Socket Mobile Inc (SCKT) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Socket Communications, Inc. first quarter fiscal year 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jim Byers of MKR Group. Thank you, Mr. Byers, you may begin.

Thank you, operator, and good afternoon, everyone. Welcome to today’s Socket Communications conference call to discuss financial results for its 2006 first quarter ended March 31, 2006. Shortly after the close of market today, Socket distributed its earnings release over the wire and by e-mail to those who have requested such distribution. Socket has also posted their earnings release on their website at www.socketcom.com. In addition, a replay of today’s call will be available at vcall.com shortly after the conclusion of this conference call. And, a transcript of the call will be posted on Socket’s website by Friday. We have also included dial-in numbers in the press release for those wishing to replay this conference call by phone. The phone replays will be available for a week.

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 and Exchange Act of 1934, as amended. Such forward-looking statements include but are not limited to statements indicating a positive outlook for our business; statements predicting trends and opportunities in the markets in which we sell our products, including the anticipated completion of the market transition to the Windows mobile 5.0 operating system and other market opportunities and trends tied to the introduction of third-party products, such as the Windows mobile 5.0 operating system and mobile handheld devices; and statements forecasting market acceptance of and demand for our 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 that market trends and opportunities such as the anticipated completion of the market transition to the Windows mobile 5.0 operating system may not materialize as quickly or as robustly as we anticipate, if at all; the risk of delays in our ability to design, manufacture and market new products due to technological, market or financial factors, including the availability of necessary working capital; and risks related to 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; product delays associated with new model introductions at 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 Socket management. Online today are Kevin Mills, President and Chief Executive Officer, and Dave Dunlap, Chief Financial Officer. At this time, I will now turn the call over to Kevin Mills.

Thank you, Jim. On today’s call, I will focus the majority of my remarks on the mobile computing market, its evolution, and the opportunity for Socket. But, first, I would like to begin with a few comments on Q1.

Q1 was very much in line with the expectations we outlined in our last call on February 14. We expected Q1 to be soft from a revenue point of view due to the continuing mobile device market issues we described that are associated with the transition to Windows mobile 5.0. On the last call, we mentioned these issues would affect Q1’s revenue, as there wasn’t sufficient time for many companies to port, qualify and recertify their solutions during the quarter. As expected, Q1 started slowly but continued to strengthen on a monthly basis, as more and more of these transition issues continue to get resolved. We expect this improving trend to continue over the coming quarters until all the transition issues are fully resolved. Obviously, we are pleased to generate record quality revenues, up $6.8 million, despite the ongoing transitional issues. The stronger revenue performance gives us some reassurance that we are getting past the recent mobile device operating system transitional issues. It also suggests that on a going-forward basis, there are good reasons for optimism about the long term growth of the Company. Dave Dunlap, Socket’s Chief Financial Officer, will discuss the financial results for Q1 in greater detail in a few minutes.

I would now like to discuss the mobile computing market business dynamics and how they will impact Socket going forward. I’ll start with the ever-changing mobile computing market. The mobile computing market continues to evolve. Right now, it seems more confusing than ever, as terms like smart phones, enhanced smart phones, connected PDAs and PDAs are used interchangeably and arbitrarily in different contexts. We believe the market is finally beginning to provide companies with the mobile computing devices they need to deploy mobile applications. Socket’s growth will come from the deployment of all these devices. Let me explain.

In 2006, it is estimated by Gartner that there will be a total of 829 million mobile phones sold worldwide. The vast majority of these, about 71% or 509 million, will be enhanced mobile phones. These are phones that have features like cameras, calendars, music players, and that are sometimes referred to as smart phones. There will also be about 206 million basic phones, or about 25% of the market, which are used just for voice calls. There is a final group of about 4%, or 32 million mobile phone devices, that fall into a category of enhanced smart phones and connected PDAs. Even though the relative number of these devices is small in the mobile phone world, 32 million is actually a very big number. The enhanced smart phones and connected PDAs is where Socket’s broad family of products have enormous value. This smaller section of the mobile phone market is becoming an important part of the market we serve.

The reason for all the confusion in the marketplace is the variety of devices and the terminology that is used to describe them. In one article, the Treo will be described as a smart phone and grouped with other smart phones, and the article may mention numbers, like the 509 million smart phone devices. In the next article, the Treo will be described as an enhanced smart phone or connected PDA, and the article mentions the 32 million enhanced smart phones and connected PDA market. Therefore, it is very difficult to characterize the size and relevance of the mobile computing market and the opportunity for Socket.

