Socket Mobile Inc (SCKT) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Socket Communications Incorporated Third Quarter Fiscal Year 2006 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, Mr. Jim Buyers from the MKR Group. Thank you.

Mr. Buyers, you may begin.

Thank you, operator. Good afternoon and welcome to Socket's conference call to review financial results for the third quarter ended September 30th, 2006. On the line today are Kevin Mills, President and Chief Executive Officer of Socket; and Dave Dunlap, Chief Financial Officer.

Earlier today Socket distributed its earnings release over the wire service and has also posted the 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 completion of this call, and a transcript of this call will be posted on Socket's website by Friday. We've 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 one week.

Before we begin, I would like to remind everyone 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. Such forward-looking statements include, but are not limited to, statements indicating a positive outlook for our business and demand for our products and statements predicting trends and sales opportunities in the markets in which we sell 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 sales opportunities may not materialize in the fourth quarter of 2006 and beyond as anticipated; risk that our Strategic Vertical Integrator program may not be as successful as we anticipate; the risk that acceptance of our products in vertical application markets may not continue as anticipated and that anecdotal evidence of success in those markets may not be indicative of a trend; the risk of delays in our ability to design, manufacture, market and sell new products, due to technological, market or financial factors, including the availability of necessary working capital; risks related to our ability to effectively manage and contain our operating costs; risks related to the availability of announced handheld computer hardware and software, as well as 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; and other risks described in our most recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission.

So that said, I will now turn the call over to Kevin. Kevin?

In today's call, I will provide an update on the mobile computing market and the dynamics we expect to see in Q4 and into 2007. But first, I will begin with a few comments on Q3. While Q3 did not meet our expectation, it's important to understand the dynamic behind the lower than expected number, and that reflects a drop in revenue from one sales channel that we consider a one-time event.

Despite the lower numbers, the rest of our business remained strong and there were many positives in the quarter. First, I would like to address why our number was lower than we expected. For the past eight quarters, Dell has been our largest reseller, representing $1.2 million in sales of our products in the second quarter. In Q3, we saw this number drop significantly to $400,000. This sudden decline of $800,000 from this one channel is the primary reason behind our lower than unexpected results in Q3.

The impact to Socket was that our sales of CompactFlash scanners, CompactFlash Ethernet and CompactFlash modem, associated with the Dell Axim, were suddenly substantially lower than expected. But this didn't impact the other elements of our business. The rest of our business performed very much as expected. We believe the overall mobile computing business, which is driven by customers' application, remained very strong. In fact, our business in Europe, or EMEA, as we refer to it, which is traditionally weak during the summer months, reached record levels from Q3. As also did our Asia-Pacific and OEM businesses, and they both performed inline with expectations.

In addition, we continue to see great progress and increasing market acceptance with our cordless scanning products, and they continue to roll out on track with the expectations we set during our last conference call.

In Q3, we saw sales of our cordless scanners almost double during the quarter, as more and more solutions were deployed. We expect to see the strength continue through Q4 and into 2007 as many applications that are being developed continue to make their way to the market. As we have noted before, there was a considerable lead time to get established, as applications need to be written and field trials completed prior to deployment. We believe our Cordless Hand Scanner has progressed the point where we can safely say, it' a winner.

It has successfully completed numerous trials in many different environments and feedback indicates it has met or exceeded the expectations of our customers. We expect this positive momentum to continue to grow from here.

We also saw a significant progress with our Cordless Ring Scanner. We have seen our sales of Cordless Ring Scanner, or CRS, more than double during Q3, which is extremely encouraging since the vast majority of these units are currently going into trials and not to deployment. We expect the Cordless Ring Scanner to continue to strengthen as a number of successful trials conclude that we expect will move to the deployment phase. As with the Cordless Hand Scanner, it takes time. But we are excited to see the positive momentum continue to build.

The Cordless Ring Scanner is currently going through a number of trials in many different applications. However, most of these applications center around the pick-and-pack type solutions that are driven by people's ever increasing desire to purchase from the Internet. To provide one example of the many market applications we are seeing, the Cordless Ring Scanner is being evaluated in an Internet driven, on-demand book printing application. Historically books were printed in batches and sold over time, but rarely did the supply of printed books correctly match the demand.

