Socket Mobile Inc (SCKT) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Socket Communications Inc. doing business as SocketMobile Inc. fourth 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 Byers of the MKR Group. Thank you. Mr. Byers, you may begin.

Good afternoon and welcome to Socket's conference call to review financial results for the 2006 fourth quarter and full year ended December 31, 2006. Online 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 web site at www.SocketMobile.com.

In addition a replay of today's call will be available at vcall.com shortly after completion of this call. A transcript of this call will be posted on Socket's web site typically by this Friday. We've also posted replay numbers in our press release for those wishing to replay this call by phone.

The phone replays will be available for one week.

Before we began I must remind everyone this call may contain forward-looking statements within the meaning of Section 24A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

Such forward-looking statements include but are not limited to statements [indicating] that Socket's new handheld mobile computer product introduction, including details on the timing and distribution of the product and statements predicting trend sales and market opportunities in the market 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 risks that our new product introduction may be delayed or not happen as predicted if ever due to technological, market, or financial factors including the availability of necessary working capital. The risks that market acceptance and sales opportunities may not happen as anticipated once the product has been introduced into the market. The risk that our integrator program and current distribution channels may not choose to distribute the new product or may not be successful in doing so. The risks that acceptance of our new product and vertical application markets may not happen as anticipated, and the risk that evidence of strength in the Mobile computing market may not be indicative of the trend and other risk described in our recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission.

With that said I will now turn the call over to Socket's CEO, Kevin Mills.

Thank you, Jim. First I would like to give some color on the dynamics of our marketplace and the new strategic direction and initiatives we have undertaken to position our business for growth going forward. This discussion will include our recently announced decision to build and produce our own handheld computer, the strong market opportunity we seek to this device and why we believe we will be successful. Dave will review our 2006 financial results later in the call.

In general, 2006 was disappointing in that we were not able to meet our primary objective of growing our business. However, we did make significant progress in strengthening our business including expanding and stretching our product lines, increasing vertical applications from a growing base of integration partners, completing the greening of our product line to meet the requirements of the Reduction of Hazardous Substance Act or RoHS and perhaps, most importantly, watching development of our own handheld computer system.

With the introduction of our own handheld device, we are reducing our dependence on third party handheld device suppliers and enabling greater control over our corporate customers and, thus, our own destiny. Socket's historic business has been to provide the mobile peripherals that enable our customers to customize standard mobile computing products for their specific needs.

For example our plug-in barcode scanners are used in conjunction with standard PDAs from Dell and HP, addressing the substantial market that exist for [lice] or occasional mobile scanning not served by bigger players such as Symbol, or [Intermec].

Over the past three years, Socket has sold over 400,000 mobile handheld peripherals. However as we have noted before, our peripherals business has been impacted by the timing of new product launches and corporate deployments.

To better utilize our strengths and more fully capitalize on the continued strong demand we see from mobile solutions, we have taken significant steps to leverage our experience, expertise, and capabilities and have more control of opportunities we see in the marketplace. One of the most significant opportunities we see is the gap that exists today between the solutions needs of the business consumers -- business customers I should say, and the standard consumer grade PDAs currently available.

As is typical with any normal technology cycle, our customers have become more dependent on mobile solutions and more sophisticated about the specific solutions required to meet critical business needs. As we have documented on our web site, these solutions have helped many companies significantly increase the effectiveness and the efficiency of their mobile workforce. And some firms have monetized these metrics to illustrate the substantial improvement.

Our customers now typically start their solution quest staking a lighter, faster, smaller and more portable device that is a more cost-effective solution than what they can get from traditional Auto-ID companies like Symbol now Motorola or Intermec. They start with the standard consumer grade PDA from Dell or HP and add peripherals like Socket's barcode scanner or (indiscernible) readers or modems to build the hardware solution they need.

At the same time the consumer-driven PDA market has moved forward towards the convergence of the mobile phone and PDA device which is ideally suited to individuals who want voice and e-mail communications. Since Dell and HP are consumer-driven companies, their mobile focus has understandably shifted to a combination device and away from the stand-alone PDA device. The rapid pace of this shift by these firms has made life difficult at Socket's as we are dependent on the business-driven segment of the PDA market.

We believe this dynamic also creates a significant opportunity for Socket. To support this with numbers let me reference a recent Gartner report.

