Socket Mobile Inc (SCKT) 2008 Q1 法說會逐字稿

Greetings and welcome to the Socket Communications, Inc. First Quarter Management Call. (OPERATOR INSTRUCTIONS.) It is now my pleasure to introduce your host, Jim Byers of the MKR Group. Thank you, Mr. Byers. You may begin.

Thank you, operator. Good afternoon and welcome to Socket's conference call to review financial results for its first quarter ended March 31, 2008. On line today are Kevin Mills, President and Chief Executive Officer of Socket; Dave Dunlap, Chief Financial Officer of Socket; and Bob Zink, Socket's Vice President of Worldwide Sales and Marketing.

Socket distributed its earnings release over the wire service at the close of today's markets, and the release has also been posted on Socket's 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 within a few days. We've 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 meaning 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 statements include, but are not limited to, statements with respect to the distribution, timing and market acceptance of our products, and statements predicting trends, sales, order activity, backlog and market 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 the result of a number of factors, including, but not limited to, the risk that shipments of our products may be delayed or not happen as projected, if ever, due to technological, market or financial factors, including the availability of necessary working capital; the risk that market acceptance and sales opportunities may not happen as anticipated; the risk that our integrator program and current distribution channels may not choose to distribute our products, or many not be successful in doing so; the risk that acceptance of our products in vertical application markets may not happen as anticipated; and other risks described in our most recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission. Socket Mobile does not undertake any obligation to update any forward-looking statements.

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

Thanks, Jim. I would like to begin by thanking everyone for joining us today.

The format today is a little different than past calls. I've asked Bob Zink, our Senior Vice President of Sales and Marketing, to join in today's call and provide additional perspective on our progress to date with the SoMo 650 handheld computer, which is a very important element of our business mobility systems strategy. Bob will provide additional color and insight on the increasing traction and market receptivity we are seeing for SoMo in the business mobility markets, as well as some key partnerships we have established that we expect to help drive the business going forward.

First, however, I will provide an overview of the business during Q1 and how we see the business mobility markets continuing to evolve in 2008.

Q1 was a reasonable start to the year, up 11% over Q1 of 2007. We entered the quarter looking to maintain the growth momentum we saw in Q4, but not really expecting Q1 to be stronger than Q4. These results were within the range we were hoping to achieve in the first quarter. The year started slowly, but the business strengthened in March, and we feel the quarter would have been stronger if Easter had not been so early this year, which caused a number of deals to slide into April. The silver lining to this is it gives us a stronger start than normal to Q2, and we believe we are well-positioned to further build on this momentum.

Looking at the dynamics of the business, there are three distinct elements driving the business today. We have a mobile phone-centric segment; a classic handheld segment, including SoMo; and a tablet PC-related segment. All three are being driven by companies seeking to increase the productivity of their business. We refer to this market as business mobility, and we have solid business in all three categories with our broad range of products.

Today, we are seeing strong demand for our data collection products in the mobile phone-centric business. The recent addition of the Motorola MC35 back into the market, coupled with some mobile phone-centric deals in China, resulted in a strong contribution to our business in Q1, and we expect that trend to continue in Q2 and throughout the year. There are millions of combined PDA mobile phones shipping quarterly, and more and more companies are using these devices to support business applications.

In the classic handheld segment of the business, the category that traditionally included consumer PDA's and other non-mobile phone-centric devices, we are seeing the market continue to struggle. HP did not ship their new device until mid-February, even though it was announced last September, and with the departure of Dell, HP is a primary player in this market today.

Our business in this category was weak in Q1, but we are expecting it to strengthen during 2008 as HP continues to deliver. The SoMo is also in this category. However, our numbers are not yet large enough to influence the market -- something we are hoping to change over time, and Bob will discuss in more detail in a few moments.

Finally, we are seeing more opportunity in the tablet PC-related segment of the business mobility market. Again, this is newer business for Socket, but it is helping to offset the weakness in the classic handheld market in the short-term, and we expect it to continue to grow as customers supply Windows XP-based solutions to mobile workers.

So overall, we are happy with the direction and outlook of our business mobility-related activities. While the first quarter was slightly softer than we would have liked, we believe that Q1 should be our lowest quarter of the year.

