Socket Mobile Inc (SCKT) 2008 Q3 法說會逐字稿

Greetings, and welcome to the Socket Communications, Inc. Q3 management call. (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 afternoon, and welcome to Socket's conference call to review financial results for its third quarter ended September 30, 2008. Online today are Kevin Mills, President and CEO of Socket; Bob Zink, Socket's Vice President of Worldwide Sales & Marketing; and Dave Dunlap, CFO of Socket.

Socket distributed its earnings release over the wire service at the close of market today. 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 have 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 27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the Securities Exchange Act of 1934, as amended.

Such forward-looking statements include, but are not limited to, statements with respect to growth in future periods; statements related 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 orders for or shipments of our products 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 risk that market acceptance and sales opportunity may not happen as anticipated; the effects of the current and future economic environments; the risk that our integrator program and current distribution channel partners may not choose to distribute our products or may 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 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. First, I would like to thank everyone for joining us today. I'll begin by providing an overview of our business during this past quarter, including our SoMo handheld computer and our view of the business mobility market and how it continues to grow and evolve.

Q3 was another solid step in the right direction and another quarter of growth. Total revenues were up 48% over Q3 a year ago and up 7% sequentially over Q2. And we achieved this growth in what is typically a seasonally weak third quarter.

For those new to Socket, our revenue is driven by three distinct segments of the business mobility markets that our products address. We have a handheld segment, including our SoMo, a mobile phone segment, and a tablet PC-related segment. All three segments are being driven by companies seeking to increase the productivity of their workers and improve their business. We believe we are well positioned to benefit from this trend and are making progress in all three categories.

I will start with the handheld segment, since this is the market where our SoMo handheld computer is positioned along with its associated peripherals that we provide. We saw steady progress and increasing market traction with our SoMo in Q2, and we continued the strong momentum in Q3. For the first time in a single quarter, we shipped over 3,000 SoMo units, a very solid number, especially for Q3. We ended Q3 generating a second straight quarter of both record SoMo revenue and sequential sales growth of approximately 50%.

As our SoMo shipments and install base continue to rise, we expect our barcode scanning and peripheral products to benefit as well. The traditionally strong player in the handheld segment of the business mobility market has been HP. During Q3, we saw limited availability of HP's iPAQ 2000 series, as their stocks of these products run out. The HP 2000 series has been a workhorse in this category and traditionally was a strong driver of Socket barcode scanners and other compact (inaudible) peripherals. While the reduced availability of these HP units slowed demand for our plug-in peripherals in Q3, it also drove an increase in companies evaluating our SoMo as a potential replacement, which is providing even more long-term opportunities for the SoMo.

In Q4, we expect our CompactFlash barcode scanning business to resume growth, as we estimate that 50% of our plug-in CompactFlash cards will be driven by SoMo sales. We believe this increasing trend of our CompactFlash peripherals, being SoMo-driven, is underway, and I expect our SoMo to be our primary driver of our CompactFlash barcode scanning business going forward.

Over the last four quarters, we have introduced the SoMo, gained market acceptance, and have demonstrated growing market traction with increases in shipments of approximately 50% in each of the last two quarters. We feel very good about this progress and expect to continue to see strength in this category of the business mobility market going forward.

Turning to the mobile phone portion of the business mobility market, sales of our cordless hand scanner also helped drive a record revenue in Q3, as it too was at record levels. We continue to see significant opportunity in the mobile phone market as more and more businesses add business applications to smartphones like BlackBerry, Nokia, and Windows mobile professional-based units. Currently we are generating the vast majority of our revenue in this segment from smartphones running Microsoft Windows Mobile Professional operating system. In Q4, we'll be introducing into the market improved support for BlackBerry phones, which will help us to continue to grow this segment of our business.

Our third targeted business segment, tablet PCs, remains the smallest segment of our business mobility market. Sales in this area remain lumpy and very deal-driven. However, the installations are usually well worth the effort and focus.

Another area I'd like to touch on is our hands-free barcode scanning efforts with our cordless ring scanner. We've not talked much about this product in past calls, and I wanted to provide an update, since this remains a very good growth area for Socket.

Over the past two years we've sold over 2,000 of these units to a wide variety of customers who need highly mobile, hands-free scanning solutions. Our initial feedback was extremely encouraging, but the initial design fell short of expectations in the very harsh environment that represents our main market opportunity.

Over the last several quarters, we have redesigned this product for these harsher environments. Early customer feedback from customers testing the redesigned ring scanner is very positive, and we will relaunch the product in Q4 for initial deliveries in Q1 2009.