Today books are printed on-demand after they are ordered. One of these on-demand printing companies evaluated our Cordless Ring Scanner and concluded that it can increase the efficiency of their operation by roughly 20%. The company prints 40,000 books a day and runs their operation seven days a week, 24 hours a day. Once we complete the few minor modifications they requested, which are all currently underway, we believe that this company will deploy several hundred units.

Another key product in our data collection category is our SD product, the 3E, which is an entry level scanner targeted at the many mobile phone-centric and very thin PDAs in the market. This product has done very well for us and our customers, and was recently recognized with a Mobile Impact Award.

Socket has delivered over 40,000 SD Scanners since 2004, and we have just launched a laser-based version of the SC Scanner, the 3M, which would further strengthen this product family. The new product is the world's smallest laser scanner, and provides a higher level of barcode scanning performance for these customers. The 3M began shipping yesterday. We expect the addition of this product to increase the revenue in the mobile phone category, mobile -- PDA mobile phone category, I should say, a category which continues to grow very well.

Finally, there is our combination RFID and scanning products. These products continue to be requested for trial, and are generating strong worldwide interest from health organization. Even though the health market moves cautiously and slowly, and we remain in sampling mode, we are delivering to a number of areas in the world, and we are involved in important trials.

Early feedback from the trials of our combination RFID scanning product has been positive, and we expect initial deployments to be in Q4 and to be strong in 2007. So, even though the overall scanning revenue was flat, there was significant forward movement on a number of fronts that offset the declines we saw in the Dell channel.

To further support our outlook, our SVI program continues to strengthen and mature, representing more that 20% of our North America revenue in the third quarter. We now have over 100 SVI partners in the program, with the top 20 of these partners producing 80% of our SVI revenue in Q3. I have been running this program for 15 months. We now can see that after an SVI enters into the program, it takes on average about nine months to begin generating any meaningful revenue.

The focus of our SVI team remains on training, coupled with our excellence development tools, which is enabling our SVI partners to easily incorporate our products into their customer driven solutions generating revenue for both of us. We are seeing good traction with our SVI partners in many vertical markets; with healthcare, retail merchandising and asset management being the top three. We expect to see continued solid growth in the SVI channels in Q4 and expect to see another key driver of revenue in 2007, as we will see more revenue from the partners that have rolled out their solutions, as well as initial revenue from partners entering the market.

Moving over to our connectivity products. As mentioned earlier, the number was lower than expected. Again most of the shortfall was associated with shortfall we had in the Dell channel in North America. The biggest drop was in modem sales, where sales dropped from over 10,000 units in Q2 to just over 5,000 units in Q3. Again, it's important to point out that this seems to be a channel issue and not a demand issue.

Most modems are used to transmit data to corporate databases after information has been selected by a remote worker. The modem is a simple, easy to use, and extremely inexpensive way to do this. We have seen strong demand for this type of solutions for the past dozen quarters, and feel this requirement remains strong and we expect sales to rebound in Q4.

Our other connectivity products, like our WLAN and Bluetooth, continued to see stronger demands from the enterprise environment and we continue to see a shift away from the consumer market for an increased number of devices shipped with Bluetooth and WLAN installs. Over time, the strong demand coming from the enterprise market will be serviced by our OEM group as customers change from plug-in to built-in solution.

Our WLAN announcement today demonstrates both the progress and continued commitment we are making in the WLAN market. It also shows our focus and future direction will be very much in the enterprise and corporate market.

The fast roaming capabilities we announced earlier today are enterprise and corporate required features only, as most individuals simply do not have more than one access point. These features enable customers to enjoy seamless roaming between access points in a wireless network. This is a very important feature for customers using their Wireless LAN infrastructure for voice calls and other mission critical type applications.

When using your WLAN infrastructure for voice calls, it eliminates the dropped call experience when moving between access points. Socket's fast roaming algorithms can switch between access points in less than 200 milliseconds, which we believe is the fastest in the industry and enables us to guarantee a reliable connection for all mission critical applications that are dependant on WLAN.

We expect the WLAN product business to continue to seed our wireless module business as an increasing number of customers build products with WLAN functionality built in. All of the work and investment we are making in our Wireless LAN card business is transferable to our WLAN module business. The customers would have the choice between built-in and plug-in solution.