Gartner expects the overall PDA market to reach 20 million devices in 2007, with 70% of these devices having mobile phone capabilities, up from 49% in 2006. This clearly shows the shift away from traditional PDAs to the combination mobile phone PDA device. However, the numbers also show that Gartner expects that six million PDAs without mobile phone capabilities will be sold in 2007.

These units will be primarily used in the mobile business market, the market we are focused on and we continue to serve. We are leveraging our experience and expertise in the mobile computing market to develop, build, and deliver our own business mobile handheld device. We are targeting a substantial market that needs to be serviced with the customized solutions we can deliver.

Simply stated, we are repositioning Socket from a peripheral supplier to a systems and platform company. In addressing the business mobility market segment, we are serving the substantial and significant market segment between consumer and industrial. We believe Socket not only has the experience and understanding to successfully service this market but, over time, can also become a major player in servicing the small- to medium-sized business mobility deployments.

During our nearly 10 years' experience in the mobile computing market, we have often assumed responsibility for the complete solution being used by our customers. We have ensured success by working closely with our customers and business partners like Dell and HP. In the operating system arena we have been involved with Windows Mobile since its inception and serve on Microsoft Mobility Partners Advisory Council.

And for connectivity we are considered experts in both Bluetooth and wireless LAN.

We have a solid reputation for delivering a broad range of well-accepted peripherals and an excellent understanding of what our customers want from a PDA supplier. The business PDA market is complex. It is a functionality and price-driven market. It is also a market we believe is seriously underserved. As such, we believe we are taking a unique and significant step by introducing a device specifically designed to meet the requirements of this market sector. We expect to formally launch our device next quarter.

To better illustrate our strategy with this device and the market we are targeting let me provide an analogy using the car market. If Socket's PDA were a car it would be an SUV. That is, a vehicle that is positioned between your standard car where I would push the consumer grade PDAs from Dell and HP and your light trucks where I would put industrial grade PDAs from Symbol and Intermec.

In the PDA market businesses have had to choose between a consumer grade PDA, available at an attractive price point but that did not meet all of their requirements or industrial grade PDA which offered the functionality they needed but comes with a physical size or price point that are far from ideal. With our device Socket and our partners will make possible and deliver business mobility solutions designed for small to medium-sized deployments.

By combining the business mobility handheld of choice along with our broad range of peripherals, we will be providing a very complete and compelling business offering to the business mobility market. Our handheld device will be physically small and light but have industrial functionality. It will provide a more function-rich platform to meet specific mobile business needs not adequately addressed by current consumer grade devices.

In short, we will be offering a business mobility-based handheld with a complete range of peripherals. Our device has features beyond what the consumer device can offer and at a price that is affordable when compared to higher end industrial grade products. As noted earlier the total market for these devices is estimated to be around six million units and we believe we are well-positioned to capture a meaningful share of this market over time.

Another key selling point of our device will be its expected lifecycle. We have noted before the difficulty we have seen when devices or operating systems change and our customers need to requalify their solution. This process causes delays in deployments and makes customers worry about the time they will have to get the return on investment.

Our device will be available for a minimum of three years, providing customers adequate time to qualify and deploy their solutions and avoid multiple requalifications. Socket will always be able to support customers with existing devices and will provide a road map that will enable them to move to new technologies as their timeframes allow.

We plan to publicly show our new device for the first time at the [HEM] Show in New Orleans next week. Socket will be providing a limited number of samples to select customers in March. And we expect to ship the new device in early Q2.

As we introduce this important new product it is important to also note that we will continue to serve other portions of the mobile computing market with our peripherals. As I noted earlier, a significant number of combination mobile phone PDA devices are expected to ship in 2007 and some of these will require scanners and other mobile peripherals. We continue to develop and deploy our line of cordless scanners to support the many mobile occupations that continue to be needed in the market.

We also see more interest for our cordless scanning products in the tablet market which, though currently small, we will continue to support going forward. Likewise we are beginning to see excellent market response for our recently announced cordless ring scanner. Most of these cordless ring scanners are being used and deployed with industrial grade devices from Symbol and Intermec and we are also seeing strong interest from customers using XP desktops where the computer is stationary but the worker is highly mobile in a limited area.

We intend to continue to serve these markets with cordless wearable scanners that work seamlessly with industrial grade devices, using Bluetooth and potentially other wireless technologies.

So we expect the data collection portion of our business to grow as we build revenue from our new computing device.

