Socket Mobile Inc (SCKT) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. And thank you for dialing-in for the presentation and listening to the Socket Communications, Inc. second quarter management conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. [Operator Instructions] As a reminder, today's conference is being recorded Thursday, July 21, 2005. At this time, I would like to turn the presentation over to Tatia Meghdadi. Please go ahead.

Thank you, good afternoon, and welcome to the quarterly conference call for Socket Communications for their second quarter ending June 30, 2005. 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 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 for this call will be posted on socket's website on Friday. We also posted replay numbers in our press release, for those wishing to replay this conference call by phone. The phone 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, expectations 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, 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 handheld computer hardware and software, the integration of our products and third party hardware and software solution.

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, 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 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.

Thank you. Overall, we are reasonably happy with our Q2 results. We're very pleased with our level of profitability in Q2. We achieved this record profitability with a combination of revenue growth, an increase of 10% over the previous quarter and lower expenses, a reduction of 11% over the previous quarter. This combination enable us to achieve record profit levels in Q2, an overall improvement in operating results of over 600,000 over the previous quarter's results.

Our revenue growth of 10% over Q1 was a particularly good achievement when you factor in that we still had turbulence in our market due to the transitional issues associated with Pocket PC model transition. Socket has been impacted by some performance and reliability issues outside of our control, with the recently introduced Pocket PCs, in particularly, some of the higher volume models from HP.

As we explained in our last call in April, the issues and problems have already been identified and corrective actions have been taken. And we expect HP to release their updated ROM for the HP 2000 series by May 15. We felt that a May 15 date gave us enough time to seek customer deploying solutions in Q2 with our products. Unfortunately, this simply did not happen as expected. The updated ROM was released by HP in late June, over a month later than expected. We are happy that it was released, and the releases seem to fix all known issues. But it was too late to provide any revenue benefits in Q2.

The revenue results that we achieved are more positive when you factor in the understanding that one of the market's leading handheld providers was experiencing difficulty with one of its mainstream products. Now the updated ROMs are in the market, we expect we'll see the benefits from these improved ROMs before the end of the summer. A typical business enterprise approval cycle we see as six weeks for customers to test and approve device updates or changes. We expect in this case due to the summer vacations and the general slower pace of business over the summer months that may take a little longer.

On the expense side, Socket did an excellent job of managing its expenses in Q2. I'm very pleased that in the second quarter, we were able to lower expenses by 11.5% over the previous quarter. The benefits we receive by not having any significant audit expenses in Q2 helped greatly in lowering our expenses. But even excluding those costs, our expenses were lower than Q1 and they were lower than our Q2 expenses a year ago. So we continue to demonstrate our tight expense controls.

The combination of revenue growth and expense controls allowed us to report record profit levels. $0.01 per share isn't a loss but it is a step in the right direction and it's a huge improvement from Q1. In today's call, I would like to outline some of the dynamics of the business and how we see things progressing going forward. Overall, we remain optimistic about the business and we continue to see good growth ahead. Bar code scanning remains our largest product category representing 42% of our revenue in Q2 and 40% of our business for the first 6 months of the year.

Bar code scanning business continues to be driven by software developed by our large community of bars and integrators. In Q2, we announced that we now have 36 strategic vertical integrators or SBIs who are actively selling our bar code scanning products and in many cases connectivity products as a component of their overall mobile solution. SBIs typically have industry expertise and generally deliver a complete solution to their area of expertise that includes handheld, industry-specific software and software products. The mobile solutions delivered by our SBIs encompass a number of different areas with retail merchandising, sales force automation and field service and automotive being our three strongest categories today.

As a result of our work with the SBIs, we continue to better understand the delivery of solutions for mobile workers and we continue to see the number of available opportunities and our order pipeline growth for these types of mobile solutions. We have built and continued to build our SBI channel. It has grown modestly over the last few quarters. With the handheld product transitions effectively behind us, we are convinced that now is the time to increase our investments in this area and grow our SBI channel more aggressively. This will allow us to grow our revenues more aggressively going forward.