We expect the WLAN module business to follow a similar path we experienced with our Bluetooth business. Our Bluetooth business started with our CompactFlash card and customers initially used these cards to add Bluetooth functionality to their products. Over time, more and more customers selected our KwikBlue modules as more of their customers used Bluetooth and modules are more attractive from a cost and size point of view.

This strategy has enabled us to build our OEM business, which today is at record level and represents 22% of our business and is on track to grow by more than 60% over last year. The addition of WLAN modules, coupled with the enterprise level software, we are now delivering will enable this aggressive growth to continue in 2007.

Finally, in Q3, we substantially strengthened our sales reach in both, EMEA and Latin America. The additional resources in Germany, France and Italy, coupled with our existing presence in the UK, really gives us significant strength and will enable us to work more closely with the many developers who are committed to mobile solutions in these countries.

So in summary, despite issues this quarter with the Dell channel, overall business remains very much on track, and Socket continues to be an integral part of delivering mobile productivity solutions to enterprise vertical market.

Mobile computing devices, both with and without mobile phone connectivity, have become open platforms with improved security, higher processing fees, better connectivity, improved reliability and lower costs. With the growth we are seeing in our cordless product category, the support of our expanding SVI partners and the increased demand from our core customers for productivity enhancing mobile solutions, we expect increasing momentum and success in a number of vertical applications across a wide range of enterprises that will enable us to move forward in Q4 and return to a higher revenue level.

With that, I would now like to turn the call over to Dave for his comments.

Thank you, Kevin. Revenue for the third quarter totaled $6 million compared to 6.5 million in the year ago third quarter, and 6.9 million in the previous quarter. Revenue for the first nine months of 2006 is 19.6 million compared to 19.1 million for the same period last year.

As Kevin mentioned, our third quarter is traditionally a flat quarter, and most of our products, regions and partners met our sales expectations. The one major exception was the change at Dell in North America, where Dell substantially reduced the number of Socket products that they are reselling through their website. That decision lowered sales of our products through the Dell reseller channel by $800,000, from 1.2 million in second quarter to $400,000 in the third.

Socket has 20 online electronic resellers in North America, and more than 300 other value added resellers in North America, and we believe that customers will ultimately redirect much of that business through other resellers. The effect on our third quarter revenues was the lower sales of the CompactFlash plug-in products that traditionally sell with Dell Axim, including our ContactFlash barcode scanner, our CompactFlash low power modem, and our CompactFlash Ethernet cards.

The drop in barcode scanning revenue was made up by growth of $450,000 in our cordless hand and ring barcode scanners that use Bluetooth wireless technology, an increase of 80% over the second quarter revenue levels for these products. These cordless products represented 40% of our third quarter data collection revenue, and we expect the growth in cordless scanning to continue.

In the third quarter, our revenue mix has shifted upwards for our data collection products, representing 42% of our third quarter revenue, versus 37% in the second quarter. Productivity products represented 23% in the third quarter versus 31% in the second.

Our OEM embedded products and services remained at similar levels to the second quarter, and so the mix grew to 26% of revenue in Q3 versus 22% in the second quarter. In our legacy serial business, which over time we will phase down in favor of USB and other technologies, many that we offer, represented 9% of revenue in the third quarter versus 10% in the second.

Our gross margin on sales for the third quarter was 47% of revenue, versus 50% in the second quarter. The change in the mix of products sold accounted for 2% of this drop. Sales of more margin products, such as our OEM Bluetooth modules, are growing; while sales of higher margin products, such as our legacy serial products, are on the decline.

In addition, new products, such as our wireless LAN 802.11g card, typically have lower margins at the start. Then the margins improved through engineering cost reductions and higher volumes. About 1% of the decline reflects the fixed portion of our manufacturing operating costs as measured against the lower revenue total.

Our operating costs for the third quarter were 3.7 million, compared to operating cost of 3.9 million in the second quarter and operating cost of 3.1 million a year ago. We reached a peak in engineering development activities in the second quarter, including new management software we are developing and the conversion of substantially all of our products to comply with the Reduction of Hazardous Substances Act by removing lead from the solder used in our products. As these and other projects have been completing, the level of engineering activity was lowered in the third quarter.

