Socket Mobile Inc (SCKT) 2005 Q4 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Socket Communications Inc. fourth quarter fiscal year 2005 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host for this afternoon, Mr. Charles Messman of the MKR Group. Thank you, sir, you may begin.

Good afternoon and thank you for joining us today to discuss Socket's fourth quarter and 2005 financial results. I am Charles Messman of the MKR Group. With me today is Kevin Mills, Socket's Chief Executive Officer and David Dunlap, Socket's Chief Financial Officer.

Before I turn the call over to Kevin, let me begin with the necessary forward-looking statements. Let me remind you that certain portions of our comments today made about future outlook, expectations and plans and prospects of the Company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including factors discussed in our most recent quarterly report on Form 10-Q under the sections titled "Other Factors Affecting Future Operations."

Except where as required by law, we do not assume any obligation to update the forward-looking statements we make today. Also note that today's call is being recorded and webcast. A webcast replay will be accessible on our Web site at www.socket.com under the investor relations heading. In addition, a phone replay will also be available commencing approximately two hours after the call and for the following five business days. You may access the phone replay by dialing 877-660-6853 and entering the following pass code -- 286-188-004 and then pound. That said, I would now like to turn the call over to Kevin. Kevin?

Thanks, Charles. I would like to begin with a look at the year just ended December 31, 2005 and then focus the balance of my remarks on our outlook for 2006. Dave will follow within a detailed review of our 2005 financial results. We will then open up the call for questions.

For those that may be new to the Socket story, we are a leading supplier of data collection and connectivity solutions for the mobile computing market. Socket provides a broad array of data collection and connectivity products that enable mobile workers to increase their productivity by automating data collection via bar-code scanning and RFID and enabling electronic communication over various wires and wireless networks.

The mobile computing market continues to move towards wider adoption of productivity-enhancing electronic solutions to meet the increasing demand of business enterprise customers. This past year has proved challenging, however, because of the significant product transitions that have taken place in the mobile computing markets resulting in a delay in new product deployments.

Specifically, both Dell and Hewlett-Packard began 2005 transitioning to new pocket PC device models, resulting in a product shortage that lasted through the first half of the year. In the latter part of the year, we saw an operating system transition to Windows Mobile 5 that required enterprise-based applications to be rewritten.

The result for us was the need to requalify certain corporate customer opportunities as there were simply too many new and untested elements for them to get confident with prior to deployment of their mobile solutions. These transitions and rollout delays have not just affected Socket, they have impacted nearly everyone in the mobile corporate solutions business and most firms have essentially been operating under the equivalent of a caution flag.

While we are disappointed with the delays and negative impact on our ability to realize our sales and growth expectations this past year, the net effect is simply a delay in deployment of these new products to the mobile marketplace. While we cannot predict timing, we believe these transitions are moving towards resolution and once completed, business enterprises will once again focus on mobile computing markets for applications to improve efficiency and productivity.

Socket remains a dominant supplier of critical components for mobile enterprise solutions and market demand for our products has not diminished. The opportunity for enterprise-based solutions remains significant. As their transitions resolve, we remain well positioned for future growth and are optimistic about our prospects going forward.

Going forward, we believe the opportunity within the mobile computing market has never looked more promising or exciting. The transition issues just discussed are directly related to mobile product suppliers resolving issues in response to market demand, which will ultimately translate into growth.

To elaborate on these dynamics, over the past three years, the mobile computing market has been driven by a single mobile application, namely mobile e-mail. During that period, Win has provided the best mobile e-mail experience and has been able to capture much of the early market with their Push E-mail solution. As we start 2006, Microsoft and its partners can now deliver the same experience with its Windows Mobile 5 solution and Exchange Server, all of this at equivalent or lower cost and with little or no extra burden on customers using Microsoft Outlook and Exchange Server products.

The Palm Treo 700W smart phone running Microsoft's 5.0 is a perfect example of the market's response to corporate demand for both mobile e-mail solutions and additional productivity enhancing mobile applications. We're excited about this development as it opens new market opportunities to drive sales of Socket's supporting products. An example is the deployment Palm recently announced that [Sure Express], a parcel service delivery company, has deployed the new Palm Treo 700 with Socket's SD Scan Card, scan barcodes and capture signatures associated with deliveries. Sure Express's deployment of the Treo Socket solution accelerated its delivery process, cost billing and collection times to one day from 14 to 21 days, reduces errors and enables a more real-time environment for customers to track packages.