Our OEM business grew well in 2006 and we expect it to continue to grow in 2007. A main growth driver in 2006 was our Bluetooth modules and we expect to add revenue from Bluetooth cards, wireless LAN cards, and modules in 2007. Since our own device will have both Bluetooth and wireless LAN built in, we are moving responsibility for all wireless LAN and Bluetooth cards to our OEM group. They are better able to service this business for many of our OEM customers to start buying Socket CF cards or CompactFlash cards and over time migrate to our module-based solutions.

This change will initially increase our OEM numbers but will better describe the OEM business going forward. The OEM business will continue to be driven by the many customers in the mobility market who need complete Bluetooth and wireless LAN solutions.

In summary, 2007 will bring many changes. Most notably, our strategic direction. We also changed our name to SocketMobile which we feel better reflects this new strategic direction. As a result of these changes we already feel more empowered and more in control of our destiny now that we have more of the overall solution under our control.

We expect 2007 to be an exciting year during which we expect to grow our revenues and return to profitability.

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

Our revenue for 2006 of 25 million was flat compared to revenue for 2005 which was also 25 million. In the collection continues to be our product family growing from 38% of revenue in 2005 to 42% of revenue in 2006 and jumping to 51% of revenue in the fourth quarter of 2006. Socket has developed an extensive matrix of mobile bar-code scanning solutions and our cordless hand scanner in the fourth quarter became our leading data collection product although plug-in scanning using either CompactFlash or SDIO form factors is still the most popular form factor for mobile bar-code scanning applications.

We started 2006 on a growth track with the first and second quarters each being record revenue quarters. However beginning in the third quarter Dell, one of the two major pocket PC suppliers and Socket's largest reseller, reduce their deployments of our product and we refer to the drop in our third quarter revenue of $800,000 compared to the second quarter resulting from that reduction. These lower employment levels continued in Q4 but were partially offset as businesses redirected their purchases of Socket products to other resellers.

Fourth quarter revenue was $5.4 million compared to revenue of $5.9 million for the same quarter a year ago. In the fourth quarter we experienced a major reduction in our OEM revenue stream from the sale of embedded Bluetooth modules to manufacturers of ruggedized industrialized handheld computers. Our OEM business for the first three quarters averaged 1.5 million per quarter but was less than 700,000 in Q4.

We are a Bluetooth component supplier to our OEM customers and some of the orders anticipated by our OEM customers to close in Q4 did not happen. We are expecting this segment to improve in the first quarter of 2007 and to strengthen throughout the year as we add wireless LAN modules to our OEM product offering. Our total order backlog at December 31st, 2006, for all of our products was approximately $1.2 million.

As Kevin has discussed, much of the flatness in our data collection revenue during 2005 and 2006 is attributed to the availability of mobile computing platforms and the long leadtimes that businesses need to deploy mobile productivity solutions, particularly where they are needing to integrate a mobile computer or peripherals and a vertical application.

Our decision to build our own mobile handheld computer was in direct response to our believe that this segment is not being well served and the recognition that we have both the know-how and the hardware and enabling software products to serve this space well.

The addition of a mobile handheld computer will make Socket a one-stop shop for the hardware portion of mobile computing solutions. And the growing number of third party applications available through our integrated partners will make it easy for our customers to build mobile productivity enhancing solutions for their mobile workforce. Our integrated partners are developing and marketing 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 a number of partners -- many of which are listed on Socket's web site -- now number over 100.

Most of these applications today involved data collection and wireless connectivity using Socket's products. Most of our integrated partners welcome the addition of our mobile handheld computer. Socket's mobile handheld computer is compatible with all of our peripheral products and will add a major new product to our revenue stream starting in the second quarter of 2007.

Responding to the challenges we have addressed in 2006, and to take advantage of the opportunities immediately in front of us made 2006 a more expensive year for the Company. During 2006 we increased our headcount by about 5%, where we added developer support resources to support the more than 100 partners in our integrated partners program and added resources to support our computer systems development.

Our personnel expense reflected this growth and was up about 8% or $900,000 for the year. We also increased our spending on outside services by about $600,000, reflecting the cost of designing, qualifying, and certifying new products including successfully redesigning all of our products to remove leaded solder to comply with the Reduction of Hazardous Substances Act in Europe and similar initiatives around the world and developing the qualifying new products such as our cordless ring scanner, our SDIO laser scanner and our mobile handheld computer.