Most of our operating costs are unrelated to the level of revenue in any particular quarter. So, with the lower revenue in the third quarter, we have reported a net loss for the third quarter of $839,000, or a loss of $0.03 per share, of which 298,000, or a penny per share was from the expensing of stock options during the quarter, and 541,000, or $0.02 per share, was from general operations.

Socket's operations continue to be highly leveraged, with the personnel in place to manage our worldwide distribution channels. Thus an increase in sales does not mean a corresponding increase in operating expenses and a large percentage of revenue growth will drop through to the bottom line, while the converse is true, when revenues decline. Our objective remains to grow Socket revenues and bring the bottom line back to profitability.

Our cash balance at September 30th, 2006, was 6.2 million, or about $4 million free and clear of the bank line draw that we make at the end of each quarter. As a result of our operating losses in the third quarter, we broke a string of six consecutive quarters of positive cash flow from operations that started with the first quarter of 2005. We believe our cash balances are adequate for financing our operations and the liquidity measures of our balance sheet, such as the current ratio, defined as current assets compared to current liabilities, remains a healthy 1.8 to 1.

On a different topic, Socket has been at its present location for nearly ten years, and our lease is up at the end of this year. We reached agreement to move from our present 26,000 square foot location into a new 37,000 foot facility in late January, while remaining within the community of Newark, California, in the San Francisco Bay area. Because of market conditions for office space in our area, our rent will remain at about its current level.

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

[OPERATOR INSTRUCTIONS]. Our first question comes from the line of Mr. Brian Swift with Security Research Associates. Please proceed with your question.

Hi guys. I am sorry, I was late getting started, so I wanted to know if you talked about the line you are going to take with the Dell thing, that kind of play itself out. It sounds like there is only $200,000 left to lose and maybe I am -- was missing there?

No, I don't think you were missing anything. The total revenue we have in conjunction with Dell at this stage is about 400,000, and we don't expect it to strengthen going forward.

And, secondly, did you give any actual guidance in terms of top line for the -- for Q4. I just heard -- you were talking about the various segments of business being up sequentially, but I didn't hear out any absolute number?

We didn't provide any absolute numbers, Brian. So, I think that the guidance is that we expect things to be stronger in Q4. I think that we still have some weakness in the Dell channel, but I think as I pointed out it [start off] the number, where we were able to overcome us with difference we have in other areas during the quarter.

Right. And you think you will be -- when you say a stronger fourth quarter, would that be stronger relative to Q2 or just stronger relative to Q3?

Again, it depends on the deals that close, but I think that certainly stronger relative to Q3, and I would hope stronger relative to Q2.

Okay. And is this the Dell thing -- again, I apologize for not being on at the beginning. Is that related to the stories around that they were exiting this platform, or is this something bigger?

No. Obviously we can't comment on what Dell's product plans are. We can only comment on the impact they have on our result. So, we've also heard the rumor, but we cannot either confirm or deny that. But we don't expect our revenue with Dell in the PDA space to grow going forward.

And I think the key, Brian, is that Dell was just one of our many channels, although obviously the largest. They were electronic reseller and they were carrying all of our products, almost all of our products on their website. They're still selling a few of our products, but it's substantially reduced. But we have 20 other online resellers in North America, many big well-known names. And in addition, there's more than 300 value added resellers who purchase from the North American distribution channel. So, these are -- much of the selling is taking place, and we expect that the business that otherwise might have gone through the Dell channel will be routed to this wide range of other distributors, but it does take a little bit of time because then people have to setup accounts with these other folks. But, so there's some delay factor, but we expect most of that business will still be coming in our direction, if not all of it.

Right. And then, isn't there another platform, Acer or [sales] coming into the picture too?

Yes. We believe that the demand is still as strong in the market, and other people will enter to fill that demand. I think the difficulty is that, when there is, I would say, disturbance in the market people who have qualified a particular solution need to re-qualify and with new entrants there has to be a period whereby the products are tested and approved, and the unfortunate thing is it all takes time.

And lastly before I turn over to next person. What's the -- what are your most popular devices that your Ring Scanner, now that it is -- that it connects to, what kind of platform?