The essential characteristics of the enhanced smart phone or connected PDA is that these devices can run business applications and can be used to increase the productivity of mobile workers. Socket refers to this category of the mobile phone market as mobile application devices, or MAD, for short. This includes the Palm 700W; HP’s smart phone, like the HP 6950; and a number of connected PDAs, like the iMates or [inaudible]; and a number of house-branded PDAs offered by mobile phone operators like T-Mobile, Cingular and Vodafone, to name a few. The bottom line is that there is an increasing number of mobile application devices available in the market, and this category within the overall mobile phone market is expected to grow at a compounded annual growth rate of 60% over the next few years. This relatively new category of mobile application devices is additive to the traditional non-cellular connected PDA market, which remains as a market of about 10 million devices, of which 6 million run the Windows mobile operating system. The traditional PDA market is expected to grow slowly, at around 5% compounded annual growth rate in the next few years.

Today, over 90% of these mobile application devices and traditional PDAs have Bluetooth installed at the factory at the time of production, which is an ideal way to connect peripherals like Socket’s cordless scanners. Many of these mobile application devices and traditional PDAs have SD slots, like the Palm Treo. Again, these slots can be used to connect products like Socket’s SD scanners or SD wireless LAN cards. A reasonable number of the traditional PDAs support compact flash interfaces like the HP and Dell PDA products.

From Socket’s perspective, we believe the available market for our data collection and connectivity products will increase substantially over the coming years, and Socket will continue to remain agnostic to the connection method used to expand mobile devices. We continue to be happy supporting customers with our Bluetooth, our plug-in peripheral products, and are also happy to work with both the traditional PDA and a mobile application device that runs Windows mobile. We support them equally. We have no preference or favorites with regard to the host device. So, from a mobile device view of the world, the market is growing, and we are well positioned to participate in the mobile device growth. Available devices will be supplied by numerous manufacturers with built-in cordless connectivity and with expansion slots. These devices will be available in greater numbers than we’ve ever seen in the past. Our peripherals will be connectable to all these devices, so corporate customers will have more choices than ever before.

It has taken a long time for the mobile computing market to reach this level of maturity in terms of device numbers. The OS and product transitions have been, and to a limited extent continue to be, frustrating. However, when all is said and done, these transitions were needed to develop the mobile computing market to its current potential. Everyone needs to understand that the hardware platform provides the potential, but it’s the software applications that really drive the market. It’s the software applications that enable mobile workers to do their jobs more effectively and enable companies to realize the productivity gains that make it worthwhile to deploy mobile solutions. All of the 32 million mobile application devices and the 6 million Windows mobile-based, traditional PDAs will run business applications that companies need to increase the productivity of their mobile workers.

Socket’s focus will continue to be on the strategic vertical integrators, or SVIs, who are working with business customers and providing critical software applications. Our SVI program is designed to leverage software application developers who have industry-specific knowledge. These SVI partners are developing solutions which incorporate Socket’s broad family of data collection and connectivity solutions, which enables us to have the potential to continue to grow our revenues and increase our importance in the mobile computing market. At the end of Q1, Socket had more than 80 SVI partners, who are actively working on or deploying mobile solutions. These solutions take time to develop, test, and field trial. This solution-oriented focus and commitment from our SVI partners is building a foundation of revenue-generating business that will continue to be leveraged over time.

We are seeing the largest number of SVI solutions in the area of sales and field service, healthcare, professional service, manufacturing, and warehouse management. These applications include medication-dispensing applications, order-taking applications, inventory and sales-related information, inventory management, and merchandising applications, to name a few. These enterprise opportunities align well with the market research we have received from Gartner. It is interesting to note that mobility solutions are for the first time in the top three concerns of IT professionals, according to a recent survey.

Today, there are 650 million workers who fall into the mobile worker category, a number that is expected to increase to 850 million worldwide before the end of the decade. Today, a very small percentage of these workers have access to mobile e-mail, let alone business applications. In fact, less than 10% of mobile workers have access to e-mail when they are mobile. We believe that this reflects how nascent this mobile computing market really is and the growth potential. With our Socket-branded data collection and connectivity products, the small to medium business segment of the market is our area of greatest strength. The small to medium business segment is a very large sector, and it comprises of many companies that lack the purchasing power to have dedicated mobile computing devices developed for their specific applications. We believe this segment would be serviced by [inaudible] applications running on reasonably standard hardware platforms taking advantage of peripherals such as Socket’s products.