Commencing in 2006, we also added $1.2 million in non-cash expense to record the value of stock options vesting during the year in compliance with Financial Accounting Standard 123R. With revenue flat, these increased expenditures directly impacted our bottom line resulting in a loss for 2006 of $2.9 million or $0.09 per share compared to a net loss for 2005 of $215,000 or $0.01 per share. Net loss applicable to common stockholders in the fourth quarter of 2006 was $1.3 million or a loss of $0.04 per share compared to a net loss applicable to common stockholders of $252,000 or loss of $0.01 per share in the fourth quarter of 2005.

Despite our higher losses in 2006 our use of cash for operations during 2006 totaled about $400,000; and we reported a cash balance at December 31st, 2006, of $6.1 million compared to a balance of $6.8 million at the previous year end. Our current ratio as a ratio of current assets to current liabilities was a healthy 1.6 to 1 at December 31st, 2006. And we had no long-term debt.

Socket is well leveraged to benefit from revenue growth and conversely a drop in revenue significantly impacts the bottom line. On Socket's manufacturing side most of our product components are manufactured by third-party contract manufacturers and so increased volume can be easily handled by the capacities of these manufacturers and higher volumes usually result in unit cost savings.

On the sales side, Socket distributes its products worldwide through two-tier distribution and it has in place the sales support infrastructure to manage this channel. Substantially higher quantities of products can be shipped through our distribution channels without needing to add significant personnel resources. And so the benefits of growth go primarily to the bottom line.

We believe that our new mobile handheld computer, the increasing numbers of easy to deploy vertical application solutions for our integrator partners and customers, and growing awareness by businesses of the productivity benefits of a connective mobile workforce will position SocketMobile as a leading provider of these easy to deploy business mobility systems and peripherals, resulting in a resumption of growth and a return to profitability.

I would also like to comment briefly on several additional areas of investor interest. For those of you who would like hear more about Socket's products and programs, Kevin Mills and I are participating in the Security Research Associates Technology Conference being held next Monday in San Francisco, with our presentation at 8AM Pacific time. We will webcast an approximately 40 minute presentation.

We'll also be attending the American Electronics Association Microcap Conference in May.

Finally Socket's annual meeting will be held at the Company in Newark, California in the San Francisco Bay area on Wednesday, April 18th at 9 AM. The record date for voting at the meeting was February 20 we and will be distributing proxy materials and 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 [Voss Adams] to service the Company's independent auditors in 2007.

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

(OPERATOR INSTRUCTIONS) Brian Swift. Security Research Associates.

On the OEM business, you indicated that you felt you're going to have an uptick in that business after the customer -- you say you had a customer that dropped from 1.5 million to 700,000. Is the rebound because of that customer coming back or is it through new customers or both?

Yes. It's the timing of orders. In the fourth quarter -- as you know we've got a fairly large customer base although our largest customers are Intermec and handheld products in the bar-code scanning area but we do have a number of customers. What we found is that these customers anticipated orders to continue at the levels that we had been experiencing in the first three quarters of the year but there were delays in -- and some of the orders that they expected to close in the quarter simply didn't happen in that time frame.

So as with anything these things can be lumpy and our understanding is that some of these orders should be closing in the first quarter and we do expect to see the revenue volumes recovering somewhat in the first quarter but it's a function of how the deals of our OEM customers close.

And maybe just to add, Brian, Intermec is our largest customer and the third quarter at conference call they cited that their business was down and one of the reasons it was down was, as they described it (indiscernible) in particular were using some -- they used the word 'abnormal' practices, particularly as they were looking to keep revenue high as they were consummating their deal with Motorola.

And as a result they won a lot of business in that space and the losers in that space were Intermec and handheld products. So as they were the primary recipients of our module, as their business was delayed or lost our business associated with that was delayed or lost. I think things in the auto ID markets have stabilized some. And we are seeing orders coming back from those customers now that they are winning business again.

And on to the -- from a PDA standpoint, can you describe what some of the leading features that you expect to have on that device that you say would not be available on the -- what people have been used to from the Dell and HP and others? Just give us a little flavor?

I will give you a little flavor. We are not looking to announce the product on this call but some of the areas where I think we will have a lot of strength will be in the wireless LAN area, as an example. Our device will have a full rolling client and what we mean by this is that it can be used in an environment where there's multiple APs and as a worker or a user moves from one access point to another it will be seamless. Much like the way you have roaming on your mobile phone today.

On consumer grades at PDAs the base assumption is that the person -- or customer has one access point and that's true if they are in Starbucks or if they're home. And generally the software is set up so that it attaches to the strongest access point. And everything works well.

The difficulty is when you then use consumer grade device in a mobile environment, say, in a hospital. Eventually you lose connections for a period of time because you don't have a roaming client. You are connected to access point a. You move away at some point and no longer can hold onto access point a so it drops the connection realizes it has lost connection and looks for access point b and then connects.

That whole process, the process of the time when you have no connection can be up to a minute. Maybe a minute and half which, again, if you are occasionally getting your e-mail isn't a big problem. If you are dispensing medications, it is a big problem.

So with our software, with it being more sophisticated we would monitor all of the access points that you might have available to you. And when the signal strength of access point a maybe dropped 30% we would automatically switch to access point b, where you would have 70%. And from a connectivity user experience point of view, you are never without wireless LAN.

That's just one of the many features and these are the types of problems that we feel our device can solve. And we have a lot of feedback from customers, explaining that they are looking for better feature sets but they can't really afford to go all the way up into the full featured types device, especially from a physical side and price point of view that the likes of Symbol and Intermec offer.

So we see a substantial unserved market between the consumers and the industrial type devices. And that really is going to be our focus.

And in the position of the buttons for example are designed for use, particularly with bar-code scanning. You have some consumer devices that have have buttons that are positioned okay but many of them aren't anticipating that the devices would have been used for things like bar-code standing.

You have got a -- we will offer a much longer useful life for the products. We find one of the big complaints businesses have is the time it takes to qualify a solution and then they're up against model change and they have to requalify. So our intention is to not allow that to happen. And we've also strengthened the device, so that it will better stand business use. So these are just some of the types of things.

And there will be when we do the launch, Brian, we will be giving all of the product details. Some of those are still -- have not yet been released to everybody but it will contain Socket's software on the ROM and as you know Socket gets excellent marks for its software, both in bar-code scanning and wireless LAN and Bluetooth.

And lastly, on that subject here in your discussions with your distribution partners on your plans to roll out your own PDA, any particular reaction that they're having in terms of it gives you this confidence that you are doing the right thing?

Yes, actually we are. We before we embarked on this we talked to a lot of our customers and I certainly did a tour. I went to our distributor partners in Europe over this summer. And I toured, I visited over ten of them and each of them, we had a discussion about what the impact would be with us bringing our own device.

Overall the overwhelming response has been positive. The issue I think that everyone is suffering from right now is the uncertainty of the PDA market in that, there isn't a strong commitment from either Dell or HP that they are going to be in this space long-term. And as Dave mentioned people spend a great deal of money upfront to get their solutions deployed. And that's a real hard decision if you don't know the device that you are targeting is going to be available when you are all done.

So overall I would say all of our distributors as response was extremely positive and in talking with customers, probably the stability of it all being the number one I would say positive; and then, the fact that we will be able to provide extra features that people have been struggling to solve in the market. So on that score I think we feel very confident and actually we already have, I would say, distributors clamoring to get units.

It's not just our distributors because our integrated partners have faced same sorts of issues because they are doing application software for the small and medium business market segment. And these folks also have been struggling with the same issue of how to utilize either a consumer and industrial PDA and get these solutions to work at a price they can afford.

So as you know our immigration partners will promote the combination of their applications along with Socket's peripherals and now will be able to add to that the handheld computer which will give them their customers, literally, a one-stop solution. Because they all the offering the applications along with all of the hardware that is needed and enabling software needed to make that application work. So we have our integration partners equally enthusiastic about adding the handheld computer.

[Ron Craven], a private investor.

I would like to talk a little bit if I could about the cordless ring scanner. What was our revenue that we derived out of it in Q4 and also how many companies do you have presently evaluating the unit?

On the exact revenue we don't have that figure in front of us; but in terms of where we are with the ring scanner let me answer your question in the following way. We have something in the region of 50 companies evaluating the ring scanner. I think that introducing the ring scanner has been somewhat of an education for us. We issued the ring scanner and a number of our customers even though they excepted the ring scanner and their initial qualifications etc., which were very similar to our qualifications in terms of a LAN-based environment.

We discovered a number of issues with the ring scanner when it went into full production. We had to basically go and strengthen the number of things and we've done that in Q4. Now we are off shipping again.

[I'm happy] that the market reaction to the ring scanner has been extremely positive. However I would say the level of abuse and durability required in the environments was probably higher than we initially anticipated and therefore we had to make some adjustments. I'm happy to report those adjustments have been made and we had given units to what we were described as our most stringent ardent customers. And they have recently reported that the fixes we have made meet their requirements.

So we feel we are in great shape going forward. So we're not had a lot of revenue yet from the ring scanner that we are actually very optimistic that now that we have some of these issues behind us we can expect the revenues to grow rather quickly.

Back in your October conference call you alluded to one of the trials of your cordless ring scanner. It was being evaluated by an Internet-driven on demand book printing application and that you said with the few minor modifications that they requested that you believe that the Company will deployed several hundred units. Where are we with that?

Basically they were one of the customers where the rings were being used in a more stringent environment. As we dug a little bit deeper the ring scanners were being used seven days a week 24 hours a day. They run their facility around the clock and the ring scanners were being passed from user to user.

As we got into the four-month, five-month type category we saw a few failures particularly in our cables. And therefore we had to go back and redesign the cable to meet that level of -- robustness is probably the right word. We have done this and we are now sending them back samples. We believe that is a deal that is still very much on the table. We have worked closely with them and they have indicated they are happy but we haven't seen the benefit of that revenue just yet.

And they continue to use the ring scanner. When we asked if they would like to take back the current ring scanners they had they said absolutely not. So all they're going to do is they are upgrading now with these new changes we made and we expect that will be sufficient for them to move on with their larger deployment.

I would say as you enter new markets you certainly live and learn a little bit. And I think that when we went from what we were considering the occasional scanning market into these very specialized intense scanning markets, the functional requirements moved up a level. And I think that even though we correctly brought the product to market and we did a great job in terms of the design and usability of it we came up a little bit short on the durability. But those issues now have been addressed and we feel pretty good going forward.

And I think the good news on that particular product is that, as you know we started out with a highly durable case with liquid metal. And that has well stood the test of what ever people could throw at their ring scanner. So we are feeling pretty comfortable now about the product.

Now back if I could, back on the Dell channel and the short falls and everything that were associated with that in the last quarter. There was a drop that you noted at the last conference call like your modem sales had dropped from over 10,000 units in Q2 to just over 5,000 units in Q3 and that you thought that this was not a channel issue and not a demand issue.

But I was wondering you had also -- had expressed some optimism that you thought that this was really expected to rebound in Q4. Where are we with that?

I think that we have talked with a number of large customers in fact, when we did our special conference call on January 16th, one of the customers that called in explained that he has 5,000 modems. And one of the things I did was to call them afterwards and discuss and his dilemma it seems is kind of representative of other people's dilemmas.

He has a solution that requires a modem. He currently has 5000 of his 11,000 employees outfitted and he really didn't know what to do so he did nothing.

I think as we enter with our own device and provide a stable platform for people, that our modem sales in particular will come back strong. They weren't particularly strong in Q4. They were okay. So I don't think the situation has improved.

In looking at what drives the modem sales, it is pretty fundamental or basic. You have a business model that allows people to collect data whether it be marketing or other related information, go home and send the information up over a modem line. It is simple; it is extremely cost-effective; and it really has no technical issues for people. We believe such a market exists. But it hasn't been served well because people didn't know what to do and the numbers are quite large.

So we are in discussion already with certain people who have such a business model and are interested in evaluating our device to see if they would meet that need. The fundamentals I don't think have changed but the business I would describe as somewhat on hold until there is a more definitive solution in the market.

And we did see an uptick in both data collection and our modem business in the fourth quarter from the third quarter in excess of 10%. But compared to the first half of the year it's still substantially down. And I think the underline level of selling activities for our products by Dell and to some extent even by HP is at a much lower level in the second half of this year than it was in the first half. And I think we are reflecting that.

We also believe that as our handheld computer comes into the market which will be next quarter, that we will see a correction of that situation.

If I may, just one quick follow-up question. Do you or can you even give us a price range of the new handheld?

We prefer not to but if you stay tuned, we will announce everything in early March. So in early March.

That's all I had. Thank you.

Brian Swift with Security Research Associates.

On your evaluation, normal evaluation process. When would you think that we should be expecting to have any kind of significant revenue contribution from your new PDA? Would it be like September, December quarters?

I think if you run the normal course we would expect the six-month (indiscernible). What we're trying to do with the units that we are providing in March is to target people who have a shorter time to revenue window. We have a number of customers who have come to us who have fully qualified solutions and will need a device and we will try and get them devices so that we can speed up the ramp.

I think a normal situation is six months and that would be what we would expect. But I think that we will aggressively target people who have a fully qualified solution in the market already and maybe they were Dell customers and are unable to get supply or HP customers who are unhappy with the particular aspect. And based on that, I believe we will be able to ramp, not so significantly but faster than would be expected during Q2.

So what you're saying is some revenues in Q2 and then (MULTIPLE SPEAKERS)

Absolutely. Some revenues in Q2 but I think that we will separate people into maybe the people who can do a fast start because they have already heavily invested in this area. And then people who are now moving over to a mobile-based solution and these guys will take six and possibly nine months to get fully going. But I think that the current market climate, the uncertainty of the market situation gives us some advantage, based on our timing.

If you look out, if you have any long or short or long-term targets in terms of what kind of -- in other words if you do the math on what you're saying earlier in the conversation or on your remarks was, it sounds like you're shipping out or devices are going to be attached, that have been attached to about 125, 150,000 of these PDAs each year. So what do you think is kind of your fair share if you look down the road as you are trying to go after?

What I prefer to do is to defer that to the next call till we have the product launch but I'll be happy to talk about that. I think that certainly people know well our products in the markets. And we shipped almost 200,000 in 2005, I didn't look at the number yet for 2006 but I would say certainly in the last two years we are in the almost 400,000 range.

So again I would say 10, 20% of those people would switch over to a Socket-based solution which would put us in the 40,000 range of the devices. And that would basically significantly change our business profile and put us up into the $50 million range as opposed to being in the $25 million range.

Also we're not changing any customers' behavior with this device. They are already seeking a solution that has a handheld computer which would be a Windows Mobile-based computer in many cases. but not all. Add peripherals and then an application and all we're doing is we are making our handheld computer available to be that handheld computer portion.

I think it is a much shorter decision process for people who have already qualified their solution. Typically the longer lead times are with applications and integrating and making sure that people are able to successfully use the capabilities that have been developed. So companies that are already well along in that process, substituting our handheld computer for another handheld computer is a much easier decision.

From what you describe as the experience your customers have been having you guys shouldn't settle for much less than 100% of the market.

I think we will have to settle for something less than 100% but we will do our best to get as close as we can.

Kevin Dede with Merriman Capital Management.

It's Merriman Curhan Ford. Thank you. Apologies for jumping on late but I was hoping you might let us know if you would be prepared to demo some of the new equipment primarily that new PDA, at the CTIA show coming up?

We are happy to demo it, we will be demoing it at the HIM show. We don't believe that CTIA is the appropriate venue or event for us to demote this. Primary reason is I think I mentioned -- I don't know if you were on yet -- earlier in my remarks that there is expected to be 20 million PDAs sold this year of which about 14 million will be phone-based devices and about six million are non phone-based devices.

Our initial target for this product is the non-phone-based market which we feel has been somewhat abandoned by the larger players, particularly as the numbers far driven by consumers have moved people over to a converged device. We have made business application suppliers who want a device that has good wireless LAN and Bluetooth but doesn't necessarily need a phone.

So our target is them. So we are happy to demonstrate the product and I think that is why we are deciding to show it for the first time at the HIM show which is the Health Industry, Healthcare Information Management show because it better reflects the target we're going after.

So I don't know if that answered your question. We are happy to demonstrate at other events as well but I think that we would prefer to keep it away from the mobile phone-centric type events because it doesn't have a mobile phone built in and it really is designed to service the people who don't need a mobile phone for their application.

But that show, Kevin, is next week -- the HIM show -- so we will be able to demonstrate it starting next week and again can certainly look to other forums to demonstrate it. And we are certainly happy to show it to people who are interested in the product.

You anticipated my next question. Thanks very much for entertaining me.

Gentlemen, I'm showing no further questions in the queue at this time. Do you have any additional remarks?

Yes, just to close, I would like to thank everyone for joining us today and also to remind people that we will be presenting at the upcoming Security Research Associate Technology Investor conference in San Francisco next Monday February 26 at the Omni Hotel and that that presentation will be webcasted. We look forward to reporting to you our first quarter results and also updating you on our progress on our next called an April. And that concludes the call for today.

I would just like to again thank everyone for participating and wish you all a good day.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.