Socket Mobile Inc (SCKT) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Socket Communications fourth-quarter management conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Wednesday, February 23, 2005.

I would now like to turn the conference over to 80, Tatia Meghdadi, Manager of Marketing and Communications. Please go ahead, ma'am.

Thank you. Good afternoon, and welcome to the quarterly conference call for Socket Communications for their fourth quarter, ended December 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 the release on their website at www.socketcom.com. A replay of today's call will be available at ccbn.com shortly after the completion of this call, and a transcript of the 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. Phone replays will be available for a week.

Now, before we begin, I would like to remind you that this conference call may contain 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 statements forecasting future financial results and operating activities, market acceptance of our products, expectation for general market growth in handheld computers and other mobile computing devices, growth in demand for our products, expansion of the markets that we serve, expansion of the distribution channel for our products, adoption of our embedded products by third-party manufacturers of electronic devices and 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 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 computer hardware and software, product delays associated with new model introductions and product changeovers, continued growth in demand for handheld computers, market acceptance of emerging standards such as Bluetooth and wireless LAN and of our related connection and data collection products, 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.

And with that said, I would like to now turn the time over to 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.

Overall, 2004 was a very good year for Socket. We were able to report four consecutive quarters of profitability, with an annual profit of $288,000, an excellent improvement from the $1.9 million loss reported in 2003.

Along with the excellent achievements in 2004, there were a number of challenges. The first six months of the year were great. We grew our revenue by 37 percent during this period. The second half of 2004 was a bit more challenging. We saw our growth slow significantly, as both Dell and HP completed major pocket PC product transitions, which resulted in extended periods of limited supply and product shortages that caused our customers to slow their deployment. These transitions also caused delays in customer qualifications and verification on solutions (ph).

This turbulence in our marketplace put pressure on us in the second half of 2004. As usual, we rose to the challenge and maintained profitability by tightly managing our expenses. However, these transitions did prevent us from meeting our planned revenue growth objective.

Even with these setbacks in 2004, we were able to grow our revenue by 21 percent, down from our historic rate of 30 percent plus for the preceding two years. All things considered, it was a very solid performance by the Socket team, one that marks a considerable milestone in our history, our first profitable year.

As we look forward to 2005, there are a number of very positive events that should help us return to our historic growth level. The first piece of good news is that the product transitions that complicated the second half of 2004 are largely behind us now, and we feel that we should have a stable and growing pocket PC market. This will help get our revenue growth back on track.

The second piece of good news, our decision to broaden our market reach, which has been made easier by the continued evolution of the mobile device market. In 2005, we intend to broaden the reach of our existing products and expand into the Symbian, RIM, Palm and Tablet XP market. Obviously, this market expansion will take time, but we feel the time is now right to make this move. We will also reduce our overall dependence on the pocket PC market. As we saw the impact of these product transitions in the second half of 2004, especially as they relate to our revenue growth plan, it is important that Socket expand into other markets to avoid a similar situation in the future, as these transitions are completely outside of our control.

We are confident that our existing product families are being well accepted in our traditional pocket PC market, and that this market will benefit from the lack of turbulence in 2005. We are counting on good growth, based on the development work we have already completed in 2004, so we have the capacity to take on these new markets.

In addition, there have been a number of developments in the mobile devices market that have made it both possible and worthwhile for Socket to expand its market to the other devices in the mobile computing area. As a company, Socket has traditionally focused on mobile devices that have three characteristics. One, they are truly portable, which we would define as usable when walking or standing. Two, they support an open software architecture. And, three, they support a standard expansion mechanism. We believe these are still the right characteristics for success in a peripherals add-on business, and we intend to stick to this approach going forward. Our focus on these mobile device characteristics has stood us well over the years. It has helped us avoid a number of potential issues associated with proprietary software and interfaces that always seem to change when you have completed your development investments. We have seen plenty of examples whereby companies are forced into rework or into inventory write-off situations by drifting from these values.

This criteria for success made the Windows Mobile, our pocket PC, our platform of choice, as it really was the only platform that supported truly mobile devices with an open architecture and an open expansion mechanism. We are happy with our success in the pocket PC arena, both from a growth and leverage point of view. Not only have we grown our revenue, but we have grown our expertise. With this knowledge, we are now able to leverage our expertise and expand into additional markets on alternative platforms and operating systems.