We believe our market sweet spot is for opportunities between 200 and 1,500 units in a deployment. These deployments will be comprised of standard mobile computing devices from manufacturers like Dell, HP, Palm, or T-Mobile. These devices may be acquired from a telco operator through two-tier distribution or direct from the manufacturer, depending on their sales channel strategy. Applications will be built by combining customer or industry-specific software with peripherals from Socket for data collection and connectivity. Our sales channels are well trained to support and cost effectively deliver such solutions. This is not to say we will not get deals greater than 1,500 units. We have deployed solutions greater than 1,500 units in the past, and we will have larger deals again in the future. What we are emphasizing is that the model and structure for delivering solutions in the 200- to 1,500-unit range is ideal for Socket. We believe Socket has the right business model and products to deliver and grow revenues in the mobile marketplace for opportunities in the small and medium business categories, and we have unique strengths we believe will ensure long term sustainable growth in our business.

We believe larger organizations like the FedEx and Wal-Marts of the world have the volume and requirements to need more ruggedized or dedicated devices and will continue to get devices from Intermec and/or Symbol. Socket is also participating in these opportunities via our embedded Bluetooth modules that we currently supply to vertical application device manufacturers like Intermec handheld products and, to a lesser extent, Symbol. We plan to introduce wireless LAN embedded modules in the second half of this year, which will be targeted at those same customers. We also now have products, like our cordless ring scanner, that are more suited to these larger, more traditional auto ID opportunities. That can be used in connection with these more ruggedized or dedicated devices.

So, in conclusion, we believe the mobile computing market continues to evolve. The combination of improved hardware and a more robust and full-featured operating system from Microsoft have put the elements in place to service the mobile computing markets. It’s been a difficult market over the past eight quarters, as the industry moved through the many changes that were needed to get the right combination of elements to enable the market to grow. Today, we are still impacted by these transitions, and we expect to continue to be impacted during Q2 but to a lesser extent than Q1. We are seeing software applications being developed in greater numbers, and, overall, we feel the mobile computing market is still very nascent. We are optimistic that the market will develop strongly in the second half of the year and that Socket can play an important role in this market, giving us the opportunity for long term growth going forward.

I would now like to turn the call over to Dave Dunlap, Socket’s Chief Financial Officer, to discuss our Q1 results.

Thank you, Kevin. As Kevin has noted, the pace of business for Socket began accelerating in the last month of the first quarter as pocket PC transitions have been completing for some customers, from sales involving mobile devices not using Windows mobile 5.0, and from growth in our OEM business, which is not impacted by the pace of pocket PC transitions.

Our revenue for the first quarter was $6,759,000, a record revenue level just slightly ahead of our previous record revenue quarter in the first quarter of 2004. Revenue grew 13% over the first quarter a year ago and grew 14% over revenue from the previous quarter.

Our largest revenue growth driver in the first quarter was our OEM business. Socket is a major supplier of embedded Bluetooth modules for industrialized, ruggedized PDAs, and this business grew by more than $500,000, or 54%, over the fourth quarter of 2005 and by more than $600,000 over the first quarter a year ago as our customers increase the pace of ruggedized, industrialized PDA deployments. As a result, our OEM business represented 22% of our first quarter revenue. We believe that these higher revenue levels for our OEM business are sustainable in the second quarter and should grow further as we introduce embedded WiLAN modules in the second half of this year.

Our second largest growth driver was revenue from our data collection product family, which grew 17% over the fourth and first quarters of last year and represented 37% of our first quarter revenue. Much of the growth came from our plug-in barcode scanners, including our compact flash linear and 2D barcode scanners and our SDIO barcode scanner. Many of these orders were for use with mobile computing devices other than pocket PCs. In addition, the quarter included the first sales of our newest barcode scanning product, the wearable ring scanner. We look to the wearable ring scanner as a major revenue growth driver in the second half of this year.

Our connectivity product family represented 30% of our first quarter revenue, flat with the fourth quarter and down 5% from the first quarter of last year. Part of the decline was due to a delay in our own product transitions from wireless LAN 802.11b to 802.11g cards, which are being completed in the second quarter; and part was due to pocket PC transition delays.

Our legacy serial card family, which primarily serves the notebook market, represented 11% of our revenue in the first quarter. Our margins from this legacy product are excellent, but over time the need for serial connections is being replaced by USB technology; and we expect this product family to continue a slow decline.