We are seeing two different categories here. We are actually seeing it connecting to stationary XP computers, where people are working in a WorkShelf; the computer is stationery, but the person is moving around. And the example I quoted of the on-demand book printing application, that's a pretty good example of a situation where the computer is stationary and the person is floating and fulfilling orders, and books come down the conveyer belt. The other area is ruggedized handheld devices, whether they be from Symbol or Intermec, where we have a mobile worker who is in a pretty rugged environment and are using Bluetooth as a way of connecting. So, those are the two categories. We see almost no demand in conjunction with Dell or HP devices or with mobile phones centric type PDAs.

Well, I lied, I have got one more. How big do you think the Ring Scanner revenue on a quarterly basis could get together? I mean, in terms of market size opportunity keeps going how big can that get?

I think that it will take time to get there, but I wouldn't be surprised to see that product in the several million dollars per quarter range, right. We know that this is a big market, and what is it driving, it is the fact that more and more people are shopping online, whether it would be for wine, for groceries, for books; and each of these orders have to go and be picked and packed by an individual at some level. And the productivity gains people are seeing when they can use both hands, which the Ring Scanner allows them to do, as opposed to carrying a scanner are enormous, and the feedback we get from customers are indicating savings in the 20% range, which again is enormous for these type of applications.

So, we think it is a long way to go. The environments are very tough, right, and people really do have stringent requirements. Again, going back to the example I cited, people are using the product seven days a week, 24 hours a day and they're sourcing 40,000 books a day. So, they've come back with some requirements to say that they would like the barcode to be a little a bit tougher, and other things that really make it suitable to their application, which -- all of which we can do. So, we are very, very optimistic about the Ring Scanner. It will take time, but I think it will be a big number when it gets there.

And what was the number in this Q3?

I think, we are still on the quarter of a million dollars, or --

Actually it's just under $200,000, Brian.

Yes. So, I guess, at the moment we are delivering in the threes and fives, and we are going to trials and we are visiting customers and we are seeing what works and all the indications are positive. But it will take a bit of time before we see large deployments, and typically the deployments will be larger in the hundreds of units as opposed in the tens of units.

And we try to get close to at least the initial companies that are testing and evaluating and trialing this device so that we get as much feedback as we can. And we have been tracking very closely the first 50 companies that are using this device in a trail basis. That said, the feedback has been good, so we know there are at least 50 companies out their today that are considering the device.

All right, thank you.

Thank you, Brian.

Thank you. Our next question comes from the line of [Dick Syracusa] with Merrill Lynch. Please proceed with your question.

Yes. Kevin or David, can you say with any degree of confidence that Q4 will not be a repeat of Q3?

Well, I think we can say with some degree of confidence that it won't be a repeat of Q3. I mean, there is always some uncertainty in the market, but I mean I think the things are generally on track. We are seeing a lot of strength. We are always dependent on deals closing, which we have little control over and -- but overall, I think we are optimistic about Q4, and we will be working hard to make sure it's not a repeat of Q3.

Yes. Traditionally Socket's weakest quarter is the third quarter because of the vacations that impact group activities like field trials, Europe takes long vacations, and so our weakest months are typically July and August. I mean, we are already -- we are two-thirds away through the month, well ahead of our July totals, as an example. So, there should not be -- I mean, if we follow our traditional patterns, fourth quarter should be popping up from third quarter level.

Okay And what I'm really -- I'm also referring to the fact that each quarter -- I don't know, for the past five or six quarters, whatever, it seems that there's been one or two isolated incidents out there that derailed the company. This quarter, it was Dell. Have we moved beyond that?

Well, actually the first and second quarters, Dick, we are at record revenue levels. I think relative to the expectations of growth was where we and you and others, I think, will have to be -- or have been disappointed. And then Dell is a new event, and as Kevin pointed out, it's limited in terms of any further exposure to us. So, we're expecting -- not expecting to see any other recurring type of activities in the fourth quarter that would draw down the revenue growth, but it's still early in the quarter obviously.

And the other thing maybe just to add, Dick, is that we continue to see companies and customers that are desperate for these productivity solutions, mobile productivity solutions. So, in some ways, it's been a little bit difficult, in that, the demand has remained strong, and our ability to services has been, I would say, hampered or interfered with because of other events. I believe we are coming to the end of those events, and that we will see things being much better in 2007, because other things -- I think, other good things will happen in the market.

