Socket Mobile Inc (SCKT) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Socket Mobile, Inc. Q2 Management Call. (OPERATOR INSTRUCTIONS)

It is now my pleasure to introduce your host, Mr. Jim Byers of the MKR Group. Thank you, Mr. Byers, you may begin.

Thank you, operator. And good afternoon and welcome to Socket's Conference Call to review financial results for its second quarter ended June 30th, 2008. On line today are Kevin Mills, President and CEO of Socket; Dave Dunlap, CFO 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 market. The release has also been posted on Socket's Web site 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 the call will be posted on Socket's Web site 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-looking statements include but are not limited to statements with respect to growth in future periods, statements relating to the distribution, timing and market acceptance of our products -- especially the SoMo handheld computer -- and statements predicting sales trends 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 a result of a number of factors, including but not limited to the risk that shipments of our product 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 opportunity may not happen as anticipated, the effects of the current and future economic environments, the risk that our current integrator program and distribution channel partners may not choose to distribute our products or may not be successful in doing so, the risk that acceptance of our product 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 SEC.

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. And thank you, everyone, for joining us today.

We are pleased to report record revenues in the second quarter, representing a 21% increase over Q1 and reflecting growth in all three of our major product families, including record sales for SoMo 650 handheld computer.

In addition, with this increased revenue, combined with our ongoing expense management, we're also pleased to note that we achieved our Q2 target of cash flow-positive operations before working capital changes, which resulted in our net loss being essentially at breakeven levels for Q2.

We entered Q2 with good momentum and continued to make good progress building increased market traction and customer adoption of the SoMo as part of our Business Mobility systems strategy.

In a moment, Bob Zink will provide more details on our sales activities and marketing programs during the quarter. First, let me give you some highlights and our perspective on the business mobility market.

In the second quarter, we recognized SoMo revenue of $1 million, which is a 53% increase over the first quarter. This represents sales of more than 2,000 units in Q2 and reflects our success in realizing many of the opportunities that we had initially seeded during the past nine months.

As we've noted before, customer evaluations can be a lengthy process. We have typically seen significant corporate deployments and data collection opportunities take nine to 12 months, and sometimes longer.

As we begin to receive a growing number of larger-scale orders, they typically involve deployments that roll out over multiple quarters. We continue to build on this order pipeline and believe we are steadily building a solid base for continued growth.

We see excellent opportunity across all our traditional vertical markets that include healthcare, retail merchandising, hospitality and automotive; and remain focused on further establishing the SoMo and our system solutions in the mobile workforce market. We're also seeing growth opportunities in Europe, where we recently introduced the SoMo 650 in German, French, Spanish and Italian.

We are pleased with performance of our traditional business in Q2 within an otherwise challenging economic environment. During the quarter, we saw growth in all three of our major product families, including the SoMo and our traditional data collection and OEM products that serve the business mobility market.

Socket's broad range of products serve the three distinct market segments that comprise what we call the business mobility market. We have our classic handheld segment, which includes our SoMo and peripheral solutions; we have a mobile phone-centric segment driven by Bluetooth, and our tablet PC segment that is continuing to evolve.

While these segments have their own individual dynamics, they all continue to be driven by companies seeking to increase the productivity of their business and mobile workers. Socket is well positioned to benefit from this increasing trend, and we see our revenues being driven by each of these segments as we continue to expand our business.

The strong performance of our classic handheld business reflects our growing SoMo sales, with the additional revenue in this segment coming from sales of Socket's plug-in scanners to non-SoMo PDA devices from manufacturers like HP.

Our mobile phone-centric business was solid in Q2, despite some delays in deals. We remain very optimistic about the opportunity in this segment, given the continual increasing use of mobile phone applications to control and improve business processes. This trend, coupled with the requirement for fast and accurate data entry, will drive the requirement for automated data entry methods like barcode scanning, which make a substantial difference in the overall accuracy and effectiveness of the system.

Our tablet-centric business continues to be the smallest segment, but we are seeing some significant opportunities that we expect to be very nice revenue contributors later in the year.

Bob Zink will discuss in more detail our focus on key markets I mentioned earlier, including the recently added educational vertical and the growing success of our vertical industry and distribution partners in serving these markets with solutions incorporating Socket products.

Our OEM business was strong in Q2, and we anticipate that it will remain strong in Q3, balancing some of the seasonality factors we see in the third quarter. While we expect some weakness in OEM in the fourth quarter as we enter a new design-in phase for certain modules, we are very committed to this business and expect it to continue to be a strong contributor to our long-term revenue growth.