Overall, we are very pleased with the increasing traction of our branded products in the emerging business mobility market. This market is growing, and we are gaining traction in line with the plan we mapped out when we refocused the Company on this market back in early 2007. We have successfully transformed from a peripherals-based company to a systems company. And, as we progress along this path, we remain very optimistic about the long-term growth opportunity this transition brings to Socket.

Finally, our OEM business was very strong in Q3, driven by a combination of strong sales of our older Bluetooth BC02-based modules and some last-time purchases from volume customers. As we noted on our previous call, we expect some weakness in Q4, as a number of OEM customers continue to evaluate and design in some of our newer modules and cards for Bluetooth and wireless LAN. This business continues to perform extremely well with a high level of predictability. In Q4, the OEM will continue to be a key contributor, and we expect to make solid progress with key customers on our newly announced [WLAN ABG] product line.

In conclusion, we are happy with our solid Q3 results, and we remain very optimistic about our long-term prospects. While we certainly recognize the uncertainties of the current troubling economic climate, we believe the small to medium business mobile workforce market we address is less prone to the negative impacts affecting the consumer market. In this current environment, businesses are especially committed to maximizing efficiency and ROI to productivity enhancing solutions like the ones we provide. Plus, IT forecasts continue to show increases in general IT spending. While these are challenging times, we believe we have enough momentum to maintain our current levels of revenue going forward.

I would now like to turn the call over to Bob Zink for his more in-depth comments regarding our SoMo 650 and data collection sales activities.

Thanks, Kevin. Good afternoon, everyone. I'd like to provide some additional color on our progress during Q3 from a sales and marketing perspective. During the quarter we continued to see additional tangible progress in the overall market acceptance of our products and partner programs. And we continued to execute on our strategy of growing a select group of targeted vertical markets, focusing our efforts on a select group of vertical integration partners and participating aggressively in our distributors' marketing programs. As momentum increases, we are refining our message to what we believe is an emerging and growing business mobility space.

I'm happy to report that during Q3, we continued to grow our branded business, which includes our SoMo handheld computer to reach the highest single quarter revenue for this segment of products in over three years. As Kevin mentioned, we shipped approximately 3,000 SoMo units in Q3. This sales growth was largely fueled by additional growth in our healthcare vertical, which contributed 50% of total SoMo sales in Q3, or double what we sold in healthcare in Q2. All of our other target markets also contributed solid revenue for the quarter.

In addition to healthcare, our government education and retail merchandising verticals represented the other leading categories. In Q4, we will initiate a general availability launch of two new versions of the SoMo targeted specifically at healthcare and the government Homeland Security and Department of Defense segments, which we believe will further increase our momentum in those leading categories. We also believe they will gain traction within our other targeted verticals, such as hospitality and retail.

Our first major single customer of the SoMo, the Evangelical Lutheran Good Samaritan Society, continued their scheduled rollout by adding 850 more SoMos in Q3 and will be continuing their implementations through Q2 of next year for completion of their 3,200-unit deployment.

To give some perspective on SoMo sales by region, sales in the Americas increased in Q3 by 46%, and Europe increased by 35% compared to Q2. In addition, various Latin American initiatives we started last year are taking hold and facilitated our first significant shipments of the SoMo to this region in Q3.

Along with our positive SoMo results, we also made several key customer deployments in Q3 for our Series 7 cordless Bluetooth hand scanner and our Series 9 Bluetooth hands-free scanner. These deployments were in the pharma, life sciences, and mail courier package tracking segments, respectively.

Our data capture business overall is still in transition period as customers migrate from legacy products to a choice of phone-centric, PDA-centric, or tablet-centric solutions. However, our current pipeline of opportunities suggests that we are in an excellent position to take advantage of this migration of data capture and middleware software products that serve as all three platforms and with the core technologies of both 1-D or 2-D barcode scanning and RFID.

Our message to customers is that Socket can fill the requirements of many mobility applications in a number of vertical markets which may be either over-served with more features than needed or poorly served with not enough features by the other vendors of such products. In addition, Socket can also augment other vendors' offerings with specialized plug-in and wireless data capture accessory products to complete business mobility solution. This message is resonating positively with both business partners and end users.

Our VIP partner program grew 9% in Q3, and we have a much stronger representation now of this program on our Company Website.

The program is starting to gain traction in the EMEA region as well, and we expect it to accelerate in Q4 as our multi-language SoMos continue to gain very positive notice from the reseller community. With more products going end of life, customers are looking for products in the SoMo category.