Our OEM business remained strong in Q1 and performed very much as expected. We continue to see a solid OEM business for the rest of 2008 and booked some excellent orders in Q1 that we believe we ensure that our OEM business will continue its solid upward trend throughout 2008.

I will now turn the call over to Bob Zink for his more in-depth comments regarding our SoMo 650 and data collection sales activities. Bob joined Socket about a year ago with the mission of helping us convert Socket from a peripheral to a systems company. Bob has spent most of his time building the sales and marketing team and laying the foundation required to build the business. As he will highlight and you will see, we are making substantial progress. Bob?

Thanks, Kevin. Good afternoon, everyone.

I'd like to provide some additional color on our business mobility strategy and some of the indicators of success we are seeing in the marketplace.

During the past year, we have positioned Socket from being strictly a peripheral supplier to a systems company, offering a full range of mobility products, including a new category of business mobile computer called the 650. Reflecting this change, Socket Communications is now officially Socket Mobile.

Our strategy reflects a new market we see emerging, a mobility system we have designed to address the requirements and functionality needs of that market, and a new value-added channel strategy designed to best serve the market. Given the ongoing proliferation of lower-cost wireless capable devices, increasing wireless communication speeds and available business applications from the software development community, we see the adoption rate of mobility solutions growing significantly in the largely unautomated companies within the small and medium business space. We believe the greatest new business growth opportunity exists in the SMB-sized company market and have defined this underserved market as business mobility. We are focused on establishing the SoMo and our systems solutions in the mobile workforce market and maximizing the strong market response and excellent opportunities we are seeing across all our traditional vertical markets.

We feel the positive feedback gained from early deployments, coupled with the various positive press reviews, have clearly indicated the SoMo to represent a new class, or category, of handheld mobile computer, and our targeted partner community has been responding favorably. We are very pleased to note that during the quarter, the SoMo was named Product of the Year by Portable Computing Magazine. The SoMo has also received several favorable reviews from various other technical publications. As an example of our increasing traction in vertical markets, in April, we received a letter of intent of our first large-scale deployment of SoMo from a very well-known company in the long-term health care segment for a minimum of 3,200 systems over a 12-month period commencing in June. This win culminated a 4-month evaluation period. In addition, we have received notification of several multi-thousand-unit commitments for rollouts commencing in late Q2, early Q3 for our Series 7 Cordless Bluetooth Hand Scanner. The Series 7 can be enabled with other vendor devices, such as tablet PC's, classic handheld computers and virtually any mobile phone-centric Windows mobile device via our embedded Socket Scan and Connect!Agent software components.

We have announced a medical version of the SoMo with an antibacterial case for use in hospital environments, which has generated significant interest. Resellers are picking up this product and putting it in their stable of solutions. At the recent Health Information and Management Society Conference held in February, the standard and medical versions were demonstrated at the Cisco mobile pavilion, as well as the Dell mobile kiosk and three other new VIP partner booths. The SoMo was one of only three vendor products demonstrated by Cisco and the only device in its class. Our target of gaining 100 qualified leads resulted in over 300 leads for qualified end-users and new partners. An informal survey of the booth visitors during the show provided positive indications that the cost profile, durability and usability of the SoMo addresses health care IT professional buying preferences. In the first quarter, health care represented 15% of the SoMo sales, and we will see that percentage increasing dramatically in the second half of 2008. Thus far, retail third party merchandising has led at 26% of SoMo sales, with all our other target markets running very close to each other.

At the conclusion of Q1, we reached our Phase I target of 180 vertical integration partners, focusing on the SoMo 650, which represented 113% growth in this program since inception at the end of Q2 2007. This achievement was clearly helped by our Q1 joint announcements with Cisco of having CCX 4.0 compatibility in our enhanced Wi-Fi companion software, and also our announcements of two additional versions of SoMo targeted at government-related or other high-security applications and specific health care or other hygiene-sensitive market segments.

To better structure and support our growing market outreach, we have organized our sales, technical and marketing support around three distinct programs, with some localization differences between our international regions in the Americas, Europe, Middle East-Africa and Asia-Pacific. These three programs are designed to significantly increase the exposure of Socket Mobile products to those markets we feel would be most interested in our business mobility value proposition. The three programs are specifically designed around the individual needs of our value-added and broadline distributors -- what we call vertical integration partners -- and a select group of broadline internet direct marketers. During Q4 and Q1, we added four additional U.S. field-based salespeople and one EMEA-based systems support person to expand our coverage across these programs and into our primary target markets, being health care/life sciences, retail merchandising, hospitality, government and education and various lighter duty applications in the industrial and manufacturing segments, including the automotive aftermarket.