Is it -- we've always talked about the -- that 25% - 30% annualized growth rate. Is that -- is it realistic to hope that we can achieve that in '07?

Yes, I think it is. But, what seems to be the problem over time, and again, we've had two difficult years, right, is that, the demand has remained quite strong. Our ability to services has been interfered with. I think as long as we can service the demand, then growth rate in the 30% is very, very realistic.

And you are positioned to do that now?

We are. I mean, I think that we have been well positioned and I think that we like our investors, have been disappointed that we been unable to service the requirement. Some of the items aren't under our control, which is certainly a good and bad situation, but when it interferes with your ability to service the customers, I don't think anybody wins.

Right. Okay, thank you.

Thanks.

Thank you. Our next question comes from John Romeo, Private Investor. Please proceed with your question. Mr. Swanson, your line is live. We have a follow-up question from John Romeo.

Hello, John?

Hello.

I don't if you heard the beginning of my question, I will start.

We didn't hear anything, so I think you have to start again.

Thank you. Regarding the Dell situation, ballpark that looks about 15% of your revenue, am I correct?

That was the traditional level, yes.

Okay. That we are not going to be counting on any more, how do you plan on replacing it, that revenue?

Well, I think that the -- you have to look at why we had the revenue in the first place. The revenue really wasn't from Dell, it was from Dell customers who had a requirement for a mobile solution and were using the Dell platform in our peripherals to solve that requirement. The requirement still exists. I think that they can still purchase from Dell our alternative platforms, whether they be from HP or Acer or some other organizations, and our peripherals will work equally well. So, part of it is that it was the ease of purchasing from a single organization, and Dell was acting as a retailer. So, I think you have to separate the demand from the delivery mechanism. I think the delivery mechanism has been, I would say, I won't say broken, but certainly has changed and therefore people have to service their demand in other way and we expect that to happen.

How would you address that?

Well, we have, as Dave pointed out, 20 other online retailers and we have 300 resellers who buy from distribution to service this type of demands.

All right. Can I shift to a question about gross margins? You did mention there is going to be a shift to lower gross margin products. What kind of corresponding increase in unit sale will we need to have in order to make up that difference?

Well, the gross margin decline, John, in the third quarter were 3%, and 1% of that was just the ratio of our -- the fixed portion of our operating manufacturing costs to the levels of revenue. So, as revenues increased, that --

We get 1.

That 1% goes away, we get 1% back at 6.8 million, and as we move into the 7 million levels and above, that percentage will become a smaller and smaller percentage of the total. The other part of it becomes the mix and we have products from a margin standpoint that most of them centered around the 50% level, but we have had our legacy serial products that are much higher than that and we have our OEM products that typically run closer to low --

High 30s.

High 30s to low 40s. And so -- and the growth has been in the OEM products and the serial products as we have been expecting for many years, is on a continued decline. But, we also were impacted by the number of new products that we have introduced, and typically those products start out with lower margin. So, we have had Wireless LAN cards, the 802.11g cards. We have now got a new SDIO Laser Scanner. As these products come out, our history is that we cost produce them and move those margins up. So, we expect the mix that we are looking at for fourth quarter, which will not have the impact of the -- as much of an impact of the Dell channel change, will actually rise by just that very nature and growth itself will cause a return. So, we expect we will be moving back in the direction of 50%. We are sensitive to margins, but it's not clear that 50% to us is a magic number. I think the -- we will provide discounts for larger volume deals. We much rather provide a discount and do more business. We make those judgments on an opportunity by opportunity basis. So -- but we are expecting to not lead -- dramatically lead the range of high 40s to 50%.

Thank you. What is your strategy when the Wireless N article is standardized? Are you -- the products in development, will you be doing the favorable firmware upgrade or is that going to require new hardware?