In conclusion, we believe our solid Q3 results continue to demonstrate the success of our strategy and execution and that we are well positioned to service the core market space of business mobility that we are targeting for the future.

Now I'll turn the call over to Dave.

Thank you, Bob. For the past several quarters, we've guided to revenue growth, improved bottom line results, and positive cash flows from operations. I'm pleased to report that, in our historically seasonally weaker third quarter, we continued to attain those objectives, with record quarterly revenue of $8 million, a 7% increase compared to our previous record last quarter of $7.5 million, and a 48% increase from revenue of $5.4 million reported in the third quarter one year ago.

With our growth, we reported the small loss of $80,000, or $0.00 per share. Because that loss included stock option expenses of $171,000 and other noncash costs, we generated approximately $250,000 in cash from operations before working capital changes and nearly $1 million in cash from working capital changes. As a result, our total cash at the end of the third quarter increased to $4.1 million from $3.1 million at June 30.

Our objectives for the fourth quarter are to maintain positive cash flows and to bring our bottom line to profitability.

As Bob has commented, driving our growth in the third quarter was our SoMo handheld computer, which reached record revenue of $1.5 million compared to revenue of $1 million in the second quarter and $448,000 in the third quarter a year ago. SoMo revenue has grown approximately 50% quarter over quarter for the past two quarters and, in the third quarter, comprised 19% of our total revenue. With a growing sales pipeline, we expect growth to continue.

Another major contributor to our growth was our family of OEM products, including Bluetooth and wireless LAN modules and cards. These products also reached a record high of nearly $3 million, 37% of our revenue, compared to revenue of $2.6 million in the second quarter and $1.5 million in the third quarter a year ago. Sales were aided by last-time buys of our legacy BC02 Bluetooth modules, which are being replaced with newer BC04 Bluetooth modules, and by the growth in sales of our wireless LAN products. Our recently introduced, upgraded wireless LAN software, e-Wi-Fi COMPANION, that includes Cisco CCX extensions has been a positive factor in growing our OEM wireless LAN customer base.

Our data collection business generated $2.7 million in revenue, 34% of our third quarter revenue, compared to revenue of $3 million in the previous quarter and $2.5 million in the third quarter a year ago. Our data collection product family is undergoing a shift, reflecting changes we are seeing in the business mobility market space. Our cordless hand scanners hit an all-time record revenue level of $1.2 million, as more applications become available for barcode scanning with phone-centric and tablet devices. Offsetting this shift was decline in our plug-in scanner sales. As mentioned by Kevin and Bob, there are fewer devices with CompactFlash slots available on the market today, causing companies to switch to cordless scanning. As deployments of our SoMo product family continue to grow, we expect to see growth return to sales of our plug-in scanners, as the SoMo is designed to handle all of our data collection devices.

Our legacy products, including our serial product family and connectivity products, such as wireless LAN and modem cards, generated $844,000 of revenue in the third quarter, representing 10% of our third quarter revenue compared to revenue of $862,000 in the second quarter and $948,000 in the third quarter one year ago. These products tend to fluctuate within small ranges from quarter to quarter, based on customer needs, and are a small but important part of our product offerings.

Our margins on sales, as we guided last quarter, dropped to 46% due to lower pricing on our last-time buy OEM sales, along with changes in our product mix. We expect margins in the fourth quarter to return to second quarter levels of 48% to 49%.

Our operating expenses in the third quarter held steady at $3.7 million compared to $3.8 million in the second quarter and $3.5 million in the third quarter a year ago. Cost increases continue to be moderate and are primarily in the areas of sales and marketing as we continue to focus on the many sales and marketing initiatives briefly discussed by Bob that are supporting our sales growth.

As I mentioned earlier, our cash balance at September 30 increased by $1 million. Cash was generated in Q3 from both operations and working capital management. Our bank line of up to $4 million will continue to provide additional working capital funding, as needed, and we expect operations to continue to contribute cash going forward.

Turning to our stock trading activity, foremost in the minds of many of our investors are the trading prices and low daily trading volume levels of our common stock. Overhanging the stock is the need for us to trade at levels above $1 to continue to trade on the NASDAQ stock market, or be delisted. As you may know, NASDAQ recently suspended for 90 days their bid price listing requirement, which extends Socket's compliance deadline to March 10, 2009.