In conclusion, our sales pipeline continues to build and will further benefit from several very exciting partner design wins where the SoMo has been integrated in conjunction with other special purpose device solutions for health care and manufacturing.

These positive events and milestones are very encouraging and indicate a stronger second quarter and continued ramp-up in the second half of 2008 as our new salespeople come online and additional in-process SoMo certifications mature within the partner community and their customers.

Thank you, and now I'll turn it over -- the call to Dave.

Thank you, Bob.

As described by Kevin and Bob, first quarter laid much of the groundwork needed for achieving solid revenue growth during the balance of 2008. We continue to target, and believe we remain on track, to reach profitability in the second half of this year.

First quarter revenue was $6.2 million, an increase of 11% compared to the first quarter a year ago, but down 10% compared to the previous sequential quarter. We started the quarter slowly, as is typical for January. That slowness continued through February, which was unusual. Hewlett-Packard began releasing its 200 Series business handheld computers in February. HP handheld computers are frequently used by businesses with our data collection peripherals, and the February pattern was not dissimilar to the slowness we experienced in September, when HP first announced the imminent availability of these units, followed by a strong October, when HP announced the handheld computer was delayed. March came back strongly, despite Easter week falling in April, which impacted European sales. We reached break-even operating levels in March and carried a record order backlog of $2.8 million into the second quarter, an increase of $1.3 million from the backlog of $1.5 million we reported at the end of last year. Backlog represents orders on hand at the end of the quarter, scheduled to ship in the following quarter. The faster March order pace has continued in April. All indicators are now pointing to growth.

Our data collection sales in the quarter were $2.5 million, or 40% of our revenue, down from $2.9 million, or 43% of revenue in the fourth quarter. Our SoMo sales were $675,000, or 11% of the quarter's revenue, compared to $826,000, or 12%, in Q4. Our total branded product sales -- which consists of our handheld computer, data collection and our connectivity peripherals -- were $3.6 million in the first quarter, of 59% of our revenue, compared to $4.3 million, or 63% of our revenue in Q4. The OEM and Serial portions of our business were $2.5 million in both periods, representing 41% of our revenue in the first quarter and 37% of our revenue in Q4.

Our gross margin percentage on sales in the first quarter was 48.9%, compared to 49.5% in the fourth quarter, both within normal operating ranges, reflecting changes in the product mix, which fluctuates from quarter to quarter.

First quarter operating expenses were approximately $4 million, about $200,000 higher than in Q4, but similar to operating expense levels of $4.1 million a year ago. General and administrative expense in the first quarter includes the cost of the annual audit and stockholder communications, which added about $250,000 in expense to the quarter. We also increased our sales and marketing expense by 5% from Q4 levels, reflecting the cost of additional sales and marketing personnel and increased selling and marketing activities, offset by reductions in research and development spending, reflecting (inaudible) in the timing of development projects.

Our cash balance at March 31, 2008 was $3.9 million, compared to a balance of $4.9 million at December 31, 2007. About half of this reduction was due to our operating loss for the quarter, and half was due to working capital changes, including growth in receivables and inventory.

As we move toward profitability, operations are excepted to shift from being a user of cash to a source of cash. We've extended our bank line of $4 million to March 2010, and the line is available to support our working capital requirements as we grow.

Socket held its annual meetings of stockholders yesterday. All nominated directors were elected, and the appointment of Moss Adams as independent auditors for 2008 was ratified. Stockholders also approved the change in Socket's legal name to Socket Mobile, Inc. That change is now effective and was announced yesterday afternoon. We believe that name better communicates to our customers, business partners and investors the current business of the company as a business mobility solutions provider.