Our backlog of orders coming into the second quarter reflects the normal ordering patterns of our customers and was about $1.2 million. April has continued at the robust order pace we experienced in March, and we are seeing the strengthening pre-sales activities that typically precede enterprise deployments. We are returning to more normal conditions in the pocket PC markets, and we expect continued growth from both the activities of our strategic vertical integrators and our new products, with the growth getting stronger in the second half of this year. We continue to sound a note of near-term caution, however, since pocket PC transitions are continuing to delay deployments for certain categories of customers; and these delays, although decreasing, will continue to slow customer deployments for at least the second quarter.

During the first quarter, we achieved our target gross margin of 50%. Our first quarter operating expenses increased by $325,000, or about $0.01 per share, over the first quarter a year ago, which coincidentally is the exact amount we expensed for stock options as required by Financial Accounting Standard 123-R beginning with the first quarter of 2006. Option expense was allocated as compensation expense between operations, about $24,000; research and development, about $95,000; sales and marketing, $133,000; and general and administrative expense, $73,000. Otherwise, expenses were similar to the first quarter a year ago. The first quarter is our most expensive quarter because they include the audit costs for the audits of both our financial statements and our internal controls, along with the costs of our shareholder mailings. We expect our operating expenses in the second and third quarters to be less than but close to the first quarter expense level due to scheduled salary increases for employees, a busy engineering development schedule, and planned increases in our sales and marketing activities.

Our engineering activities in the second quarter include completion of the conversion of our products to remove certain substances deemed hazardous by the European Reduction of Hazardous Substances Act, and the release of our wireless LAN 802.11g, compact flash, and SCIO cards.

Our loss applicable to common stockholders of $380,000, or $0.01 per share, included the $325,000 of stock option expense, which is added back to equity, and our final series of preferred stock dividend of $11,000. So, operating results were close to break-even levels. Our series F preferred stock converted into common stock on March 21, 2006. At the end of the quarter, we had 31.5 million common shares outstanding.

Our balance sheet remains strong. Our current ratio is 1.7:1. We have equity of $17.1 million and no long term debt. Our cash increased during the quarter by $650,000, or approximately 10%, to $7,485,000. Our sources of cash included $368,000 from the exercise of warrants and options and increased end-of-quarter borrowings of $439,000 on our bank line, available because of our higher end-of-quarter receivables balances. Operations generated $140,000 in cash, including working capital changes, which were neutral despite our growth. We used cash of $290,000, including $265,000 for tooling and equipment as we paid for tooling for new products, such as our cordless ring scanner.

In the corporate governance area, we continue to comply with the rules and the spirit of Sarbanes-Oxley in ensuring that the Company’s governance procedures are in full compliance with the Act. We successfully completed the second audit of our internal controls and received an unqualified opinion from our auditors. We continue to focus on improving the quality of our internal controls as we build and maintain the corporate infrastructure needed to support future growth. Our annual meeting of stockholders was held at Socket’s offices in Newark, California on April 19. All directors were re-elected, and the selection by Socket’s board of the independent public accounting firm of Moss Adams to continue as our auditors for the year ending December 31, 2006 was ratified. Results have been published on our website.

A transcript of this call will be posted on our website by Friday. Our next financial conference is May 9, where we will be presenting at the American Electronics Association Microcap Conference in Monterrey. We plan to webcast our presentation at one of the afternoon sessions.

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

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of Mr. Dick [Syracuso] of Merrill Lynch. Please proceed with your question.

Hi, David and Kevin. Nice quarter. A couple of questions. If the transition delays in the second quarter are going to decline-- even though they exist, are going to decline from the first quarter, can we expect that the revenue increase would be greater than the 13% experienced in the first quarter?

Again, it’s very difficult to pin it down to a percentage. I think the market is returning to what we might call stability, and we are seeing the deals coming in. I would just say that I think we’re feeling more confident [inaudible] seeing the deals. Whether it be plus 6% or plus 20%, we obviously don’t know, and therefore I don’t want to put a number on there.

Okay. Now, secondly, in that so-called sweet spot area, the 200- to 1,500-unit deployments, are you the dominant player in that sector?

We believe we are. I think that this sector has historically not been serviced well because the devices didn’t exist. What we’re finding is a lot of people who didn’t use data collection or bar coding because they didn’t have the financial strength to deploy the more expensive Intermec or Symbol solutions and didn’t have the IT support to deploy them are now having the opportunity to support the mobile workers with what we might consider to be more off-the-shelf solutions. So, in many ways, it’s a new category. But I think that, yes, we’re probably the dominant supplier in that category right now; and we expect that category to grow.