As you hopefully have noticed, we have increased our PR activities focused on success stories being developed and delivered by our SBIs over the last few months. In Q3, we also added additional resources to our SBI sales and management team in order to take advantage of this important sales channel. And finally, we also will be increasing our marketing funds targeted at this revenue-generating solution-oriented community. We encourage everyone not to get too excited since there is a reasonable time lag between working with and supporting an SBI and the first revenue associated with these efforts.

However, we feel that even with Q3 being a seasonally weak quarter, we need to commit these additional resources now if we expect our SBIs to assist us in returning to our historical revenue growth rates going forward. In addition to being more aggressive with our SBI outreach programs beginning in Q3, we also will be adding some new products in this category during the third quarter. We will be adding our combination bar code scanning and RFID product, which is a single CompactFlash device that incorporates both the laser-based bar code reader and a RFID reader within a single housing. This product addresses a need some of our SBIs are experiencing, namely that certain items are being tracked or controlled. Particularly higher ticket items or reusable items using RFID, but these are mixed with many items that are simply bar coded. This combination CompactFlash, bar code and RFID addresses this needs and provides a basis for a solution that's able to read both types of identification markings.

The best example of this I can give you is the medicine dispensing application in the hospital environment, which is viewable from our website, and we discussed in our last call. Currently in this medication dispensing application, everything in the system is controlled with bar codes. The nurses scan the patient, and the medication, then the system determines that it's the right medication at the right time.

However, there are three items, namely the patient, the nurse and the IV solutions where RFID tags provide a much better marking solution. The bar code on the patient's wrist can be very difficult to read if labeled with a bar code and often the band has to be rotated or moved before a good scan can be achieved. This is especially difficult if the patient is groggy, resting, or incapacitated. An RFID tag embedded in the wristband is a much easier and more productive solution, and as the number of patients are small, the additional cost of the RFID tags are acceptable.

In addition, the nurses need to log in a number of times during the day. Currently, this is done with a sign-in and password mechanism. However, they would much prefer to use an RFID-based access card as an accurate and reliable way to log on to the system. Finally, IV medications are complicated and expensive, and an RFID tag is much better suited for this application than a bar code. Our combination product, which will be supported by our very popular and extensive software developers software scan will enable us to meet these unique SBI requirements and substantially improve the solution for our customers.

For the cordless scanner, a product that exceeded our expectations in Q2 we'll add two new members to the family. First, an entry-level cordless scanner called 70, which addresses a segment of the market that requires a less sophisticated bar code scanner. This are segments we certainly do not service in the cordless area but which we do address with our plug-in, CompactFlash and SD scanners. This lower price point bar code scanner should allow us to address a big segment of the cordless scanner market.

Secondly, we'll be introducing a rubberized version of our cordless hand scanner. Our cordless hand scanners are being used in more industrial and outdoor applications, and therefore we need to provide a product that can be used in these environments. The new version will be better suited to harsh and outdoor environments where the device may be exposed to rain and an occasional drop on to concrete. We expect this product to be available in the latter part of Q3. These new products, cordless products, will all be supported via our software developer kits, our SCK's, so our SBIs will be able to include these new products in both existing and new solutions almost immediately.

In Q2, we launched our scanning STK for the Symbian (ph) and we already have some Nokia based business in the Nordic countries. This is very nice and we expect this business will add to our growth going forward. We remain on track to deliver an add an STK for the BlackBerry from rim in Q3 this. This will enable us to add scanning capabilities to Bluetooth rim devices, which adds to our markets and helps maintain our growth in the business.

Overall, we feel pretty good about the scanning business and we intend to invest more aggressively in this area in Q3. So that we can accelerate our long-term growth in this business segment. Our connectivity which represents 30% of our revenue in Q2 performed as expected. We saw our revenues increase slightly over Q1 levels, with ethernet being the highlights, as one of our large customers were traditionally deployed our scanner with modems to their work force, switched to our ethernet solution for connectivity, speed and convenience.

Our Bluetooth business remained strong during Q2 and we continue to see our industrial and embedded customers being the dominant customers for these plug-in cards. Our Wi-Fi business performed as expected, and we continue to transition the hardware portion of this business away from the consumer where increasingly Wi-Fi is being built into devices. Towards the industrial or OEM-type customer who needs a turnkey solution.