Stockholders also have given authority to Socket's board to enact a reverse stock split if deemed by the board to be in the best interest of the stockholders. The primary purpose of requesting this authority was to enable the company to maintain compliance with the minimum bid price requirements of the NASDAQ exchange, as we believe our continued listing on NASDAQ is of great benefit to the stockholders, and we did so at the annual meeting to save the cost of a separate meeting later in the year. We would like to regain compliance with a minimum bid price requirements of the NASDAQ exchange of $1 without resorting to a reverse stock split. Our hope is that we can regain compliance through improved operating results and increased investor interest during 2008 and that a reverse stock split will be unnecessary. We intend, if necessary, to transfer our NASDAQ listing to the NASDAQ Capital Market Exchange in June, which has all of the same reporting and trading features of the NASDAQ National Market, and that will extend our NASDAQ compliance period to early December. The board plans to take no action at this time and will review the status of our NASDAQ listing at their regular board meeting in late October.

Kevin and I will be presenting to investors attending the American Electronics Association Micro Cap Conference on May 5, 2008, and one of the 30-minute afternoon sessions will be webcasted, which will give us a chance to update the emerging Socket story. We will announce more details on the webcast as the conference date approaches.

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

Thank you, sir. We will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS.) Our first question today comes from the line of Richard Siragusa with Merrill Lynch. Please proceed with your question.

Hi, Dave and Kevin.

Hi.

Two questions. I don't know who it was, but someone -- either Kevin or Dave -- said that you reached break-even in February?

Just in the month of March, Dick.

Oh, I'm sorry. The month of March.

Right. So for the quarter, I reported that the first two months were --

Right.

Were slow and -- but we picked up very substantially in March to actually break even operating level.

Good. Do you expect that to continue?

April started out equally strongly. We'll have to see what happens in May and June, but our expectations are for -- that we're now on a substantial growth pattern.

Good. The second question is -- and it may be difficult to add it -- to quantify it -- but how would you -- what would you say the size of the pipeline is today compared to a year ago as far as increase?

[As you're pointing out], it's a bit hard to quantify, but if you put us on the spot as you are, I would say it's probably double. It would be a good estimation.

Okay. So it's substantial. Okay. Thank you very much.

Our next question is from the line of Brian Swift with Security Research. Please proceed with your question.

One of my questions was the same as the last one -- how to get a little bit more color on the pipeline and where it's coming from, but you did cover some of that in your regular remarks. Do you see additional models of SoMo coming out, focusing on different vertical markets or are you trying to keep it as generic as possible?

I think we're trying to keep it generic, but we feel -- both with the medical and the government -- there are what we would describe as good market opportunities that will be better served with slight variations of the device. So we're not too religious about -- it must be -- the Henry Fords -- everyone must buy and drive a black car. At the same time, we're not going to have 40 versions either. And we look at the opportunity. We think certainly having an antibacterial model not only opens up health care, but also food hygiene and other sensitive markets to bacteria. And likewise, in the government space, they have not approved either wireless LAN or Bluetooth to be secure enough for certain applications, and they are solid purchasers of PDA. So I think we will stay within a narrow range, but we want to be sensitive and service the markets well. So I think that's the strategy going forward. And then have you bring up more handheld models future down the road, we will target maybe different market segments that are not ideally suited to (inaudible) SoMo 650.

Yes. Also note, Brian -- this is Dave -- the recent announcement of adding a version of the SoMo 650 with Windows Mobile 6.0, and that version also includes multiple language support. So that itself provides additional options to the market because users can select either operating -- Windows Mobile 5 or Mobile 6 -- and then they can begin to deploy multiple foreign languages where they need to do so with the Windows Mobile 6 version. So already, we're continuing to offer a much broader variety of choices into the market.

Yes, and maybe just to add a little bit of color there for you, Brian. You remember that one of the struggles that we always had was when Dell or HP changed the OS, because the various application developers or deployments would be already started on Windows Mobile 5, and Windows Mobile 6 would come along which would cause people to re-evaluate, recertify, etc. By continuing to offer both Windows Mobile 5 and Windows Mobile 6, we allow people to change at their own pace. So if somebody has a deployment and -- Bob talked about -- we have a deployment that is starting with a large health care provider -- and they spent -- and it's a good example. There, he spent 9 months between the first introduction -- it took them 6 months to get to the qualified -- the device point, and now they have a rollout schedule which begins in June. So if you look at the process, it took a total of 9 months, and this is where we are in the process. We're about 6 months in, so we're seeing this happening. But they qualified on Windows Mobile 5. If they had qualified with a Dell or HP, they would be now forced to go and qualify with Windows Mobile 6. We're avoiding that by continuing to ship the Windows Mobile 5 for the next 3 to 5 years, and we're being told by our customers that is a key differentiator between our solutions and consumer (inaudible) devices that they've been using in the past.

