly now that a larger number of industrialized PDAs are in the market - certainly PDAs from Symbol, handheld products, Intermec, a number of other companies are now in the market, and there’s long lead times while these get qualified and built into peoples’ productivity plans, but we know that it is likely to happen.

Great and terrific, well thank you very much.

You are welcome.

Thank you. Our next question is a follow-up from Brian Swift, please go ahead with your follow-up question.

Yes, the way you answered the first question was kind of implying that maybe you can make back some of this million dollars in business that you said collectively you know it cost you with these three various issues. I just want to kind of clarify that because if you recall the end of the June quarter, you had some business that kind of spilled over into the September quarter, you are up to like a million or million-and-a-half dollar start, which obviously you really needed it as it turned out to be at the end of the quarter for reasons you had said you weren't anticipating.

Yes.

I guess what I am implying is that if you are really going to catch up and get some of that business back, you would end up with an $8 or $9 million December quarter, so I just want to see whether we are drawing the wrong conclusions or the right ones in terms of, you know, what you are trying to telegraph here without coming out with a, you know, a projection.

Well, we are not trying to really telegraph anything, I think we are trying to just tell you the way it is, I mean essentially what we saw and what we have seen happen, particularly on the scanning deals, is there just seems to be a stronger tendency to have scanning deliveries towards the end of the quarter as these tend to be large projects, and I don't know if it is just people's commitment to themselves or to their organizations, but people generally like to get things done before the quarter end. What we saw happen in Q2 was that the large number of deals that we were expecting, some of them spilled over into Q3. What we saw happening in Q3 is there wasn't large numbers of deals because particularly there were shortages of pocket PC devices, and the word got out in September that both Dell and HP had a whole new family of devices, which they encouraged people to wait for. So we are now going through the, I mean, its not that we feel that any of the deals have been lost, and this is really where, you know, we track the deals, we are in contact with the customers, but we have never had any exact timing of when they will pull the trigger on their deal.

So all I can say is that the deals we were tracking remain in place, and we don't expect due to the delays that any of the deals will be lost. What I can say with any great degree of certainty is when those deals will happen. We would expect that a higher than normal percentage would now happen in Q4 based on the fact that these people were delayed. I would say without their involvement, they were delayed for factors outside their control, and therefore, we would expect a higher percentage of those deals close in Q4. But I’ll add the caveat that, we have never been good at predicting the exact timing of closing any deals. And that's why we’ve worked so hard to have more and more deals in the pipeline to kind of smooth out the lumpiness.

I also think Brian with the fourth quarter, having the last couple of weeks being the Christmas holiday season, it’s very easy for organizations that are completing their field trials to say we will just complete them in early January, so I think we have to assume that some of the catch-up given that units are just becoming now available and even once available, it takes a while to shift quantities out to customers from Dell and HP, I think we just have to assume that some of that catch-up may spill over into the first quarter. But it is certainly likely to be a positive event and then some of the revenues that were lost such as the GPS revenue that was lost; there is good competition in that space, we don't expect that we will recoup some of that, although we do believe that people will like the new units.

And likewise the issues that we had in the UK, the inability to deliver. People will find alternatives, which, you know, some people will wait, but you know, people's patience is not infinite; in fact it is usually quite short.

So we are not encouraging you to just add the lost revenues into our normal run rate, but we will try to report further as we go through the quarter, particularly if we see any major changes from the trends that we have been experiencing.

And how is October going so far relative to --?

I would say October is still light, but we are still in the situation of we didn't have any PDAs to sell against or sell with if you will for the first two weeks of October, and we are now beginning to see the pick-up, so I would say we are comfortable that we understand the dynamics of the quarter, and we weren't expecting the start of October to be very robust based on the events of the supply chain.

Okay, thanks.

Thanks a lot Brian.

Thank you Mr. Mills. There are no further questions at this time please continue.

Thank you very much. So in summary, I mean, Socket has had a very challenging Q3. We had a number of unexpected issues to deal with, but we dealt with them well, minimized the short-term impact on the business, and made sure there was no long-term impact on the business. We increased the profitability, and are focused for the remainder of the year on increasing growth and continued profitability. Finally I would like to thank our employees for maintaining their focus on our business during Q3 for working longer and harder to quickly resolve the problems we encountered, and for putting them in the past. I would like to thank people for participating in today's call. I would like to wish you all a good day. Thank you.