In Q2, we did introduce our first standalone software product in the Wi-Fi category, the Wi-Fi companion, which continues to get excellent reviews and recognition. We expect the software product, which is bundled with our hardware, as well as offered as a stand alone product will help us grow this business going forward. Our embedded KwikBlue modules and ASIC based sales which represented 12% of our business in Q2 was slightly down over Q1 revenue levels because of the timing of ASIC shipments. We expect this business will also grow in the second half of the year.

Our KwikBlue module shipments were at near record levels and overall Bluetooth connectivity represented the vast majority of the revenue in this category. As we continue to be driven by the many design wins we have secured. We did launch our KwikBlue 2.0 developers kit in Q2 and in addition to demonstrate our continued leadership in this category, it allows our customers the opportunity to upgrade the latest version of Bluetooth this. This allows us to better serve our existing customers as well as the market for embedded Bluetooth solutions. Finally, our legacy serial business was inline with expectations and remains relatively flat.

So in summary, Q2 was a solid quarter that saw us returning to 10% quarterly growth over the previous quarter and reporting record profits. We achieved these results in less than ideal conditions, as many problems we outlined with the ROM issues remained in place for the entire quarter. All of which are now behind us. As we look at Q3, we expect it to be another good quarter where we should be able to grow our revenues despite its seasonal weakness. But as always with Q3, much of our revenue is expected in September.

We also expect our expenses to grow in Q3 as we intend to invest in growing our SBI channels. Therefore, most of the benefit from the revenue growth will not drop to the bottom line as would be our normal situation, but will be absorbed by increased expenses. We believe the investments we will be making in Q3 will enable us to grow our business more aggressively in the fourth quarter and first quarter of '06, our traditionally strongest quarters. Our immediate goal for Q3 is to be equally profitable on higher revenue and for Q4 to be stronger from both the revenue and profitability point of view. We continue to see a great deal of opportunity and we continue to work hard to convert these opportunities into sales.

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

Thank you, Kevin. We are pleased to report a return to profitability in the second quarter with the company's largest ever quarterly profit of $246,000, or $0.01 per share. Revenue for the second quarter of $6.6 million was 10% higher than our revenue of $6 million in the first quarter. As Kevin noted, both Dell and Hewlett-Packard completed fixes to their Pocket PC operating system software during the quarter. Dell completed their updates in April and we experienced sequentially increasing business from Dell in April, May, and June. Hewlett-Packard did not complete their ROM update until the last week in June, too late to benefit the second quarter.

As a result, our revenue growth for the quarter continues to be below our expectations. However, now that their software is fixed, it will give a positive boost to the second half of this year. We maintained our gross margins and sales at our 50% target levels and reduced our operating expenses from the first quarter by more than $300,000, bringing our break-even point down to about $6.1 million. Our first quarter is traditionally our most expensive quarter as it includes audit costs and cost of participation in several major trade shows, including CBIT in Europe.

Second quarter revenue returns to the more normal patterns that we have experienced over the last several years. Bar code scanning products were 42% of sales, connectivity products were 34% of sales and serial embedded products were each at 12% of sales. Bar code scanning products were our largest contributor at our quarterly revenue growth and are expected to continue to be our fastest growing product family. Our Bluetooth cordless hand scanner, which we introduced last year increased by $500,000 over the first quarter. Hedging out our SDIO plug-in scanner for second place within our data collection product family. Our workhorse CompactFlash plug-in bar code scanner remains our largest-selling product.

On a regional basis, revenue growth was particularly strong internationally. With our international sales growing to 36% of total worldwide sales. Contributing to that growth were sales of our cordless hand scanners for use with smart phones, using the Symbian series 60 Operating System.

Our balance sheet further strengthened with our return to profitability, and with positive cash flow from operations. Our cash at June 30, 2005 was $6.5 million. Our current ratio, defined as current assets divided by current liabilities was 1.8 to 1 and we have no long-term debt. Our backlog at June 30, 2005 representing orders received by the end of the quarter that are shippable in the next quarter returned to more normal levels of $1.2 million.