That leads to my next question, was what are the key differentiators in terms of why people are buying the SoMo versus competitors' products? What is a -- 2 or 3 main -- ?

I think the main ones actually come down to the life cycle of the device is very important, as we were told initially when we entered the market. I think the value proposition -- we're not the cheapest on the street, but I think we are being recognized as the best value. And the added durability. So the key things that we have gone after seem to resonate with the customers and are coming back. It's not we're winning every deal we go in -- but I would say in 80%+ of the deals where people do an evaluation, we are coming off with the right feature set for these people, and I think you'll see the deployment continues to increase going forward.

Also, the software, Brian -- Socket has been developing superb Bluetooth software since 1999 and it's a key driver in our OEM business in third-party rugged handheld devices. And wireless LAN -- you've seen the great improvements we've been making there, including the addition of CCS protocols. And the wireless LAN management software that we have that helps people find hot spots, get connected, stay connected -- including capabilities like fast roaming -- all of those together provide a far better user experience than users find in many devices. So the experience that we get reported back to us frequently is very positive relative to the overall experience. With the SoMo, software certainly is a key part of that.

This is Bob as well. I would offer up the concept on the SoMo that we feel is extremely important is that it really hits a sweet spot or a gap in the marketplace between the vertical or industrial devices and the lower-cost consumer devices, and so while it's not intended to compete head-on in highly rugged environments, there's an overlap. So where Kevin was talking about we're certainly a little more expensive than the consumer devices but offer the durability, etc., the converse is true as well, and so many of our new partners are extremely enthusiastic about the SoMo because it gives them a lower cost -- a very viable alternative that has extremely robust laser scanning and RFID reading capabilities that are coming more and more into vogue in various applications, but gives a price point that is extremely attractive.

And lastly, regarding trying to get through that $7 million quarterly revenue number. You're kind of like the little engine that could. You keep hooking up there, but something always seems to get in your way. Starting off then with a good strong April, do you -- would you -- do you think that this might be the quarter that you can (inaudible) through with the combination of HP getting their product out and maybe your peripherals business will snap back in addition to the --

Yes. I think that we're optimistic about Q2. We think -- yes, we expect to see growth in Q2, and I think the 7 is within our reach.

And I think the record backlog levels, Brian, are a great indicator as well as a great start. $2.8 million is higher than we --. We generally, as you know, report $1.2 to maybe $1.5 million as our typical backlog. So I think that alone is indicative of starting out with a much stronger base of orders on which we're now building.

Right. Okay. Thank you.

Thanks, Brian.

Our next question is coming from the line of Steve Kruger with Foresight Investment. Please proceed with your question.

Hi, Kevin. Hi, Dave.

Hi, Steve.

Kevin, could you give us any color on what the application is for this large health care provider that has signed on for multiple-thousand-unit deployment?

Yes. The application is actually to help monitor both the activities as well as -- just the tracking -- daily activities, moods and behaviors and dietary needs of long-term care patients. The organization in question, which -- whose name we haven't released yet, but we intend to release in the not-too-distant future -- has approximately 240 of their own facilities around the U.S., and they will outfit their various workers with our SoMo devices, and then they will record during their day so that statistics can be gathered and the process can be improved. They're not using any bar code scanning or medication dispensing yet, but they do believe, as they go forward, that they would expand the use of the SoMo into some of these areas.

Is this a nursing home company then? Are these nursing homes?

Yes. Long-term care facilities. Assisted living, long-term care facilities.

I see. And is this a custom application that the customer developed internally?

Absolutely. And this is why things take time is that if you look at their process -- right? -- and it's always good to look back a little bit. They basically contacted us in October of 2007 and then they basically got their application, and their application is unique to their environment -- whatever regulations and systems they use. They had someone write that application. Then they spent several months doing a evaluation of the system, including the SoMo, and that took them 'til the end of March, and they basically decided --. They evaluated other devices, including consumer-grade and more industrial-grade devices in the process. They selected the SoMo. And now, they've put together a plan to roll it out, and the rollout begins in June. But from day one to deployment, you're talking about 9 months.