To further illustrate the changing competitive landscape, just a few years ago, the ability to remotely access e-mail was considered by corporate customers to be a unique competitive advantage. Now it has become a standard business tool that professionals would be a significant disadvantage without. Mobile [fresh nodes] with remote e-mail access are now increasingly demanding access to a growing list of additional corporate information and vital business applications, such as order status, inventory information, Customer Relationship Management. Socket's focus on products that increase productivity of mobile workers is firmly in step with this demand and with IT spending on running mobile applications on mobile devices.

Our growth will be driven by the increasing deployment of these mobile applications.

To fully capitalize on this opportunity, Socket has invested heavily into this past year to broaden our data collection product portfolio and further expand our SVI channel. For those not familiar, SVI stands for strategic vertical integrators, our partnerships with industry-specific indicators that serve corporate customers and encourage integration of Socket's products into third-party applications. We now have more than 70 SVIs and we expect to further grow that number this year.

We believe we are on the cusp of fully realizing the benefits of these long-term investments. Each of these SVIs provides lineup business solutions to enable mobile workers to electronically complete tasks traditionally done by pen and paper and electronically transmit that data directly into their corporate system. Each industry has unique requirements and regulations. Socket's SVI partners provide the industry-specific software applications and knowledge to ensure the process improves the efficiency of the mobile worker, enhances the overall process and provides an ROI to the company that invests in the solution. We stay in very close contact with our SVI partners as they are working on real-world market-driven opportunities and investing their resources in mobile solutions. The increase in dedicated and market-driven SVIs is a clear indication that sparked the market challenges and product transitions of 2005 (indiscernible) a significant opportunity ahead.

As we build our SVI base of developers, we are also expanding our product portfolio for data collection with unique and incredibly exciting products. Two significant products are the (indiscernible) cordless hand scanner, or CHS, and our recently announced cordless ring scanner, or CRS. Both use BlueTooth as their connection mechanisms and take advantage of Socket's BlueTooth expertise. Both products are targeted at the more traditional ruggedized handheld market associated with Symbol and Intermec.

We are also seeing opportunities for these products with our traditional Dell and HP devices. However, the near-term opportunities where we have integration already underway for these new products is in conjunction with Organize handheld devices in harsh environments.

The cordless ring scanner is truly a unique product that provides hands-free bar-code scanning, a requirement in many high-traffic logistic applications where workers are moving boxes or collecting and moving inventory requiring both hands. The need to efficiently collect and maintain accurate inventory data is indispensable to businesses in a multitude of industries. Automated methods like barcodes scanning and RFID readers are critical to the overall solution since the manual input of data is slow and error-prone.

The CRS is worn on the index finger, it is very light, weighing less than two ounces, and is made of liquid metal. Liquid metal is a material that is 2.5 times the strength of titanium. The battery -- the product's battery is housed on your forearm and connects via BlueTooth to your mobile computer. The product is unique in the market and allows the mobile worker to scan 10,000 times in a 10-hour period on a single charge. The ruggedized cordless hand scanner and cordless ring scanner positions Socket more in the industrial mobile computing market, which is substantially more stable than the Dell and HP-driven markets, and over time will provide a much more stable environment that will help us grow our revenues more consistently. These products will also reduce our dependency on pocket PC devices from Dell and HP, which is something we believe is in our best long-term interests.

Moving onto our other product lines, our connectivity business has been less impacted by these mobile computing market transitions. The connectivity layer tends to be more robust and more tightly integrated into the operating system. In 2006, we expect growth in this portion of our business to be primarily driven by our wireline products.

Turning to our OEM business, this has been dominated by our KwikBlue BlueTooth modules, which grew by 30% in 2005 as the design wins we have secured continued to be delivered into the market. We expect this trend to continue and we're confident we can increase our overall OEM business by replicating our BlueTooth success with a family of wireline cards and modules, coupled with our highly acclaimed Wi-Fi companion software. A number of existing OEM customers have expressed an interest in having Socket provide a turnkey wireline solution similar to the way we deliver BlueTooth solutions. We've built up our wireline expertise over the past 12 months and believe we are in an excellent position to service the wireline opportunity today for mobile devices.

In summary, 2005 was disappointing but for reasons largely outside of our control. We believe 2006 will be stronger as the transitional issues of 2005 are coming to an end. However, we believe Q1 may remain challenging as numerous software applications are still being converted to Windows Mobile 5. This continues to be a primary concern since bar-code scanning deals only become possible as the application is converted and a trial is approved.

Thankfully, there are no significant operating system upgrades expected in 2006 and there are no model changes expected by Dell and HP. The industry is also handling -- or also dealing with the European ROHS, a reduction of hazardous substances compliance issues, in the first half of the year, but we are hopeful that these issues are being successfully addressed by handheld manufacturers. Socket's products will comply with ROHS requirements well before the July deadline.

Despite these short-term issues, we continue to invest in our products and marketing programs to further build on our leadership position and ensure that we are solidly positioned to capitalize on the growth prospects for 2006. We anticipate the mobile market's growth will greatly benefit from the rollout of Palm and other products that are stable and suitable for corporate deployment in 2006. Socket expects to be an important part of these deployments in conjunction with our SVI partners.

In addition, in 2006, we are entering the more traditional industrial bar-code scanning markets with our ruggedized cordless hand scanner and cordless ring scanner. This is a significant new market opportunity that will also reduce our dependence of pocket PC devices from Dell and HP. We expect our new products, like the cordless hand scanner and the cordless ring scanner, to contribute to revenue in Q2. We also anticipate that our connectivity and OEM businesses will grow in 2006 as we strengthen our wireline offering and BlueTooth offerings.

In conclusion, we are confident that 2006 will be a growing and profitable year as stability returns to our market and enterprises turn greater attention to the mobile markets for their work force productivity and efficiency solutions.

I would now like to turn the call over to Dave Dunlap, Socket's Chief Financial Officer, for a more detailed review of our financial results.

Thank you, Kevin. Our revenue for 2005 of 25 million was our second-highest revenue total ever following our record 26.1 million of revenue in 2004. 2005 broke a consecutive year-over-year growth pattern dating back to the Company's founding in 1992. Our net loss of $0.01 per share, or $215,000 in 2005, was also the second-best bottom line in our history behind our first profit in 2004 of $288,000.

Kevin has described product transitions in the pocket PC market as the primary contributor to our revenue slowdown in 2005. For the years from 2001 through 2004, our annual revenue growth rate averaged 28%, reflecting underlying growth in the mobile device marketplace as enterprises increased their use of mobile bar-code scanning to capture and enter product information and as enterprises enabled their mobile workforce to communicate with the enterprise from the field via e-mail, phone and mobile phone networks, wireless LAN networks and over the Internet. This deployment was slowed in 2005 because of transitions in the pocket PC market space in the first half of 2005 to new models and in the second half of 2005 to the Windows Mobile 5 operating system while devices and applications were modified to work for the new models and the new operating system.

Our two loss quarters in 2005, the first and fourth quarters, were the quarters that followed the main parts of each of these pocket PC transitions. The largest impact of the sales slowdown in 2005 was with our data collection product family due to the long lead times needed by enterprises to qualify devices and applications. Data collection remained our largest product family in 2005 at 39% of our revenue, down from 40% in 2004. Our mobile connection product family increased from 32% of revenue in 2004 to 34% of revenue in 2005. Our OEM business helped steady as a percentage of revenue at 14% and our serial legacy businesses declined slightly from 14% in 2004 to 13% in 2005.

Our order backlog at the end of December representing orders in hand that are shippable in the following quarter was 1.2 million, which is the traditional level for the Company. We achieved our gross margin targets of 50% of revenue in each quarter of 2005 and we reduced our operating expenses moderately to 12.8 million in 2005 compared to 13.1 million in 2004 by shifting some of the savings from settling a patent infringement suit in the third quarter of 2004 to add resources in support of the growth of our Strategic Vertical Integrator Program and to support new product development. Our strategic vertical integrators are developing and will market third-party vertical applications in a number of application areas, including health care, field and sales force automation and asset management, including retail merchandising and automotive. And the number of partners which -- most of which are listed on Socket's site, now number over 70.

Most of those applications today involve data collection. We expect the number of partners to continue to grow and we will add more connectivity products to the program as we move through 2006.

Kevin also mentioned some of the significant new products delivered or announced from our engineering team. In response to customer demand, we have built a matrix of data collection bar-code scanning products measured by performance levels as E for entry level, M for mid-range, P for performance and XP for extreme performance in four series; series 3 for SDIO, series 5 for CompactFlash plug-ins, series 7 for BlueTooth enabled handheld bar-code scanners and series 9 for our newest BlueTooth ring scanner. Kevin mentioned particularly the ruggedized cordless hand scanner and the cordless ring scanner as enabling the Company to enter the industrial bar-code scanning markets. Our BlueTooth-enabled bar-code scanners have also allowed us to expand the mobile platforms we support, including Nokia's Series 60 and 80 SmartPhones and [RIM] Blackberries that are BlueTooth-enabled.

During 2005, we also added an RFID reader and a combination RFID reader and bar-code scanner in response to our vertical integrators' desire to utilize both technologies. We further expanded our data collection family with a CompactFlash magnetic stripe credit card reader to capture data from the magnetic stripes from drivers licenses, IDs and credit cards.