Most of it requires new hardware. Our focus is really at this stage is in the enterprise level. We are seeing an incredible amount of demand for what we would describe as enterprise level Wireless LAN, which the N requirement isn't really very strong and neither is the A requirement. People want dependable, reliable, robust Wireless LAN that can connect up to physical type infrastructure, provide authentication levels, and security levels that people want. That's our focus. I think the N standard looks like it will be more of a retail high-speed, in your home type situation. So, we don't really have a plan for that, as it takes us away from our core strength, and our investment is in, I would say, the software layers to make a corporate enterprise grade WLAN product. So, that's where we're investing our dollars, and that's where we believe the big numbers are.

The Socket's strengths are in its three major software packages. The Wireless LAN packages, where we've been upgrading it for enterprise requirements over a number of last several years, and we're in the next stage of adding additional security capabilities, and we've been announcing those improvements as we go. We've been building management software to help the mobile user get and stay connected. Our Wi-Fi companion software, for example, which has been selling for over a year now, is a well recognized capability to monitor signal strength, help locate hotspots, and get in people -- help people get and stay connected.

And so, the Bluetooth software, we started developing Bluetooth software back in 1999. We've got -- we control that complete software, we own it and we've kept it current with the evolving standards in our barcode scanning software. And all of our barcode scanning and RFID data collection products work with the same basic software package, so that it's easy for developers. They don't have to predetermine which of our various models or types of barcode scanners are going to be used by a user of their software. And so, these three key software programs will continue to keep current and modify and evolve as standards change, but those really become the heart of the strength of the company and we combine those obviously with a lot of hardware products.

Thank you very much. Good luck next quarter.

Great, thank you.

Thank you. We have a follow-up question from Mr. Brian Swift with Security Research Associates. Please proceed with your question.

I just wanted to -- when you expect some -- or expect the ramp to occur as far as this wireless LAN opportunity you were talking about --

I think we are beginning to see it already. What we are seeing is that people are starting to design in our CompactFlash card into many ruggedized units. We have, I would say, more than 15 devices of various flavors in-house that we are integrating the current CF Wireless LAN into, and we also, I think, announced that we have 18 different OS's that we are supporting that people have written drivers for to support our cards. We believe that a high percentage of these will convert over to a module-based solution sometime middle of next year and that module is now available. So, I think that we will expect the ramp on the Wireless LAN starting Q4, but I think that we will expect WLAN in the OEM space to be particularly strong in 2007.

In our last two releases, Brian, yesterday's release we highlighted more of the details on our developing -- OS development partners program, which are real time operating system developers that are incorporating our WLAN products into their operating systems software, and today's release formalized the announcement of the launch of our 802.11b and g module.

As well as the fast roaming and other software enhancements we have included in that release.

And how do you define meaningful revenue, like --?

I would say in the OEM space it's in hundreds of thousands of dollars. So, the OEM business I think is on track to be around $6 million this year, which is up 70 to 80% from last year. And we would expect that increment of hundreds of thousands of dollars per quarter to be meaningful.

And can you get to millions per quarter in that product line or is that not --?

Absolutely. In fact, I would estimate that over time the Bluetooth revenue we have will be dwarfed by the WLAN. The requirement for WLAN typically what we would consider enterprise level Wireless LAN is very strong. We still have more software development work to do. We would like to basically get endorsements by infrastructure players like Cisco, and that will basically open up more doors for us. But I think that there's a good opportunity to maintain the growth we have in the OEM business in 2007 at December type percentages, primarily due to the fact that the Wireless LAN will kick in.

And I think, Brian, many of our investors don't fully realize that our OEM business today has been primarily just Bluetooth module, and we have as customers most of the leading suppliers of ruggedized industrial devices that have incorporated our Bluetooth module. Companies like HandHeld Products, Intermek, Juniper Systems--

[TopCon] Systems.

Symbol Technologies.

TCS.

It's a long list and this group becomes a natural group to consider designing our Wireless LAN modules into their devices as well. So, that's our first target with these modules, and as always we have got to achieve the design wins first, but we have an extremely long and good relationship with the industrialized ruggedized PDA manufacturers and we certainly will have a good opportunity to having considered these devices.

Okay, thank you.

Thank you, gentlemen. I would like to now turn the conference back over to you for any closing comments.

Thank you very much, operator. So, I would just like to close by thanking everyone for joining us today, and we look forward to reporting to you on our fourth quarter and 2006 full year results and on updating you on our progress on our next call. This concludes the call for today and thank you for participating. Goodbye.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time.