In conclusion, we made solid progress during the quarter, with our overall Business Mobility system strategy. And we anticipate a continuation of our positive momentum and look forward to growth in the second half of the year.

I will now turn the call over to Bob Zink to provide more detail on the SoMo 650 and data collection sales activities. Bob?

Thanks, Kevin. Good afternoon, everyone.

We made significant progress during the quarter in increasing overall market acceptance of our products and partner programs, and achieved several key milestones. We are encouraged by the significant growth we are seeing in all our target markets, especially in those where we have strategically focused our field sales, tradeshow and marketing efforts.

In review, our strategy targets key vertical markets by focusing our efforts on a select group of vertical integration partners and participating aggressively in our distributors' marketing programs that not only serve those partners but also promote data capture solutions to the broader small and medium-sized businesses which make up what we call the business mobility space.

From a SoMo perspective, we achieved 115% of our Q2 sales goal, and for the first time sold in excess of 2,000 systems in a single quarter. This includes our first major single customer, which led the way by accepting delivery of over 200 systems as part of a major deployment to roll out in the coming year across 230 facilities in over 24 states.

We can now disclose that this customer is the Evangelical Lutheran Good Samaritan Society. They have started full deployment of the SoMo 650, and we are expecting approximately 800 more systems to be deployed in Q3, and more in the following quarters until completion of the planned 3,200-unit deployment.

Good Samaritan is the nation's largest nonprofit provider of senior care and services. Their initial application for the SoMo 650 is to keep track of patients' daily activities including meals, rehabilitation and social or extracurricular activities. As part of their evaluation, Good Samaritan tested the SoMo along with other competitive devices, and selected it as the most cost-effective solution that could effectively scale to widespread organizational deployment.

Throughout the development of the project, much was learned over a 10-month period by all parties in terms of staging, configuring and deployment of the systems to make the rollout process as efficient as possible. We will soon be issuing a press release with this information, including customer comments on the key points for selecting the SoMo and the quality of Socket's customer support, in terms of making the project a success.

To give you a sense of our revenue mix -- the shipments to Good Samaritan, along with other hospital and healthcare-related orders, grew our revenue from global healthcare from 15% of total sales in Q1 to 41% in Q2, to become the leading revenue category over retail merchandising. For the first half of the year, healthcare represented 25% of our product sales, and retail merchandising was 23%.

We also generated growth in other key markets including manufacturing, automotive, hospitality, transportation and government education, with each segment averaging around 10% of total sales.

Within education, we closed our first significant opportunity in this segment with our partner, Plasco ID, and the Memphis City School District in the area of student tracking. The application involves using the SoMo 650 equipped with a CompactFlash scanner to read bar codes on student ID cards as part of an overall tracking solution provided by Plasco. The solution includes the ability to track tardiness, assign detentions; verify student identities, and various other tracking tasks. After initial pilot in five schools, Memphis City Schools ordered 100 units in July to implement across 68 middle and high schools.

Automating school systems with the ability to efficiently track students is just one of the many mobile applications being aggressively adopted across the nation in conjunction with several government programs targeted at improving student attendance and enhancing overall efficiencies and safety in the school system.

Along with increasing sales of the SoMo, we also began deployment in Q2 of several multi-thousand-unit rollouts for our Series 7 cordless Bluetooth hand scanner in the retail and pharma life science segments, in conjunction with tablet PC and Smartphone devices respectively.

We anticipate that initial Q2 shipments of 600 units for those two customers will grow to a total of 7,000 units in the next 12 months. Both applications fall squarely within Socket's strategic focus on the phone-centric and tablet-centric markets.

We also made significant progress in our European operations in Q2, in terms of adding new partners and growing sales of the SoMo, which totaled approximately 600 units. Similar to the U.S., initial sales often involve companies who are testing for larger deployments. So we are very encouraged by what we are seeing in Europe from a market segmentation and adoption perspective with the SoMo, as well as our cordless scanners that are being used in conjunction with Smartphones in sales automation applications.

In conclusion, these positive results reflect the increasing market traction and sales momentum we are generating, and the positive response and increasing acceptance we are seeing in our selected partner community and target markets.

Thank you. And now I'll turn the call over to Dave.

Thank you, Bob.

In our first quarter management conference call last April, we guided to solid revenue growth during the balance of 2008, looking to attain positive cash flow from operations before working capital changes in the second quarter, and targeting profitability in the second half of the year. I'm pleased to reaffirm these targets and to report that we achieved our second-quarter growth and cash flow objectives.

Second-quarter revenue of $7.5 million was the highest quarterly revenue in the Company's history, an increase of 19% compared to the second quarter a year ago, and up 21% sequentially over the first quarter of 2008. The increase was broadly based across all of our major product categories, as noted by Kevin and Bob.