Yes. No, I understand.

And we're about 6 months in.

No, I was curious as to whether or not the application -- if it were internally developed, then there's not much opportunity to see that --

Well, no. Actually, Steve --

(Inaudible) other kinds of -- the same kind of environment in other companies.

Well, one of the things that we see happening -- and this actually is what happened in this case -- is that this organization has set up a separate company to sell that application to other long-term health care facilities. So even though originally developed for their own use, they've probably invested several million dollars, and now they have met their own needs. They do intend to sell this to other similar long-term care facilities. And we've seen this pattern repeated. We see -- we talk a lot about St. Clair Hospital, and they've done the same. Initially, they had a software team that developed an application primarily for their own hospital, but once you determine how to dispense medication, it becomes -- it is a universal problem, and therefore, you can sell the system to other hospitals. So we see some of this happening, particularly with the lead software companies.

Yes. Actually, this is -- it's very indicative of an emerging market. Going back in the late 70's and early 80's when many companies in the direct store, delivery, automation were automating and other -- in the earlier days of automated data collection and mobile environments, you would see a lot of companies develop home-grown applications that had a tremendous amount of domain expertise baked into them, and then they would -- they were typically the early adopters in their industries, and then they would spin out companies that ended up becoming extremely successful in terms of automating their particular vertical niche market.

And did I hear you say you've signed up 180 resellers now?

Yes, that's correct. We started really the program in the -- June last year [of] this timeframe, and actually, in the -- probably really started getting going in the Q4, and then Q1 we've seen tremendous growth. And here again, we -- as our SoMo numbers would suggest in Q2, Q3, those were evaluation units in many cases, and now they've transcended into people -- or resellers saying that they would take on the SoMo as a full-line product.

Now are most of these people -- most of the resellers people who have existing applications and they're just looking for a replacement for the (inaudible) that they were selling before or are these people who have brand new applications and this is like the first time they're putting their foot into the water with mobile PDA kind of application? Can you kind of characterize what kind of how rapidly the uptake could be in this reseller market?

Sure. Well, we've put a lot of thought into selecting the partners that we really wanted to go after. So if you look at our market segments that we're targeting, we've done research and identified the leading companies that provide software solutions in those segments, and then we've gone about going after them, and some of them have a mix of applications. Most all of them have existing applications in their target markets, and most of them promote more than one vendor of handheld computers of one type or another -- all the way from highly verticalized, integrated products down to, say, a consumer PDA -- and some of them have focused on one type or another. And so we've gone out and convinced them -- by looking at the SoMo, trying it, evaluating it on their software -- that it has significant advantages, and so they have ready markets that they currently sell their products into. Some of them have very large install bases. We signed a partner in January that has an install base of over 10,000 users, and they regularly upgrade because they've been historically users of consumer-grade PDA's, and they typically upgraded every 15 to 18 months. So that -- those are the types of partners we're looking at that will start to ramp up a predictable, recurring base business for the SoMo, and then we have a very nice percentage -- 20 to 30% of these partners -- that are new market-type companies that have designed the Socket SoMo into a new application, or using what they -- using it with another type of mobile device -- that are going after completely new niche markets that should be very high growth for us.

Do you have a sense, Bob, of how many of these people offer the SoMo exclusively versus offer the SoMo with one or two or three or more PDA options?

I think, Steve, almost nobody will offer any device today exclusively, right? You'll always have some competition, right? They'll have a preference, and I think what's happening is we're moving up the preference table, right? We are displacing HP in some cases, or there are people have moved from Dell in many cases. But even the people that were with Dell -- they weren't exclusive with Dell. They had a preference. And applications are portable and can move from device to device.

Have you got any kind of order of magnitude, Kevin, in your head about an average number of units sell-through per reseller on an annual basis that you might have a year or two down the road? Are we talking about 100 units per reseller or 1,000 units per --?

No. Actually, I think you're talking about bigger than 100 units per reseller. Most of the resellers are in the business to make money, so there needs to be a calorie count that's meaningful to them.

Yes.