There are exciting new opportunities in the mobile environment that now meet the above-stated criteria and requirements for success in the Symbian, RIM and Palm areas that we believe will provide an excellent growth opportunity, and we are confident that now is the time to go after these markets. Many of these opportunities center on Bluetooth as an open expansion mechanism, which is an area of expertise for Socket. During 2004, we added a number of cordless-enabled products to our product family, so that we can support the increasing number of pocket PCs that include Bluetooth. These cordless products include our cordless hand scanner or CHS, our cordless GPS, our cordless modem and our cordless serial adapter. The same hardware can be used without modification in the Symbian, RIM, Palm and Tablet XP markets when the appropriate software becomes available.

On the software side, all these devices now support open standards, and we feel the investment we are making in software will be leveraged, but over time, as well as give us access to these large mobile device markets using the same mobile computing distribution channel we have in place to support our pocket PC efforts.

Our Bluetooth, bar-code scanning and GPS products are providing the initial opportunity and will be supporting the Symbian operating system later this quarter. We currently support the Palm OS and Tablet XP platforms with our cordless hand scanner, and we expect to support the RIM platform in Q2. The software we're developing is designed to support other product family members as they come to market. In addition to Bluetooth, we will be able to support standard expansion slots such as our SDIO barcode scanner on the Palm Treo.

The benefits from our expansion into these markets will not happen overnight, as we expect the sale of our products in these platforms will be driven by software applications and corporate deployments, just like the pocket PC market. These efforts will take time. Our experience has shown that it takes about six months after hardware and software tools are available until you see your first real customer-driven sale. In these new market areas, Socket's focus will be on the corporate deployments which, in the case of Symbian, will be a portion of the overall markets, but in the case of RIM will be the majority of the market.

In terms of market size, the Symbian-based smartphone market is substantially bigger than the pocket PC market. According to the Gartner Group, 14.4 million Symbian-based devices shipped in 2004, with 5.6 million shipping in Q4. This is about 3 times larger than the pocket PC market in 2004. However, it's important that we keep things in perspective, and I don't expect that today, a large percentage of these Symbian-based phones are used for business applications. This is something we expect will change. We believe that the Symbian opportunity could over time represent a market that is at least equivalent to the existing pocket PC business.

Likewise, when you factor in RIM, Palm, Tablet PDA, we could easily be in a position to service a market that is substantially greater than the market we are serving today. These new expansion opportunities give us great cause for optimism for our going-forward growth plan.

In summary, 2005 should be a strong year for Socket, because we believe the pocket PC market will continue to be strong, and we will focus on expanding the reach of our products to operate on other mobile devices. We will do this for two primary reasons -- market expansion and diversification. By 2006, both of these efforts should be in place and taking effect.

As we look at the individual product categories and their associated dynamics, the highlight of 2004 was our bar-code scanning product. In 2004, we grew our business by 56 percent and sold approximately 40,000 scanning-related solutions, the vast majority of these sales driven by applications written by a large and growing developer community. The bar-code scanning business continues to be driven by the occasional scanning opportunity at the medical sales reps and other mobile professionals, where there are major advantages in bar-code enabling a mobile device they are already using. This eliminates the need to carry a dedicated scanning terminal for this occasional scanning requirement. We expect this business to continue to grow, as more and more applications come to market.

In terms of scanning hardware, we intend to continue to introduce future improvements and reduce our manufacturing costs, in order to offer improved price points. Both of these efforts will help maintain our strong momentum in this category.

On the software side, we continue to improve our development tools, make it easier and quicker to implement solutions using Socket's products. In fact, based on the success of our bar-code scanning software tools, we have expanded our overall efforts in the software tools area. We have made some internal resource adjustments in order to provide more enhanced in software development tools across five product families, which will help us provide more functionality and some additional features for customers using multiple Socket products. These five families include bar-code scanning, RFID, GPS, Bluetooth and wireless LAN.

On the connectivity side of our business, we experienced a decline in revenue in 2004. The decline was the result of the few issues -- delays in our GPS transition in Q3, as well as the effects of the pocket PC transitions and the rate at which Bluetooth and wireline are being built into standard pocket PC devices. Today, almost all standard pocket PCs come with built-in Bluetooth, so we don't have a lot of demand for Bluetooth plug-in cards in these new devices. However, we are continuing to service and support the demand for upgrades to the installed base of devices, which is still a reasonable business opportunity. We have successfully moved most of our Bluetooth sales over to our Embedded Systems Group, and have design wins for our KwikBlue Bluetooth modules and CompactFlash cards in a broad base of industrial units. We have also broadened our Bluetooth offerings with a USB download (ph) to cover the notebook and desktop markets, so we can be a one-stop shop for customer Bluetooth solutions such as our cordless hand scanner, for customers who want one company to be responsible for both sides of the cordless solution. It is also interesting to note that we are seeing some new devices like the HP 1700 series that ship without Bluetooth, and this could provide additional Bluetooth opportunities for Socket.

On the wireless LAN front, about 44 percent of pocket PCs now ship with wireline built in. In addition, during the previously mentioned product transitions by Dell and HP, the higher-end pocket PC models with built-in wireline shipped much earlier than the non-wireline-enabled devices, temporarily reducing our sales. However, we believe there is still a good opportunity here for Socket, especially as it relates to complete wireless LAN solutions built around software. We have been working very hard to develop a complete suite of wireline software tools that will enable our customers to configure and monitor their wireless LAN access and the status of their mobile device on the wireless network. This software will serve as the foundation for this business going forward, and will allow us to add security features that are essential to corporate deployments. It will also enable us to differentiate our solutions from competitive offerings.

Our differentiation in the wireless LAN market for mobile devices will be done through software. This includes such areas as ease of use, enhanced security, better UI and overall feature richness. We feel the wireless LAN peripheral market represents a good opportunity for Socket. We see opportunities in the smartphone area, as these devices continue to become more business-oriented machines, most of which do not have wireless LAN built in, but many of which can support an add-in wireless LAN card.

We also expect to have new opportunities in the industrial area, and for wireless LAN to follow the same path as our Bluetooth, whereby Socket can be a leader in offering complete embedded solutions for virtual application devices requiring wireless LAN.

The other products in the connection category, like our landline 56K modem, continue to grow. We see more and more corporate deployments requiring highly reliable and secure connected solution. This trend is something we expect to continue. We recently added an SDIO modem to support the many devices that have only S/B (ph) slots.

Overall, we expect the connectivity category to grow in 2005, primarily driven by modems and GPS, and with continued support from all our products in this category. We believe the connectivity category will remain important and evolve, and provide us new opportunities. We are very committed to this category, since it represents a fundamental building block for communication to mobile devices.

Our ESG business, while representing a small portion of our overall revenue, grew very well in 2004. The designs we secured in 2003 in the virtual application device market started to add to our 2004 revenue base. We expect this trend to continue. We also expect to add some new products into this category in 2005. In particular, we will be adding wireless LAN and GPS, both of which are ideally suited to our existing customer base, and we can provide superior and better solutions, based on the software know-how we already have developed. We expect our ASIC business to be flat to lower in 2005, as the designs we secured are coming to the end of their life or being superseded with designs that require faster interface than our mobility IC can support. Overall, our embedded category should grow well in 2005, as we expect to see some large customer deployments that have our Bluetooth modules already embedded in them.

Finally, our serial-based products continue to be required by customers who need legacy serial connections. Each year, we predict a decline in this business, and each year we are surprised to see it remain relatively flat. We expect this flat trend to continue, and we are happy to support these customers for as long as we can.

So, in summary, 2004 was a very good but challenging year, and we are happy to have achieved good, profitable growth. We believe 2005 will be another good year for Socket, where we can drive our revenue from an improved and more stable pocket PC base, and where we will have the opportunity to expand the reach of our products supporting Symbian, RIM, Palm and Tablet XP devices.

As is our practice, we're not going to provide quarterly financial forecasts, as our business is too deal-driven to provide highly accurate numbers at these revenue levels. However, we are committed to working hard in 2005 to get our revenue back to our historic growth level of 30 percent, and we expect to continue to manage expenses tightly. If we can achieve this, we will be able to report a second profitable year and another record revenue year for Socket.

I would now like to turn the call over to Dave Dunlap, Socket's Chief Financial Officer, for his remarks.

Thank you, Kevin. 2004 was another year of record revenue for Socket, reaching 26.1 million, an increase of 21 percent compared to revenue of 21.6 million in 2003. More importantly, 2004 became Socket's first profitable year, with net income applicable to common stockholders of $288,000 or 1 cent per share, compared to a net loss applicable to common stockholders in 2003 of $2 million or 7 cents per share. All four quarters of 2004 were profitable. The Company's balance sheet at December 31, 2004 remained strong, with cash of 5.9 million, a current ratio of 1.8 to 1, equity of $17 million and no long-term debt.

Revenue growth in 2004 was driven primarily by new data collection products and by growth in our embedded products business. Our data collection family of barcode scanning products grew 56 percent in 2004 over the previous year, increasing by 3.8 million to $10.4 million. Data collection is now our largest product family, at 40 percent of total revenue. The SDIO Bar Code Scanner -- that plugs into the SDIO slot of a pocket PC or PalmOne handheld computer with expansion slot -- was introduced in the fourth quarter of 2003, and immediately became our second most popular barcode scannin product behind the CompactFlash in-hand scan card, which also contribute to our revenue growth. In addition, we introduced in the second quarter of 2004 a cordless hand scanner using Bluetooth wireless technology to connect to a mobile computing device, which also added revenue in the second half of the year.

Our embedded products business grew in 2004 to 3.7 million, an increase of 1.1 million or 43 percent over 2003. Socket is a major supplier of embedded Bluetooth modules for manufacturers of ruggedized, industrialized handheld devices, and our revenue growth reflects an increasing number of devices moving from design win and development stages to market deployment.

Our connectivity product family revenue declined by 4 percent, and represented 32 percent of our revenue in 2004. Sales of modems, wireless LAN plug-in cards and Bluetooth plug-in cards were all higher for the year. The growth in popularity of our cordless Bluetooth and wireless LAN connections caused declines in our wired product sales for Ethernet and digital phone connection cards, and we phased out our digital phone cards at the end of 2004 in favor of wireless connections.

Our largest revenue decline within our connectivity product family was in sales of our GPS cordless receiver, due to a combination of price reductions, increased competitive choices and the delay of nearly three months -- essentially all of our third quarter -- and introducing our newest GPS cordless receiver, which began shipping in early October. In addition, model changeovers to new models of pocket PCs by Dell and Hewlett-Packard in the third and fourth quarters slowed enterprise orders for our products, which are generally purchased along with a mobile computing device. Model changeovers are now completed, and we are experiencing the speeding-up of enterprise deployment orders.

Our fourth product family, our legacy serial card products, grew 3 percent in 2004, due to the introduction in late 2003 of a cordless serial adapter using Bluetooth wireless technology to connect electronic devices without cables. This product family represents a legacy business going back to 1993, with excellent contribution margins.

Our revenue results for the fourth quarter of 2004 were similar. Revenue of 6.5 million was up from the third quarter of 2004 by $300,000, reflecting the resumption of GPS sales and the continued enterprise purchasing slowdowns from model changeovers, specifically Dell in October and Hewlett-Packard in December. Compared to the fourth quarter of 2003, revenue was up 7 percent.

Our revenue outlook for 2005 is for a continuation of our historical growth, driven by expanding markets and new products. Kevin has highlighted growing enterprise adoption of mobile devices deploying productivity-enhancing applications for the mobile workforce. He has also commented on the planned expansion of our markets during 2005 beyond pocket PCs, to enable data collection and connectivity using notebooks and tablets, smartphones and Bluetooth-enabled Blackberries for research in motion.

Our pipeline of sales opportunities in data collection continues to strengthen, including several field trials underway with our newest cordless hand scanner, and our embedded products customers are increasing their orders for Bluetooth modules, as their sales of ruggedized handheld devices increased. New enhanced Bluetooth software introduced by us last year for tablets and notebooks, new wireless LAN software and new GPS software have significantly improve the user experience for these connectivity products, and continue to differentiate Socket from its competition. The increasing support we are giving to software application developers and integrators should continue to expand the number of productivity-enhancing applications using our products that are available for enterprise deployment during 2005.

Reaching profitable operating levels in the first quarter of 2004 and growing that profitability throughout the year reflected our ability to maintain and improve our gross margin and to manage the growth of our operating expenses. Our gross margins on revenue were 51 percent during 2004 and during the fourth quarter of 2004, compared to 50 percent for the respective periods in the previous years. We've had an active cost reduction program in place at Socket that has allowed us to price our products competitively, while passing on the benefits of cost reductions to our customers in the form of lower pricing without eroding our margins.

Socket is noted for the quality of its software, which enhances the quality of the user experience. Our Socket scan software supports all of our barcode scanning and RFID products, so developers can write applications once that can be used on many platforms by all of Socket's barcode scanning and RFID products.

Our Bluetooth and wireless LAN software give exceptional user experiences. Our margins are a blend of traditional hardware margins and software margins, and we expect to be able to maintain those margins during 2005.

We also managed our operating expense growth. Our research and development expense increased 6 percent to 3.7 million during 2004, and $868,000 during the fourth quarter of 2004, compared to the corresponding periods in the previous years. We have maintained our commitment to research and development as essential to leadership in our markets, and we will continue to do so during 2005. Our sales and marketing expense increased 14 percent to 5.9 million during 2004 and 15 percent to 1.5 million in the fourth quarter of 2004, as compared to the corresponding periods in the previous year, due to higher headcount and increased advertising and promotion expense.

Socket has a highly leveraged distribution sales model, and we have in place the infrastructure that we need to manage our worldwide distribution channels. Thus, we can significantly increase our sales volume without substantially increasing the size of our workforce. We provide funding to support product advertising by our distributors and resellers, and have encouraged them to fully utilize that funding to promote our products, which accounted for the increase in advertising and promotion in 2004.

Our general and administrative expense for the year increased 7 percent to 3.1 million during 2004, but declined in the fourth quarter of 2004 by nearly $200,000 over the fourth quarter of 2003. Included in the year-over-year increase for 2004 was approximately $300,000 in higher legal expenses in 2004 compared to 2003, primarily due to the cost of defending a patent lawsuit initiated by Khyber Technologies that was settled in the third quarter. The fourth-quarter 2004 expense decline included the absence of these litigation defense costs.

In 2005, we expect our general and administrative cost to be less than in 2004, although our costs in the first quarter of 2005 are expected to be similar to the first quarter a year ago, as we cover the additional cost of an audit of our internal controls in 2005 and accelerate the costs associated with our annual stockholder mailings to the first quarter by moving our annual meeting of stockholders from June to April.

Cash at December 31, 2004 was 5.9 million, compared to cash of 6.4 million at December 31, 2003. We used 1.8 million of our cash for working capital changes, including higher inventories and receivables reflecting growth, and we decreased the amounts that we owed to our suppliers. We partially funded this working capital requirement by drawing an additional 1.4 million at the end of the quarter from the Company's working capital bank line, increasing our bank line draw at the end of the year to 2.9 million. Our operations before working capital changes generated 1.2 million in cash, and we received another $200,000 from the exercise of options and warrants during the year. We used $400,000 to invest in property and equipment, including manufacturing tooling needed to operate the business; $500,000 to complete the repayment of a note payable, relating to the acquisition of Bluetooth technology and a business from Nokia in 2002; and $600,000 to acquire a barcode scanning patent from Khyber Technologies, which was capitalized as an intangible asset in the third quarter of 2004. In 2005, we expect (indiscernible) requirements and investments in property and equipment to be our primary uses of cash.

I've received several inquiries from stockholders which I wanted to take a moment to address before we open up the call to questions -- first, the effects of Sarbanes-Oxley Section 404 that require the Company to have an audit of its internal controls as of December 31, 2004. Kevin Mills and I have been certifying to the effectiveness of our internal controls for over a year in our 10-K and 10-Q's. Section 404 requires that management certification be audited and attested to by the Company's independent public accountants. I am pleased to report that our internal controls audit has been completed, and we will continue to certify that our internal controls are effective. By the end of the first quarter, we will have spent more than $200,000 related to this audit, including approximately $90,000 for the audit itself and over $100,000 of consulting services to ensure that we were complying with the extensive documentation and testing requirements needed to allow an audit to be performed. These costs do not include the considerable use of management and staff internal resources.

We are glad to see the American Electronics Association released this month a white paper on the impact on small business of Sarbanes-Oxley Section 404, and we encourage the accounting profession to reconsider how to reduce the substantial financial and resource burden imposed by the current auditing standards as they apply to smaller businesses.

Secondly, details about Socket's upcoming stockholder meeting -- we have moved to stockholder meeting from its traditional June time period to April 21, 2005, and it will be held at the Company's headquarters in Newark, California at 9 AM. There are two matters to be voted upon -- the reelection of current directors and the ratification of the appointment of Moss Adams LLP to serve as the Company's independent auditors for the year ending December 31, 2005. Proxy materials will be distributed around the middle of March to common and Series F preferred stockholders of record on the record date of February 21, 2005.

Thirdly, I have been asked about Socket's intellectual property. Today, Socket owns four patents -- three covering the invention of removable memory and the removable input-output device that we were issued, and a bar-code scanning patent that we acquired. We have more than a dozen patents covering various inventions around mobile connection and data collection devices that are pending. Socket has designed and built its own ASIC interface chip, now in its third generation, which is at the heart of our ability to achieve fast data transfer speeds with low power consumption. We have also designed a chip that supports removable memory and removable input-output device.

We have a number of licenses from the suppliers of technology components that we have chosen to incorporate into our product design as chips or engines, such as Bluetooth barcode scanning, wireless LAN, GPS and RFID. Our driver software is also unique and protected by copyright, and in the case of barcode scanning, Bluetooth and wireless LAN, quite extensive. For most products, Socket designs its own hardware and writes its own software drivers, making them unique.

I have heard Socket incorrectly characterized as a reseller of products designed by others. More than 95 percent of our product revenue in the fourth quarter was from products designed and owned by Socket. Socket has a history of innovative design, and we are committed to building a large intellectual property portfolio.

Now, let me turn the call back to the operator and open up the call to your questions. Operator?

(OPERATOR INSTRUCTIONS). Kevin Dede, Merriman.

Dave, could you review for me the gross margin trend from second quarter to third quarter, third quarter to fourth quarter? It seemed to improve pretty substantially in December, but then decline again.

I think the main increase -- well, we went from 51 percent in each of the first two quarters, went to 52 percent in the third quarter and then back to 51 percent in the fourth quarter. And the main reason in the third quarter was that the product that caused the decline in the third quarter, particularly our GPS product, was one of our lower-margin products. So the mix changed in the direction of moving the margins up slightly.

What was your headcount at the end of '03 and the end of this past year?

We have added just a few people during the year. Our headcount at the end of last year was -- let's see. Today, we are around 71 people, and it looks like we were at about 64 or 65 people, as I recall, at this time a year ago.

Can you comment on where you think that might be at the end of next year?

Well, I think we're still expecting to have a very moderate increase in our workforce this year. I am anticipating we will probably add another 5 or 6 people, but not a whole lot more. We may add a few additional people if we see growth in the operations packaging area, but from a dollar perspective, we expect to keep our overall expense growth down to less than 10 percent this year over 2004.

Also, Kevin, I would add that we do include the cost of operations in our gross margins, so I think, as we added people, particularly in operations, that's already included in your cost of goods sold.

Dick Vercusa (ph), Advest Inc.

That question was already answered on the profit margin. Thank you.

John Bucher, Harris Nesbitt.

On the other operating systems that you plan to support, can you give an idea of where you think the revenue potential is, in terms of the various accessories that you'll be supplying? Will it be similar to Windows CE pocket PC, or do you expect a different mix for accessories supporting Symbian and RIM-based and other operating systems?

I expect a slightly different mix, John. Other people want to use Bluetooth as the primary expansion mechanism for Symbian-based devices. And we will start by adding our cordless hand scanner and our GPS to that platform this quarter. Likewise, with RIM, we will primarily connect using Bluetooth. Again, I think the scanners will be the leading candidate in this area. On the Palm, essentially -- again, Bluetooth, and we have some SDIO opportunities. And finally, on the XP, we'd have the full range of products.

For us, in general, the things that are important is to add additional functionality and allow people to use these as more business devices. If we see more opportunities with standard expansion slots, we'll certainly work to supply peripherals to leverage the opportunity there. But as we view it today, Bluetooth would be the primary candidate for expansion, and I think barcode scanning in general would lead the charge.

When do you expect to have accessory available for RIM platforms?

I think that Q2 is a reasonable timeframe. We have units working in the lab, but the difference between the lab and having a finished product is quite some time. And bearing in mind that when we deliver peripherals to this market, people's livelihoods are dependent on using these peripherals. So we need to make sure that they are robust and well-tested before we roll them out to the market. But I think that the Q2 timeframe is a reasonable expectation.

(OPERATOR INSTRUCTIONS). Ronald Craven (ph), Private Investor.

Congratulations on a good quarter. Can you give me any kind of an idea, as far as your backlog in sales that you had at the end of Q4, and then also the acceptance that you are seeing with your Bluetooth cordless scanners with, say, like Siebel mobile business applications and so forth?

Our backlog was about $1.2 million at the end of the quarter, so it's held pretty consistently in the 1.2 to 1.5 million range over the last several quarters.

In terms of the cordless hand scanner, we had some deals already deployed, particularly in Europe, in Q4. I would describe the products currently as undergoing a lot of testing, both in hospital environments, as well as other highly mobile environments. We haven't seen any large deployments. The general feedback for the products has been exceptionally good, but generally it's going into, I would say, more sophisticated scanning applications that are maybe a little less on the occasional scanning area than we have seen in the past. And we are very happy with the product where it is right now, and we expect sales to be strong this year -- again, deal-driven, possibly large deals, extensive testing before they are deployed. But overall, we are very pleased with the product.

And then one last follow-up question, if I may, please. The 30 percent growth that we have seen in years past -- you are still at a reasonable level of confidence that you can achieve this in '05, also?

Yes, I mean, that's the target we're going after. I think that we have seen pocket PCs growing at around 30 percent, in maybe a little bit above, and we have been growing similarly. I think that we were on track for the first half of the year. I think we reported 37 percent. Obviously, with the turbulence we saw in the second half, our growth rates dropped substantially. We expect those to pick back up as the environment becomes a little more stable. We also will have the benefit, I think, towards the end of 2005, to be able to add revenue from Symbian and RIM and other devices that we will support by that time.

Michael Kim (ph), 033 Asset Management (ph).

A couple of questions. One, if you have a sense on channel inventory levels, if they are consistent with historical seasonality? And also on the distributor side, I know last quarter, (inaudible) Q3 there was a reorder (ph) with one of your (inaudible) distributors -- just kind of curious if any other distributors are, I guess, sort of in a similar predicament?

I think the first thing, on channel inventory -- when Socket reports sales, we only report sales out. So any inventory that we have in the channel is fully reserved and has not been counted. So I think that's an important point to start with. We manage the channel inventory quite tightly. I think the exact number, in terms of the amount of inventory, is about $1.1 million.

Yes, and that's actually the gross profit, Michael. If you look at our balance sheet, we have a line called deferred revenue, and that is the gross profit, because we have both the deferred revenue and the deferred cost of revenue reported in there for all inventory that's still in the channel. So if you about double it, you are looking at about $2 million worldwide in the channel at the end of 2004, compared to about 1.7 million worldwide in the channel at the end of the preceding year. And again, that's just reflecting -- higher inventory levels are just reflecting our general growth.

And those numbers are very much in line, on a 6 -- we'll say $7 million quarterly run rate, $2 million would represent 4 weeks' inventory. So certainly, we wouldn't have an excessive inventory in the channel.

And then, any other distributors kind of out there?

Distributors -- we've been doing quite well with the distributors. We are very pleased. We have actually done a lot to improve both our controls and support for the distributors over the last six months. So I think in that area, we are in pretty good shape

Great. And then, on the competitive side, I was just curious if you guys have seen any change in the landscape there, or any of the Taiwanese participants out in the channel kind of making any noise? Any color you can provide on that front.

I think that the competitive landscape is always changing. It's somewhat of a double-edged sword. We find, with these product transitions -- and with, certainly, software transitions -- that invariably we lose a few competitors more than gain them. I think that, generally speaking, the more complicated the market is, the better companies with a lot of know-how and IP do. We haven't seen any serious impact of competition across the markets. Probably the most competitive area we have seen has been in the GPS-Bluetooth area. And I think there seems to be a situation of oversupply in the short term, which certainly pushes prices down, and often causes some of the Taiwanese competitors to decide to go and have business elsewhere. And therefore, they reduce their prices substantially to move their inventory. This is a normal course, and these things correct themselves. But on a general scale, we are quite okay, in terms of competitive threats right now.

We also found that with GPS that in 2003, early 2003, when we introduced that product, it was a brand-new product in the market, and it took off quite well. By 2004, we had several other folks that were producing almost identical products, so we didn't have any longer a differentiated product. The new GPS receiver that began shipping in October is a nicely improved product, and we continue to work on software, and so you will see enhancements coming from time to time. So we look to, even in these competitive areas, continue to supply a differentiated product, with a lot of emphasis on the software.

Brian Stall (ph), Westrock Advisors.

I wonder if you could make any projections on expense growth in 2005, as you roll out these new products. And if I can ask a second question, could you comment on the start of '05?

Yes, sure. Expense growth won't change dramatically as we roll out new products, because we have a highly leveraged distribution mechanism, and we are selling everything through two-tier distribution. So we pay for the management of the distribution channel, which is somewhat independent of the actual volume that flows through it. And if you look at our historical expense numbers, you will see that the growth in expenses is reasonably small, but also somewhat independent of our revenue. And you can go back to 2001, when we were a $12 million company and our expenses were around 13 million, and you go forward to 2004 and our expenses were 13 million on a revenue of 26.1. So we are highly leveraged, and we don't expect there to be significant changes in the cost of distributing our product.

But in general, Brian, I think we'll look at moderate increases. Generally, we expect our expenses to hold at about a 10 percent or less growth rate in 2005 over 2004. And we have some discretion, so that if we find that revenues are not growing as rapidly as we would like to see them grow, we can hold back on some of those expenses, particularly in terms of adding people or in the levels of discretionary spending that we do. But in general, you'll see R&D and sales and marketing expenses moving up. We do expect general and administrative expenses, except in the first quarter for 2005, to be down because of the absence of the litigation costs that we had last year.

In terms of revenue, one of the reasons that we don't provide financial forecasts is that, if I look at the quarters and I divide them into the particular months, we can have as much as 48 percent of our revenue in the last month of a given quarter. I would say we are off to a reasonable start. I think that we are on track for a good quarter, but we still have a lot of the quarter ahead of us. And generally, the last month of the quarter represents a number north of 40 percent of the entire quarter. So it's deal-driven. I think we have a good history of closing these deals. I think we were surprised in Q3, when we didn't close some deals. So I would say we are comfortable with the quarter to date.

And at this time, there are no further questions. I would like to turn the conference back to Kevin Mills for any concluding comments. Please go ahead.

Thank you. Overall, 2004 was a very good year for Socket. We were able to report four consecutive quarters of profitability, with an annual profit of $288,000, an excellent improvement from the 1.9 million loss we reported in 2003. We believe 2005 will be another good year for Socket, where we can drive our revenue from an improved and more stable pocket PC base, and where we have the opportunity to expand the reach of our products supporting Symbian, RIM, Palm and Tablet XP devices.

Finally, I would like to thank our employees and our shareholders for their continued support and everyone for participating in today's call. And I'd like to wish you all a very good day. Thank you.

Ladies and gentlemen, that concludes the Socket Communications fourth-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 303-590-3000, giving passcode 11024224#. Thank you again for your participation on today's conference, and you may now disconnect.