Second quarter sales of our SoMo handheld computer passed the $1 million mark, a 53% increase over the preceding quarter, reflecting steady growth in deployments across a number of vertical markets. Our data collection product surpassed $3 million, a 22% increase over the previous quarter, benefiting from increased SoMo sales and improved availability of third-party handheld computers used with our data collection products.

In addition, our VIP, or vertical industry partners, are deploying more of our products as part of their productivity-enhancing solutions, and their contributions to our second quarter sales are growing. With over 200 active partners, we are working closely with our VIP partners to build on the momentum the program is generating.

Finally, our OEM product revenues, which include our Bluetooth and wireless LAN modules and cards, was $2.6 million of our revenue, an increase of 32% over the previous quarter, and reflects higher sales of our Bluetooth cards and modules, including the benefit of some last-time buys of our older Bluetooth modules that are being phased out and our wireless LAN products.

Our revenue outlook for the second half of the year is for continued growth. This stronger revenue pace is reflected in our backlog of orders going into the quarter. We count as backlog orders on hand at the end of the quarter that are scheduled to ship in the following quarter. We entered the second quarter with a backlog of 2.8 million, and we enter the third quarter with a backlog of 3.1 million.

Our gross margin percentage of sales in the second quarter was 48.6%, compared to first quarter margins of 48.9%; both within normal operating ranges, reflecting changes in the product mix, which fluctuates from quarter to quarter. We're expecting margin percentages to be lower in the third quarter by about two percentage points, reflecting additional last-time purchases of older Bluetooth chips and modules that are being phased out, followed by a return to more normal margin percentage levels in the fourth quarter.

Second quarter operating expenses were approximately $3.8 million, about $200,000 lower than in the first quarter. The first quarter is traditionally our most expensive quarter, as it includes costs of our annual audit and annual shareholder communications.

We held second quarter operating expenses level with both our fourth quarter of last year and with the second quarter a year ago, allowing the benefits of growth in the second quarter to flow through to the bottom line.

Our net loss for the quarter was $149,000, which rounds to $0.00 per share; compared to a loss of $0.03 per share in the previous quarter and $0.02 per share in the second quarter a year ago. As a result, we generated approximately $200,000 of cash from operations before working capital changes, which exceeded our cash flow target for the quarter.

We expect our operating expenses to grow moderately in the second half of the year, reflecting the addition of key personnel and a proactive sales, marketing and product development program. But our objective is to keep the rate of expense growth below the rate of revenue growth to further improve our bottom line.

Our cash balance at June 30th, 2008 was $3.1 million, compared to a balance of $3.9 million at March 31st, 2008. Use of cash in the quarter was due primarily to working capital changes associated with growth. Higher quarterly revenues increased our receivables at June 30th by $900,000, and we increased our inventory by $500,000 in preparation for higher July shipments. We also used $100,000 for equipment and tooling additions.

We've funded these cash uses with $800,000 of cash on hand, $200,000 contributed by operations before working capital changes, $300,000 from an increase in our end-of-quarter bank line draw, and $200,000 received in proceeds from option and warrant exercises. Our bank line of up to $4 million is providing working capital funding, and we expect operations to continue to contribute cash going forward.

I continue to receive questions about whether Socket's Board has plans to exercise the authority given by its stockholders in April to enable reverse stock split up until the end of this year. We're currently trading below the NASDAQ minimum bid price of $1 and have until early December to move above that level.

I'd like to reaffirm my guidance that the primary purpose of requesting this authority was to ensure our retention of our NASDAQ listing, and it remains our hope that we can regain compliance through improved operating results and increased investor interest during 2008, so that a reverse stock split will be unnecessary. As expected, the Board took no action at its regular quarterly meeting held yesterday and will continue to monitor trading levels as we move through the second half of this year.

Kevin and I will be presenting to investors attending the Security Research Associates Fourth Annual Summer Technology Conference on August 18th, 2008, which we will Webcast. We will announce more details on the Webcast as the conference date approaches and look forward to the opportunity to update you on our progress in serving the business mobility market at that time.

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

(OPERATOR INSTRUCTIONS) Brian Swift, Security Research Association.

Well, hi, guys.

Brian.

Well, good quarter.

Thank you.

I'm not having to make any excuses this time, so that's good.

And I just have a question -- the percentages that Bob Zink was giving out -- those are just specifically for the SoMo, or for handheld --

Well, actually, they're for the branded business, so --

But they weren't talking about as percentages of the total revenues. You're talking about your --

Well, we're actually talking about percentage of the branded -- the non-OEM revenue, all of which is Bob's responsibility. So, for example, on the 40% going into healthcare, we would count SoMo sales and also sales of cordless scanners that will be going in with tablets into that sector, right? So as we look at the businesses, you have a few different ways of looking at it. We track sales into different vertical segments, right?

So what Bob said was that 41% was sales that related to healthcare-based activities.

And so the total, Brian -- we're talking about total branded product sales for the second quarter was $4,405,000.

Okay.

And in the balance, which consists of our OEM products and services and our serial products, was $2,968. We had additional $20,000 of service revenue, totaling the $7,493,000 for the quarter.

So Bob's comments did not refer to OEM, but purely to all the branded -- the $4.4 million.

Okay.

Okay?

On the impact of end-of-life on your OEM business that you just talked about, can you give us an idea of what that aspect of your OEM sales will impact your revenues for Q3, Q4? You said -- sounds like there's a bump up in Q3 and then a drop off in Q4.

Yes, so we have the benefit of some end-of-life sales that we expect to add several hundred thousand dollars in Q3. But an end-of-life is a good-bad situation -- it's good that you get all the revenue up front, and it's bad that it goes away thereafter.

So we just wanted people to know. We have some new design wins; these things take a long time. And we feel very good about the OEM business. But we just want to recognize the fact that we're getting a bit of a bump in Q3, and we'll be back to more normal levels in Q4.

Although the last-buy sales do include sales in Q4. So the last-buy sales go through the end of the year, Brian. And in the meantime, as Kevin noted, other elements of our OEM business are ramping up, particularly our Wi-LAN business, and replacement of Bluetooth products are part of their portfolios that are available today. So we expect that that growth will virtually offset any loss of the bumps we're getting in Q3, Q4.

The other thing to note is the branded product business is growing quite well right now. So we expect that these are normal transitions that happen from time to time. We do expect that the momentum that we're currently seeing will absorb much of the impact of the last-buys once they're completed.

Okay. No, I just wanted to get some comfort that these are swings that are in the hundreds of thousands, not millions that we got to --

Right.

-- in terms of what needs to be offset. Because with the momentum, it sounds like what you have in the SoMo, anyway, should just basically kind of offset any of that.

And that's our hope. We believe that we have good momentum in the branded products that Bob talked about. But we do have an OEM business that again is significant in the overall mix.

Okay.

Okay?

And -- and well, should we be in the eights in Q3, or is that too optimistic (inaudible) seasonality --

What we're saying, Brian, is we expect to continue to grow. It's always very difficult to put a number at these low levels, primarily because -- if deals happen or don't happen. We've pointed out many times that we get 40%-plus of our revenue in the last month of a quarter, and particularly in Q3. With the Europeans taking much of the summer off, Q3's even more exaggerated.

So I think we have good momentum, but we don't have an exact figure that we're willing to put in the market at this stage.

Yes, and our target, Brian, as we've noted, is to hit profitability -- at least breakeven or better profitability levels -- in the second half of the year. We've not tried to target that to Q3 or Q4 until we get a good feel for timing of orders. But for us to hit profitability at our current expense rates, it would require us to be up into the $8 million-and-above category.

Also, last year, I recollect in Q3, in addition to the seasonality, you also had a new product announcement come out of HP, which disrupted your sales. Do you have any macro things like that that are going on to impact this quarter?

We do not. We think that the market has stabilized in terms of the availability of devices. HP has their 200 Series now in the market, and we are not aware of any new products entering or new products that are likely to go end-of-quarter at this stage, so -- go end-of-life at this stage.

So I think from that respect, it'll be a reasonably stable quarter. The big, I would say, uncertainty in Q3 is generally that a lot of the business happens between, let's say, the 15th of August and the end of the quarter. So you're generally light at the beginning. And again, we did 45%-plus of our Q2 revenue in June.

So we are a little bit back-end loaded, and September's a ways away.

Okay.

And lastly, could you give a little bit more flavor on the pipeline in the handheld area in terms of -- just kind of comparative over the last few quarters, in terms of either how much potential business is in there, or number of customers, or just some kind of flavor that we can get as to how that momentum is building?

Sure, this is Bob.

I mean, from a pipeline perspective, right now we're tracking at about 4 to 5x the plan. It's been growing significantly in terms of number of accounts.

Our partner base -- I think I reported last quarter, we had grown it pretty significantly up to about 180 VIP partners. We're rounded off to around 200 right now, and that's simply because we're staffed to effectively support that number. And now we're really cultivating this group that are fairly evenly spread across the segments that we're reporting on today.

So from a pipeline perspective, not only is our deal size growing, but the number and quality of the accounts is growing. So it's a sales pipeline, right? So nothing's for sure. But it's definitely, from just a professional sales management perspective -- when you can get into multiples of three to five times your plan, then theoretically, you're in a much better position to make growth happen.

Okay. Thank you.

Thanks, Brian.

David Segelov, Leviticus.

Hi, Kevin, good afternoon.

Hi, David --

Great quarter.

Can you give me a sense on those 2,000 SoMos of where the sales were coming from in terms of the distribution? Were they coming -- how much was direct, and how much was through your channel partners?

First of all, David, we don't sell anything direct. We have no direct sales. Everything we sell on the SoMo, with the exception of our OEM business -- everything we sell on our branded side is through two-tier distribution. So all of the sales are coming, I would say, indirect via partners. And I'll let Bob maybe answer a little bit.

But what was nice here was we saw a pretty diverse and spread-out, I would say, segmentation of the Business. It wasn't that we had one deal that made the number. I think Bob pointed out that we had 200 units coming from Good Sam, Good Samaritan?

That's correct.

And that was, I think, the single-largest deal. So it was made up of 50s and 80s and 100s, and a significant number of 10s and 20s coming from different segments of the Business.

And those 10s and 20s somewhat foreshadow bigger project?

Absolutely. I think what is important to keep in perspective here is we have worked for 10 months on the Good Samaritan deal. We have sold them a total of probably 250 devices. We sold them 50 in the first nine months, and we sold them 200 in the tenth. We've already said we expect to sell them 800 in the next three months.

Right.

These things take time. And we are building, we believe, a solid base to grow the Business on. People don't rush into this lightly. If we look at the Good Samaritan deal, it took us 10 months to get to the 250-unit level. We're only at this essentially -- officially product has been out there 11.5 months.

So this is a message we want to get across, is -- it takes time to build, but we're building.

This is Bob. I might add to your point or question there.

While we were discussing that the branded business fell in these various categories, with healthcare and retail merchandising -- because the SoMo is not only pulling through some of those products, but also one of the main revenue contributors -- if you wanted to use the 25% in healthcare, or 23% roughly in retail merchandising, and then 10% scattered across the others as the SoMo breakdown, you're pretty close.

Because contributing to that, then, is data capture plug-in devices that are with the SoMo. And then our cordless products that are connected to other platforms certainly participate in those spreads. But that's a pretty good approximation of the SoMo.

Now, one of the things, though, that's kind of interesting is some of these other markets that are, just say, right now at 10% -- the spread globally was around 600 units in Europe, and the rest out of the 2,000 in the Americas. We actually had a nice order in Mexico. But a number of these orders in, say, Europe, for instance, were with some extremely encouraging opportunities, one of which -- I can't mention the names yet, but with a couple of cruise line, very well-known cruise line ship operations, where they're using the SoMo for people tracking and hospitality applications for poolside ordering and things like that on the cruise lines. And so, out of the 600 units, around 50 units were shipped into two pilots on two different ships.

And if we win these deals, which right now are looking very positive -- together, they're a 2,000-unit opportunity.

Right.

So those are the types of situations that we're getting into right now.

Excellent.

Also, has the release of Windows 6.0 Mobile driven some of the business as well?

Absolutely. Really a couple of things -- this type of technology -- the good thing for us is there's very little difference, from an application perspective or application developer's perspective, between five and six. So from a transition perspective, it's not material. There are a few bells and whistles at lower levels that people might take advantage of. But by and large, just a move from five to six is not that difficult.

So the development community and our partners were waiting for that to some degree. There was a little bit of a pent-up demand, because people just like to be on the latest and greatest. That's just --

Right.

-- technology as it is, right?

But the other thing was that we went ahead and made the investment in supporting the various languages. And so that has not been a trivial thing. We had to certify all these languages, et cetera. And so we did achieve our goal in Q2 of making that happen. And we already are seeing orders come in the pipeline here at a pretty aggressive rate in Q3 for German, French, et cetera languages.

And then I just maybe would add one more thing, David.

In light with our policy, even though we've introduced Windows Mobile 6 and the multiple languages, any customer who wants to remain on 5 can continue to buy Windows Mobile 5 for as long as they want -- well, we've said three years. So essentially, there's two more years of that. But we expect most people to migrate.

I think this is one of the differences between what Socket is doing and what's been traditional in the markets -- is the transitions now are really paced by the developer and customer community, as opposed to by the manufacturer.

Great, thank you.

Thank you.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions. Gentlemen, do you have any closing comments?

Yes. We'd just like to thank everyone for participating in the call today, and we look forward to reporting our progress at our next call, after our Q3 results.

Thank you.

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