In our connectivity family, we completed and released our WiFi companion software for pocket PCs for detecting hot spots, setting up monitoring the connection, performing basic site management functions, viewing access points and determining the strength of a wireless connection. The software is designed to work with both built-in and plug-in wireless LAN connections.

We also introduced a new smaller SDIO Wi-Fi card and are now focused on upgrading our wireless LAN connectivity products from 802.11B to 802.11G, bringing faster speeds to wireless LAN connections. We also upgraded our modem technology to incorporate V.92 technology in our SDIO 56K modem, increasing the data throughput speed.

In our OEM business, we introduced second-generation BlueTooth modules with BlueTooth 2.0 plus enhanced data rate compliant as a Class 1 one device to extend the range to 300 feet. As Kevin mentioned, we're working on adding wireline modules in 2006 to our family of embedded OEM products.

Socket continues to have a very leveraged business model. Because most of our products, except for our OEM products, are distributed worldwide through general distribution, we are able to increase the volume of business going through this channel without needing to significantly increase the resources required to manage the channel. In a similar fashion, because we contract with well-established third-party contract manufacturers to build most of our product components, we are able to increase our volumes generally at a cost savings and without major capital investment. This is the pattern we have demonstrated over the past several years and we expect this model to continue to benefit our bottom line as we grow.

Our balance sheet remains strong with cash at the end of 2005 of $6.8 million, an increase of $900,000 over our cash balance of 5.9 million at the end of 2004. We generated $2.2 million in cash from operations in 2005, $500,000 from our net loss after adding back non-cash charges, such as amortization and depreciation, and $1.7 million from working capital changes, including reductions in inventory and receivables that reflected the slowing pace of business in the fourth quarter of 2005 and our ability to manage our assets in response to that slowdown. Our current ratio -- current assets compared to current liabilities -- was 1.8-to-1 at the end of both 2005 and 2004, which is a positive liquidity measurement.

For those of you who would like to hear more about Socket's products and programs, Kevin Mills and I are participating in the Security Research Associates Technology Conference being held tomorrow in San Francisco, with our presentation scheduled at 2:00 PM Pacific time. We will webcast an approximately 40 minute presentation. We will also be attending the America Electronics Association Microcap Conference in May.

I would like to also comment briefly on several additional areas of investor interest. First, Socket's annual meeting will be held at the Company in Newark, California in the San Francisco Bay area on Wednesday, April 19 at 9:00 AM. The record date for voting at the meeting is February 21 and we will be distributing proxy materials at our annual report on Form 10-K to all stockholders of record around the middle of March. All of Socket's present directors will be standing for reelection and we will also submit for stockholder vote the ratification of Moss Adams to serve as the Company's independent auditors in 2006.

Our audit of both our financial statements and our internal controls is nearing completion and we expect to receive an unqualified opinion from both audits.

Socket will adopt the provisions of Financial Accounting Standard 123(R), requiring the Company to expense stock options, beginning with the first quarter. The expense does not impact cash and we expect the effect on our earnings in 2006 will be approximately $0.02 per share for the year spread across four quarters, or about $0.005 per quarter.

Socket issued its Series F preferred stock in warrants to purchase stock as part of an equity financing that closed on March 21, 2003. The Series F preferred shares have been earning a dividend of 8% per year and are convertible into common stock at the option of the holder with a mandatory conversion to common stock on March 21, 2006. There are a total of 823,300 common shares remaining to be issued relating to this conversion, representing dilution of less than 3%.

In addition, there are warrants outstanding to purchase 332,859 shares of common stock at $0.72.2 per share that may be exercised by holders through March 21, 2006. For those of you who hold these instruments, we will be distributing instructions on conversion and exercise within the next week.

Finally, we were pleased to announce the formation of a technology advisory board to meet with management several times a year and to help us analyze the technologies used in our markets and our plans to continue to build innovative, mobility-friendly products that enhance mobile workforce productivity.

Now let me turn the conference over to our moderator for questions.

(Operator Instructions). Brian Swift, Security Research Associates.

I'm beginning to wonder if I'm going to live long enough for you guys to not have a wait until next with comment in your press releases. Can you give us any guidance as far as any kind of pipeline activity, any rumblings from customers or any signs that you are going to be coming out of this in the next --?

If we could convert all the activity into revenue, we would not be having these discussions. Essentially, we have seen tremendous pickup in the activity level, but we have also been hampered with the time it takes for these activities to turn into real sales. I think the management, like our investors, are tired of this situation where we are on the verge, but we cannot get across the line, and that has been very frustrating in 2005 because of the instability of the platforms.

I think that we're coming to the end of that process and we have seen no decline in the level of activity or interest. So we believe the deals are still there and the interest is still there and as the applications get converted and tested and we will seen the revenue that follows. I think as I mentioned in my comments, the quarter started a little bit weak, but we've seen it pick up week by week. But today, we're halfway through. So I think that overall, we're confident about the year and we're less confident about it being instantaneous as we have not seen this in the past.

Okay, thank you.

[Dick Siracusa], Advest Inc.

Kevin or David, on the SVIs, which you have 70 participants, when you look at '06 and you look at your [per tem] do you have any potential revenue expectations from these 70?

Yes, we have large potential revenues from these 70.

In '06?

In '06, absolutely. What we like particularly about the SVIs is that they are investing their energy as well as their expertise in conjunction with our products in solving these mobile market requirements so that we really have a good partnership here and they need to have revenue this year and we need to have revenue this year. So we're very well aligned. And I think it's something that we've been doing that we didn't formalize until maybe six months ago. We've continued to strengthen this. But all of our scanning deals come through sales in association with applications and we expect that to strengthen throughout the year as the platforms become stable and these problems are solved and solutions are rolled out.

Would SVI revenue be in addition to what Socket could generate on its own if there were no SVIs?

Yes, this would be in addition, yes. One of the things that we like about the SVIs is that we work a lot closer with them and we have more predictability over time with them than we did with our VARs and integrators because we did not have the good relationship to actually know when deals would close. It's always going to be difficult, but the more information you have, the less difficult it is.

And Dick, the depth and breadth of the SVI program, which you can see on our Website, is a great indicator of the maturing of the mobile handheld market space, because once you get to the point where a large number of applications are being written for specific vertical market areas, that is exactly what the enterprises need in order to bring these productivity-enhancing applications into their space. And we think that's still early in terms of its potential, but we have more than 70 SVIs currently either with applications being developed or coming into the market and we currently are generating some revenue from that program. And the maturing of that market with these applications, combined with the many new products, both the matrix of bar-code scanning products and then moving our sales into the more industrial barcode scanning space, and you combine that then with the completion of the transition processes, and all of those should be growth drivers for us as this transitioning comes to an end.

My second question regarding the ruggedized hand scanner and the ring scanner, which apparently are hotspots for you -- what are we talking about there? I have no idea what we're talking about; market size, for example. What is the market size for that?

Well on the cordless ring scanner, we believe that the market size is several hundred million dollars in that there was a similar product from similar technologies which is a ring scanner that connected to a writ computer, and they have been the only people servicing that market with a dedicated computer ring scanner. And over the last number of years, they have sold several hundred million dollars worth of product.

We believe with our solution where the ring scanner comes through a BlueTooth module and can talk to any device opens up the market and we are already getting very, very positive feedback from the market on that particular product. Now we are expecting to ship in March, but we do have probably 35, maybe even more -- maybe 50 units -- out at potential customer sites where they have done preliminary evaluations, and the feedback is very positive.

What's the price tag on it, on the ring scanner?

The recommended price is $1199, is the MSRP. We expect that by the time it gets into an end user's hand through our distribution channel, it will be somewhere under $1000.

Okay. And the ruggedized hand scanning market?

Again, we're not addressing the entire ruggedized hand scanning market. We're addressing our BlueTooth-enabled portion of this. Most -- they're all ruggedized scanners. To give you some indication, I believe that there are over 3 million pistol grip type scanners sold a year, and of those is a portion that are BlueTooth.

The only players in the market today would be Metrologic, Intermec and ourselves. And again, I think that our leverage because the same software tools will allow you to use the ring scanner or the ruggedized hand scanner, give us some unique ability to participate in this market.

Also, the use of cordless scanning using BlueTooth has been one of the bright spots even for us even during 2005. Overall, our scanning dropped by about 800 to almost -- about $800,000 year-over-year. But within that, our cordless hand scanner went up by $1.3 million. The drops were all in the plug-in scanning, which is where you need the pocket PCs in order to be able to have the full solution.

And also, the cordless scanners, we're also seeing some traction with tablet PCs and even situations where people are using them in conjunction with stationary computers where the person moves, but the stationary computer at your desktop remains in position.

Okay, thank you.

(Operator Instructions). Gentlemen, it appears that there are no further questions from our participants at this time.

Okay, well then I would like to conclude today's conference by thanking everyone for joining us and for the continued interest in Socket Communications. And Dave and myself look forward to speaking with you on our next conference call and we wish you a good day. Thank you.

Ladies and gentlemen, this concludes today's teleconference. We thank you for your participation and you may now disconnect your lines.