Okay. Last question, and this is probably difficult to answer. I’m not fully understanding of the technology. But, you referred to this transition that’s been going on for the past eight quarters that’s been difficult but evolving. Can you quantify this transition as far as how much of it is completed? Are we 80% there? Overall.

Overall, I would actually say we’re 90% there. I think that for us the transitions-- At the end of the day, you’ll be able to have an application run on a connected PDA, whether you buy it from T-Mobile, from Palm, or a PDA that you buy from Dell. It will be a pretty homogeneous environment, and people will be able to pick and choose the device that meets their requirements. It’s taken a while to get there, both from a hardware point of view and a software point of view. It’s taken longer and been more frustrating than everyone would like, but I would say we’re 90% there in terms of the overall time. We should see the market returning to what we would consider to be normal operating levels, certainly by, I would say, the summer.

Okay. One last question, and I’ll turn it over to somebody else. On the strategically vertical integrated partners, on the 80 some-odd that you have, have any rolled out product?

I would say not in significant numbers. I mean, we are highlighting in our press releases some of the applications. We’ve seen some nice ones with Palm. I think we highlighted [Sure Express] and a few others. But, I still think this is pretty early because a lot of these companies didn’t have the opportunity to use bar coding as a way of, I would say, improving their process until the other elements came into place. So, we’re just at the front end of it.

Okay, so that’s all ahead of us.

Yes. I would hope so. Yes.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Thank you. Our next question comes from Mr. Brian Swift with Securities Research Associates. Please proceed with your question.

Yes. I apologize. I’ve been involved in something, and I only kind of tuned in late on your conference call. I presume that you continue to have some success with your newly released products. I’m wondering whether since you’re competing a bit with Intermec and Symbol in this area, are you seeing any fallout from some of the business that you historically have kind of done with them?

The short answer to this, Brian, is no. I think that the ring scanner is actually quite complementary to what Symbol and Intermec have, and we’re seeing a number of opportunities in conjunction with Symbol and Intermec for the ring scanner. So, I would say, overall, it’s very much viewed as an accessory or complementary product to the ruggedized PDAs that they have been deploying and continue to deploy. As regards our, I would say, competition, what we’re finding and what we explained on the conference call is that we’re seeing some separation in the markets for small and medium business. They really don’t have the option to go to Intermec or Symbol because of the cost and, probably more important, the IT infrastructure required to deploy such solutions. So, as a result, they use pretty standard devices, whether they come from HP or Dell or even T-Mobile at this stage, and then add our accessories and add custom software to meet their needs. So, we are seeing some separation. I think that we are becoming quite strong in servicing the small and medium business, and that’s an area that historically hasn’t been serviced. So, I don’t think we’re seeing any overlap or any heartburn on the part of Symbol or Intermec because of the products we’re bringing to market. I think we’re ending up servicing portions of the market that they have been unable to service. In the end, our products turn out to be good for the market in general, and particularly for the Symbols and Intermecs because it drives more people into using bar coding as a process improvement mechanism.

Okay. I did hear your answer in one of your last caller’s questions that you didn’t really want to get pinned down for any kind of growth rates for the current quarter. What was your outlook as far as like the year-- year over year? Did you make any comments in that regard?

We didn’t make any comments, but I think that we’re feeling that the market is stabilizing and that we are optimistic about the future. I think we’re seeing an increased level of activity. So, overall, I think we’re feeling pretty good for the year, but we haven’t put a number out there per se.

Brian, this is Dave. One of the comments I did make perhaps before you joined was that our increase-- We’re seeing substantial increases month over month with March being quite strong. Typically, we do 40% of our revenue in the third month of the quarter. Actually, we’re stronger than that this last quarter. And, April is continuing at the pace that we found that we saw in March. So, that’s a good indicator that if our pattern continues as we traditionally see, that we certainly are getting a good start in the second quarter. If it keeps up, we’ll have a good growth quarter.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. At this time, there are no further questions. I’d like to turn the call back over to management.

Thank you very much. I would just like to close by thanking you for participating in our conference call today. I’ll remind you that Dave and I will be presenting at the AEA conference in Monterrey in May and that our conference will be webcasted and to wish everyone a pleasant day. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time.