As we look forward to the second half of this will year, we expect a continuation of revenue growth. Our third quarter is sometimes our seasonally weakest quarter because of the slowdown of corporate field trials and purchasing during the summer months. But the order pipeline build-up resulting from the Pocket PC transition delays is expected to overcome that weakness.

As Kevin has mentioned, our third quarter expenses are also expected to increase moderately across all of our departments as we staff up for the busy fall selling season and the opportunities presenting themselves with our strategic vertical integrator program. For the fourth quarter, we expect our bottom line to benefit from our highly leveraged business model. We have the infrastructure in place to manage our worldwide distribution channels and can move higher volumes of products through that channel without significantly increasing our expenses.

The combination of customers now able to move forward with their field trials with both Dell and Hewlett-Packard Pocket PCs, new products from Socket including our growing family of bar code scanning products, new platforms we now support, such as the Symbian Series 60 and Series 80 smartphones, and most importantly, new solutions from our expanding group of strategic vertical integrators are all expected to keep Socket on a growth path in the second half of this year.

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

Thank you, sir. Ladies and gentlemen at this time, we will begin the question and answer session. [Operator Instructions] Our first question comes from Steven Baskin (ph) with UBS Financial Services. Please, go ahead.

Hi, Dave. I noticed that there were some job postings, especially in the marketing and sales area and had a couple of questions about that. Are these positions filled? Did you have a lack of people in this area? Or are there -- is there just a function of greater need?

Well, I think the positions that we've been advertising are the ones that Kevin has been talking about in staffing up for and taking advantage of this strategic vertical integrator program. We did add one product manager, and we've also now hired two key management people that will be working directly in our selling activities. So I think you'll see some of those will come off of the listing very shortly. But those are the people that we've been talking about, adding a little bit of expense into the third quarter.

Very good. Thank you.

Thank you. Our next question comes from Mark Miller with William Blair & Company. Please go ahead.

Good job this quarter, guys. How you doing?

Good, Mark.

My only question was on the bar code scanners, you talked about how Dell had updated its ROM by, I think, it was by the end of last quarter, but HP didn't get around to it until just the end of Q2, is that correct?

That's correct. Yes.

And those are for the Pocket PCs, right?

Yes, you're correct.

Okay. And are those the two primary OEM platforms that you attach to?

Yeah. We would say that our revenue probably 70% of our entire revenue is attributable to Pocket PC-related activities. And that Dell and HP, between them, probably 80% of that market. So these are two very important guys, and when they're not firing on all cylinders, we definitely feel the impact.

Okay. Do you think that Dell and HP have about an equal share of that 80%? Or is it tilted more one way or the other?

Yeah, it's tilted -- I mean, HP is definitely the market leader and has been for quite some time. We would estimate, but these are just estimates, that HP share is probably twice that of Dell's today.

Okay. All right. Very good. That's all I have. Thanks a lot, you guys.

Thank you. [Operator Instructions] Mr. Mills, at this time, we appear to have no additional questions in the queue. If you would like to conclude with any comments, please feel free to make those at this time.

Thank you very much. In closing, I would just like to remind people that Q2 was a solid quarter where we saw our revenues returned at 10% quarterly growth over the previous quarter, and we did report record profit levels. And we achieved this in what we would consider to be a less than ideal environment where we still were experiencing problems, particularly with these ROM issues we've talked about for the last number of quarters. And now that these issues are behind us, we feel the job of growing our revenues will be easier, and we look forward to the next six months. Finally I would like to thank our employees for their continued hard work and dedication, and our shareholders for their patience and support. Thank you and have a good day.

Thank you, management. Ladies and gentlemen, at this time, we will conclude today's conference for Socket Communications, Inc., second quarter management conference call. We thank you for your participation on the presentation. If you would like to listen to a replay of this conference, please dial 1-800-405-2236 or 303-590-3000 with the access code of 11034714. Once again, ladies and gentlemen, if you would like to listen to the replay of today's presentation, please dial 1-800-405-2236 or 303-590-3000 with the access code of 11034714. We thank you for your participation on today's conference call. At this time, we will conclude. You may now disconnect and please have a pleasant day.