Alright? So -- and I think to Bob's point, they have to invest their dollars on top of the SoMo, and they're not going to do that unless they think there's a meaningful return in business. Likewise, we have been quite selective in who we sign up. It's not just anybody who can fog the mirror can sign up. They must have both resources and capabilities in a particular market. So -- then there needs to be an overall compelling business, and I think what Bob and his team have done is a very good job in bringing partners with concentrated activities into the -- together with SoMo into these market spaces.

Yes, I mean, the -- and the other thing I'd like to underscore is my opening remarks. The 180 or so resellers are -- was our Phase I target, and it represents a 3-pronged strategy. So the resellers I mentioned are really the value-added specialized resellers that will continue to grow that base, but then, in addition, we focus on a distribution strategy that actually goes out into segments. So for instance -- some of our distributors, for instance, like Ingram, Tech Data -- all of these people have, say, government education sector group, or they may have a health care group. And so we have -- and also we have in process programs that we're developing to get the SoMo as the preferred product in groups like that. So they may have 1,000 resellers or 2,000 resellers that work in the health care sector and that sort of thing. The third aspect of it then is our internet direct marketers. For instance, the -- Dell offers the products on the websites and then CDW is one of our direct marketers. And so those folks also have a very, very wide product offering virtually globally, right? So we really have three approaches we're working simultaneously, and we're seeing very good growth in all three segments.

So is it reasonable to think at this point that your original vision of a couple-hundred-million-dollar-a-year business is attainable?

Yes. I think that if we can execute and we are right about the strategy -- and early indications are we're on the right track -- that yes, there's a lot of headroom here to grow this company up into a really significant company.

Okay. Sounds like you've got a tiger by the tail and you're working it pretty well. Good luck.

Alright. Thanks a lot, Steve.

Our next question is from the line of Richard Siragusa with Merrill Lynch. Please proceed with your question.

Follow-up. Two quick questions. In the government sector, what are you targeting? What is your target markets there?

Well, the DOD is the core market. The Department of Defense uses a tremendous number of products like this, and so we have a general market that is just the standard SoMo, but then, working with some very large integrators -- well-known names that you would recognize -- they brought to us the need for a device that has literally no radio hardware in it whatsoever. Over the last few years, thousands of these devices have been used, but they're -- because they're not available, they've been focusing on laptop computers. And the DOD expressed a very strong desire for a smaller, more portable device. So that's why we decided to come out with what we're calling the high-security version of the SoMo.

Okay. The security aspect has been satisfied?

Well, they haven't qualified wireless LAN and Bluetooth or any type of wireless communication. So if you have that capabilities, you automatically get disqualified. It -- we're going through a process. As you know, with the government, things don't always work very quickly. So first, the product has to be available. And then once it's available, it can go on schedules and lists and be certified. We're in that process. And at the end of that process, you have a product that is certified and can be purchased by many departments within the government. We're not there yet, but we're down the track.

Okay. Secondly, in the health care sector, we've kind of been dancing around each other for the last couple of years, and it's becoming more and more of a large potential market. Like you said, when you went to the show, you thought you would get 100 leads and you got 300 leads. So this is a very general question, but when do you see that health care sector really gaining traction and taking off?

Well, I think it's ripe, and the short answer is we don't know. It takes a long time for some of these things to roll out. I think -- you can always look at things like wireless LAN. Wireless LAN -- we were having the year of the wireless LAN for -- it must have been -- seemed like about 10 years before eventually it exploded, and I think that we're close with health care, but we're not there yet. I think the ramp will start. The reason that we feel that health care is close is because the system is essentially broken and people -- workers in the industry, as well as people in general, just can't cope with the paperwork associated with all the regulations. So people are desperate to move to an electronic equivalent. Plus, it's been aided by certain changes in the laws, but you have to remember that the law that requires you to put bar codes on medications only was enacted in April 2006. Okay? So it's close, right? And we believe it's a tremendous market about to happen. We want to be there. We are there. And I think when it does happen, it will be explosive. Whether it's a quarter or three quarters -- we don't know. But we certainly feel the buzz.

Thank you very much.

Thanks.

(OPERATOR INSTRUCTIONS.) Gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

We would just like to thank everybody for participating in today's call, and Dave and myself will be at the AEA on May 5 and we look to talking to everybody there and we'll report our Q2 results in July timeframe. Thanks a lot and have a good day.

This concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation.