Socket Mobile Inc (SCKT) 2007 Q4 法說會逐字稿

Greetings, and welcome to the Socket Communications Inc., doing business as Socket Mobile Inc., 2007 year-end and Q4 management 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 with MKR Group. Thank you, Mr. Byers, you may begin.

Thank you, operator. Good morning, and welcome to Socket's conference call to review financial results for its 2007 fourth quarter and year.

Online today are Kevin Mills, President and Chief Executive Officer of Socket and Dave Dunlap, Chief Financial Officer of Socket.

Before the market opened today, Socket distributed its earnings release over the wire service and has posted the release on its website at www.SocketMobile.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 typically by this Wednesday. We've s also posted replay numbers in today's press release, for those wishing to replay this 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 meanings of Section 27A 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 with respect to the rollout, distribution, market acceptance, and effects on Socket's revenue and business of its new handheld mobile computer product, and other statements predicting trends, sales and market opportunities in the markets in which Socket sells its 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 shipments of product may be delayed or not happen as predicted due to technological, market or financial factors, including the availability of necessary working capital; the risk that market acceptance and sales opportunities for products may not happen as anticipated; the risk that Socket's integrator program and current distribution channels may not choose to distribute products, or may not be successful in doing so; the risk that acceptance of Socket's products in vertical application markets may not happen as anticipated; and other risks described in Socket's most 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.

Thanks, Jim. I would like to begin with a recap of 2007 and then present our goals and objectives for 2008.

At the beginning of 2007, we outlined a new strategic direction for SocketMobile, stating our intention to transform the Company from a peripherals provider to the mobile computing markets to a systems provider. We made steady and significant progress over the course of the year and are pleased to report success in achieving our objective.

2007 was a year of significant change for Socket. We introduced our own handheld mobile computing device, the SoMo 650, designed for mobile workforce business applications. We strategically targeted the significant market opportunity that exists between consumer-grade and industrial-grade PDAs. We began shipping units in the second half of '07 and are making good progress in gaining widespread market acceptance, and we ended the year with near record revenue in the fourth quarter, representing a 26% increase both sequentially and year over year.

In the fourth quarter, we nearly doubled the total number of SoMo units sold and recognized revenue of $826,000, representing approximately 12% of total revenue. Market response to the SoMo 650 has been excellent and many customers have completed their valuations and are now in the early stages of full deployment. At this stage, we recharacterized unit sales growth as a combination of units purchased for evaluations and early stage deployment. Our potential order visibility is good and continues to strengthen with more evaluation units being delivered monthly. We expect growth in the SoMo 650 sales to build gradually during the coming year as deployment rollouts continue and increase over time.

To give additional color on our progress, at the end of Q3, we had five companies that had deployed units. At the end of Q4, we had 22 companies with SoMo deployments. Currently, we define companies that have 25 units or more as being in the deployment phase. Within this group of 22, we have five companies that have deployed 100 or more units. So we are confident that the SoMo is meeting the market requirements as we have seen customers progress from initial small orders to more sizable, full-scale deployments, representing meaningful revenue contribution.

We're seeing good interest across our traditional vertical market sectors, including health care, hospitality, retail merchandising and automotive. And we continue to work very closely with our vertical industry partners to maximize these excellent revenue generating opportunities. We introduced the SoMo 650 in Europe about three months after our initial U.S. launch, and Europe is also showing good traction. We expect our European efforts to follow a similar steady growth path as we have seen in the U.S. We will soon have multiple languages supported and available in Europe, which will expand our total available market and help accelerate sales. Currently, the SoMo is only available in English. We are also seeing some interest in Asia, but have not really focused on this market yet.

Based on our initial market acceptance, our primary focus now is on building our sales presence and increasing our momentum. We'll be investing in building our regional sales teams in early 2008 to further build on the good momentum we already have established. We are also seeing a number of favorable market dynamics benefiting the SoMo. Dell's departure from the PDA market has left customers of their Dell Axiom with the greatest immediate need for a handheld replacement. With Dell's assistance as one of our primary resellers, a significant portion of our SoMo revenue today is coming from former Dell Axiom users.

We also stand to benefit this year and next from a potentially sizable replenishment market from the many companies who deployed PDA-based mobile solutions at the peak of the market in 2005 and have three-year warranties that are now expiring.

A recent study reported by the CIO newsletter suggests the overall climate of IT spending seems favorable, especially as many of the benefits are overall cost reduction and productivity improvements. Our strategic objective going forward is to establish our SoMo 650 and follow-on versions along with our system solutions as major products in the market serving the mobile workforce.

Turning to our other product categories, we made good progress in our data collection and OEM products, achieving sequential and year-over-year growth in both categories in the fourth quarter. Data collection revenue in 2007 grew 15% over 2006, with every product in this category showing growth on an annualized basis, led by our Cordless Hand Scanner. Bar-code scanning continues to be our largest revenue product category, representing 43% of our revenue at the end of the fourth quarter.

We continue to see strengthening in our cordless products, as more and more devices support Bluetooth connectivity. Our cordless scanners work with a variety of platforms and benefit from being less dependent on the PDA market. Going forward, we expect to see continued, moderate growth in data collection with the strongest contribution coming from the Cordless Hand Scanner and the Cordless Ring Scanner sales.

Our plug-in scanning business also grew in 2007, though at the more modest rate of 10%. The plug-in business struggled in the second half of 2007 as Dell and HP PDAs were less available and we saw the level of business fall by over 20% in the second half versus the first half of the year. We expect this business to continue at the lower levels we experienced in the second half until the availability of products from HP and Motorola stabilize.

Our network connectivity products were also impacted by the availability of platforms from Dell and HP, and we believe they also have stabilized at the lower levels we saw in the second half of 2007. We expect these levels to continue in early 2008. Connectivity products will become more important as options for the SoMo later in 2008, and we believe they will be a key driver of SoMo sales, but are unlikely to grow significantly as stand-alone products going forward, and this has been factored into our plans.

The OEM business. The OEM business was strong and stable throughout 2007 as our many customers continue to do well with their products. In 2007, the OEM business was primarily driven by Bluetooth. In 2008, we expect to add OEM revenue from our wireline modules, which we believe will initially complement our Bluetooth sales, but in time, we expect wireless LAN to dominate the OEM businesses. The OEM business is very much driven by design wins. Just as we have reaped the rewards in 2005, 6 and 7 of the design wins we achieved between 2001 and 2004 in the Bluetooth module space, we understand it will take time for us to build the wireline business. But we are confident that we have world-class wireline solutions, and we will be able to successfully grow the business going forward.

In 2007, we also began to transition away from our mini Bluetooth BCO2 designs and began working on BCO4 designs. We expect these designs to contribute to revenue in 2009 and beyond.

Looking ahead, we expect 2008 to be a year of growth. Our primary goal for this year is to build the SoMo business. We believe there is a substantial market opportunity, and we will continue to focus on increasing our market reach for the SoMo by strengthening our overall data collection and OEM businesses to support sustainable and long-term growth business. We believe there is now sufficient evidence supporting success of the SoMo and that we have enough momentum and sufficient elements under our control to overcome the partner uncertainties we have had for the past two years. We expect SoMo growth to be steady but strong, especially in the second half of the year.

At the same time, we continue to have a strong data collection business and a strong OEM business, both of which we expect to grow in 2008 as we continue to service the many opportunities we already have. These are an important part of our overall business, especially since the SoMo revenue is still in the very early stages of ramping. But over time, we will be able to reduce our dependencies on these businesses and increase our overall revenue as we get the SoMo fully up to speed.

In summary, we are excited about the opportunity ahead and the good momentum we are generating. We plan to strategically invest in additional sales personnel and marketing programs to further expand our market reach and to support continued growth, and our target objective is to achieve profitability in the second half of the year. I will now turn the call over to Dave for a review of our financials. Dave?

Thank you, Kevin. In the fourth quarter, we reported near record revenue of $6,846,000, just $10,000 shy of our all-time record quarter and a healthy 26% increase over both the preceding quarter and the fourth quarter a year ago. The increase reflected growth in every product category, with the largest growth coming from sales of our data collection products, our OEM products, and our handheld computer. Data collection product revenues were $2.9 million, or 43% of our Q4 revenue an increase of 17% over the previous quarter. Data collection product sales had dropped off in the third quarter, affected by a late in the quarter announcement of a new PDA from Hewlett Packard, the largest manufacturer of PDAs that support our peripheral products. Q4 growth reflected a return to more normal data collection sales levels as the drop turned out to be but a temporary delay.

OEM revenues were $2.1 million or 31% of our Q4 revenue, growing 38% over the previous quarter, driving this growth with higher Bluetooth module sales to an expanding OEM customer base.

Our SoMo 650 handheld computer revenues were $826,000, or 12% of our Q4 revenue, an increase of 84% over the previous quarter. The fourth quarter was the first full quarter of handheld computer sales since we reached mass production levels in September. And as Kevin mentioned, sales revenues were split evenly between product evaluations and early-stage deployments with 25 companies now deploying 25 or more units.

Our connectivity, serial and service product revenues were $1 million or 14% of our Q4 revenue. And they held their own, growing 4% over the previous quarter. These products include modems, Ethernet cards, serial cards and service revenues, and the quarter benefited from higher modem sales and service revenues compared to the previous quarter.

Our backlog going into the first quarter, consisting of orders on hand at December 31st that are scheduled to ship in the current quarter, was within normal ranges at $1.5 million. Orders for standard product are typically placed a few weeks before required delivery and so most of the revenue in any quarter comes from orders placed within the quarter. Even though the fourth quarter experienced a positive balance in revenue, total 2007 revenue of $24.1 million was down 3.5% from 2006 revenue of $25 million and was the third consecutive year of essentially flat revenue. We anticipate a return to growth in 2008 with the SoMo handheld computer, data collection and OEM products all contributing positively. We expect the handheld computer to continue to gain market acceptance as the primary mobile business computer, serving our traditional vertical markets of healthcare, hospitality, merchandising and automotive through a growing base of vertical industry partners. We expect our data collection products sales to benefit from a return to stability in the handheld computer markets and from the increasing use of mobile data collection solutions in the vertical markets we serve, as the availability of productivity-enhancing applications continues to grow. Many industries are just beginning to gain momentum in the use of mobile handheld computing solutions, such as a hospital's use of bar-code scanning to administer patient medications. A restaurant taking orders electronically, retail merchants managing their store inventories, or remote salespersons communicating with their company databases. And our OEM business is expected to benefit from a combination of continuing strong OEM demand for Bluetooth modules and cards and growing demand for wireless LAN modules introduced late last year and wireless LAN cards. We continue to make major investments in the software that enables these technologies and to keep these technologies current with the latest advancements in hardware components and software features, and this is being recognized by a growing base of OEM partners.

In the fourth quarter, higher revenues increased our gross margin to 49.5%, more than a percentage point over the previous quarter. Our gross margin for the year was up 0.4% over the previous year to 49.2%. As we look forward to 2008, we expect product margins to fluctuate within their own margins due to product mix, volume pricing discounts and product cost reductions.

Our fourth-quarter operating expenses of $3.8 million increased from $3.5 million in the third quarter and from $3.7 million in the fourth quarter a year ago, reflecting higher personnel costs from additional personnel and sales and marketing and commission and variable compensation programs paying out a higher percentage of compensation targets, reflecting the positive improvement in our fourth-quarter financial results.

As we look forward to 2008, we expect to further increase our operating expenses as we add additional personnel to drive and support anticipated revenue growth, increase our investment in key sales and marketing programs of our partners and distributors, and step up our product development programs for new hardware and software products.

The bottom line improved in the fourth quarter to a net loss of $431,000, or $0.01 per share and with neutral cash issues from operations before working capital changes. The comparable figures were a loss of $0.03 per share in the previous quarter and a loss of $0.04 per share in the fourth quarter a year ago.

Looking forward, our target is to reach profitable operating levels in the second half of this year.

One of our primary objectives in the fourth quarter was the maintenance of cash balances through improved operating results and good working capital management. I am pleased to report that our cash balances at December 31st, 2007 were nearly $5 million compared to cash balances of $4.4 million at September 30, 2007. These balances included a draw on our working capital bank line at the end of the year of $2.6 million compared to a draw of $2.2 million at September 30th. Thus our cash balances grew even without the assistance of a bank line draw. Our current ratio at December 31st current assets divided by current liabilities was 1.3 to 1.

Socket will hold its Annual Meeting of Stockholders on Wednesday, April 23rd, 2008 at 9 AM at the Company's headquarters. Proxy materials will be distributed in the middle of March to all record holders as of February 25th, 2008.

One of the items being submitted for approval is formalizing our name change to Socket Mobile Inc. We've been doing business as Socket Mobile Inc. for more than a year. We believe the name better communicates to our customers, business partners and investors the current business of the Company as a mobility solutions provider.

Finally, a reminder that Kevin and I will be presenting at 2 PM Pacific time today to investors at the Security Research Associates Winter Technology Conference being held in San Francisco. The presentation is being webcasted and may be connected to through Socket's website.

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

(OPERATOR INSTRUCTIONS). David [Segaloff], [Lavectis] Partners.

Can you give us a sense of what the cash flow was like for the quarter and what it will be like for the year?

For the quarter, David, we were essentially break-even from operations before working capital changes. And then, we've historically managed our working capital well, so we were 250, about $250,000 million positive from operations in total, the difference being positive working capital management. But $150,000 was reinvested in tooling and property, plant and equipment.

And then, but the net increase, about $350,000, $400,000 of the overall increase of $0.5 million from the third to the fourth quarter then came from essentially the additional draw on the bank line. So we were overall positive by about $150,000 without the bank line draw, and our objective was to reach cash neutral operations during the fourth quarter and we achieved that.

I guess if your sales do ramp as you expect them to ramp, will there be a cash draw down to accommodate that ramp, or what should we expect?

Well, working capital requirements with growth do put pressure on cash. But that's one, why we have the bank line. It's a working capital bank line that increases as receivables grow. And also, good working capital management is key, and I think we've demonstrated our ability to do that. So we believe the growth that we expect for 2008 will be well within our ability to handle with our existing cash structures.

Okay. I guess I have a question for Kevin if I could. Can you just break down a few of the subsectors that you're selling to, such as health care and retail and just give us a bit of flavor on each of those?

Sure. In the health care markets, I think the -- we're seeing a number of applications. Probably the one we talk about most is dispensing of medications, where people are using a handheld to scan the patient, scan the medicine and the system is confirming it's the right patient at the right -- that's the right medicine, the right patient, right time. And then the nurse administers. That's probably number one. We're also seeing applications in drawing of blood, clinical trials and again, people are using the PDA to help improve a process and get confirmation that they are doing the right thing prior to administering the procedure. Right? So that -- we're seeing that in health care. In fact, in health care, we are even seeing applications where people are using PDAs to take orders from patients for what meals they would like to have while they have a stay in hospital. So today, you have situations where people have to fill out a form at 11 o'clock and then they get a choice between chicken and beef or whatever is on the menu. Now some of those applications are going to PDAs.

In the hospitality, I think it comes down to a few applications. They fall into I would say three categories. One is, the taking of orders at tables by waiters or waitresses; checking in guests for determining their status based on they have a gold card or Platinum card or some other status card; and then probably the last is ticket validation, where, again, people have printed their own ticket and they use the PDA to scan it. And it confirms off their system that the ticket is valid. Right?

So those are the type of -- they are all business-related, I would say paper and pen replacement and process improvement type applications.

Retail merchandising essentially is people going into stores to merchandise. They use the barcodes on the products, the UPC code, they scan an item. It tells them where it belongs on the shelf or it's to be replenished or superseded, depending on what type of product they're in. If you look at things like greeting cards, we have Valentine's Day coming up. Someone has to basically go and put out all those Valentine's Day cards between now and the 14th of February and someone has to come on the 15th to remove them all. Those type of applications. Does that give you sufficient color, David?

Can you give us a sense of the growth rates in some of those sectors? How far through are we on the prescription scanning, for example?

Well, that's an interesting one. I don't think we are far along at all. I think that there's a number of initiatives trying to solve this problem. We have trials going on in the U.S. and Switzerland, in the Netherlands, in the Czech Republic. I would say in the vast majority of cases, we are still in pilot phase, where people are trying to debug their systems prior to rolling them out.

So in that respects, I think health care is very much an open market right now, where people have money and have a requirement but haven't fully figured out the best way to do it. But we believe this will start happening and you will get adoption this year.

If you look at things like retail merchandising, that's actually a pretty mature industry; they've used handheld devices and our products for many years. So that's more of a replenishment opportunity for us. But we believe health care is actually a pretty open market right now.

Okay, thank you.

Dick [Seracusa], Merrill Lynch.

Congratulations. It looks like we finally arrived. It's been a long time. I got a couple of quick questions. How many companies presently are in -- do you have let's say in the testing stage -- that have not really deployed yet?

Well, it's very hard to put a number on it. That's why we decided to at least pick 25 as being a number that we could say that they've started the deployment. If you look at, we'll say Q4, we basically sold about half or about let's say 850 units into deployments and we sold about half in onesies, twosies that we really don't have a lot of visibility on. But I would say there's probably over 200 companies that have onesies, twosies that are looking at the SoMo just based on Q4's numbers.

Okay. And then the ring scanner, which was off-line for a while because of some technical glitches, I understand is back online again and what's the upside there? You had $2.9 million in data collection in the quarter. Probably a little of it was the ring scanner, I would guess.

Actually quite a small amount. I think that the ring scanner, first of all we still strongly believe in the product, and we have modified the product, and we have fixed a lot of the issues that we felt the product had, and we worked closely with customers. I think the number was still under 200,000 --

It was about $100,000.

Yes, $100,000 in Q4. So we are back with the companies that have a burning need and we are back in evaluation mode. What's interesting with the ring scanner is that everyone who uses it loves the product. The robustness of the design we did basically wasn't as robust as it needed to be for these very harsh environments. So we fixed that and now we are seeing strong interest again.

Yes, there's good upside there.

There's very good upside there.

Yes. And last question, on this conversion into other languages, is this a tedious process? How many languages could we be in, in '08?

I think that we will be in five or six languages. We will do the European languages called EFIGS, which is English, French, Italian, German and Spanish. But we are also doing Portuguese, both international Portuguese and Brazilian Portuguese.

So that will be done in '08?

That will all be done in '08. And then we will -- we do have the ability to do more languages. Now the languages come down to two things.

From an OS point of view, the languages are fully supported by Microsoft. So there isn't a tremendous amount of work to support a given language, because we would rebuild the OS image to support something like Chinese. But then you have the business I would say decisions to make. If we wanted to go into the Chinese market, we would have to certify our device for China, which could be an investment of 60 to $70,000. So generally speaking, what we will do is we will look at I would say providing some samples to select customers in given markets, and then based on some positive response from those people, we would look to support that language. But if we wanted to support all languages worldwide, you could easily spend $1 million just on certification before you sell the first unit, so you have to kind of pick your battles. But all of Europe, Mexico, I think South America would be our primary focus, and then, we'll look at China and Japan I think going forward.

Great. Thanks, again.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions in the queue. Would you like to make some closing comments?

Yes. So we would just like to thank everyone for participating in this morning's call, and may we remind you again that we will be presenting this afternoon at the SRA conference in San Francisco and to wish you all a good morning. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.