Continuing to improve our operations is first and foremost in the actions needed to bring us to improved trading levels, and the second and third quarters were good steps in that direction. However, in our view, the threat of delisting, the current economic and market conditions that have lowered ours and many others' stock prices and market valuations, investor concerns over the impact of a reverse stock split, and the inability of many investors to invest in companies that are trading at our pricing levels are all overhangs that could make a return to compliance with the NASDAQ listing requirements difficult to achieve without a reverse stock split.

Accordingly, Socket's Board of Directors has approved a reverse stock split of one for ten that will become effective when the markets open tomorrow morning. Each ten shares will become one share, with fractional shares paid out. This action should move Socket Mobile's stock price into levels that are more normal trading levels for stocks. It should return us to full compliance with NASDAQ listing requirements in ten trading days and, most importantly, will remove the uncertainties about our compliance with the NASDAQ listing requirements and the impact of a reverse stock split that overhang investor decisions.

This decision was reached by the Board after careful deliberation and extensive consideration of the pros and cons of taking this step at this time.

With that, now let me turn the call back to the operator for your questions.

Thank you. (Operator Instructions). Our first question is from the line of Brian Swift with Security Research Associates. Please go ahead.

You talked a little bit about some of the issues that impacted Q3, including kind of weak seasonality that you normally would experience; I guess, somewhat offset by the OEM business. In giving out the numbers, you mentioned that the OEM area was around $3 million. But you didn't really quantify how much we should expect it to back off in Q4.

And, also, given all the things we've been reading about and hearing about as far as Q4 seasonality and expectations and what have you, you're not really that influenced by the retail aspects of it. So how much of your Q4 expectations of having a strong quarter was more towards just the end of the year momentum that you would have with some of the new customers that have been deploying? In other words, I'm just trying to see what kind of metrics we expect will be going on in this fourth quarter and where we should be - what our expectations should be in that quarter - just holding your own around this $8 million level or actually growing the business.

Okay. Let me get back on a few issues. First of all, generally speaking, we expect Europe to be, I would say, (inaudible) anything from 10% to 20% in Q3 as opposed to their normal levels, as people generally are not available, and they take longer holidays, et cetera.

And, in Q3 this year, we were able to offset some of that. We also had some last-time purchases on our OEM side, which provided for that expected downturn in Europe. And the net result was we were able to grow the revenue by approximately $0.5 million. We're expecting that the OEM business will go down, approximately, by $1 million in Q4. However, we also expect the SoMo branded side to increase, in line with the deployments that we have seen.

So where we are right now is that we feel we can hold the $8 million level, the current level. We're a little bit cautious in that we don't believe the economic situation will affect us long term because people are really looking for the productivity-enhancing type of solutions we're providing. However, in the short term, I think everyone's just a little bit skittish. And I might equate it to when you have a near accident in your car. You drive very carefully for the next two or three miles. I think we're suffering a little bit of that. People, I think, have been shocked by the turmoil in the markets. And we basically saw people not doing anything for some period of time. [We are seeing] people resume activity, but we don't think it will be, I would say, just linear, strong growth we expected if we were going back to June or April when we first put out plan together.

So we think we have enough momentum to stay in the levels we're currently at. And we believe we will be able to squeak out profitability in Q4. That's what we're working very hard to achieve. But this is not the type of environment where you have a high level of predictability because there's a lot of uncertainty in the marketplace.

A couple of other comments, too, Brian. Our OEM business in the BC02 is actually phasing down over several quarters, so it's not an eminent decline. But it is occurring. But, at the same time, the wireless LAN business is picking up very rapidly. So that group is focused on mitigating the changeover by maximizing the increases in the wireless LAN business, which is getting good responses and good growth. And then, also, the BC04, which is the replacement Bluetooth chip, is coming into play as well.

The other factor is that the margins, as you know, were lower in Q3 because of a portion of those last-time sales. And so we go back to margins at the levels we had in Q2 in Q4. So we can really get to profitability, even if we just hold at the current revenue level of $8 million. And so our objective is to get the bottom line profitability at those levels we continue with a very positive cash flow environment.

We don't think our working capital requirements in the fourth quarter are going to require any use of cash, if all things go as planned. So we're looking for another positive, cash-contributing quarter in the fourth quarter, and we certainly can achieve bottom line profitability, we believe, at the current revenue levels. Anything above that, of course, will go through to the bottom line.

And then I'll just maybe add one more thing. You are correct in your assumption that we are not affected by the retail markets. Currently, we really have no business in the retail space. And, therefore, long term, even in these trying times, we think we're in a pretty good position, because people generally are forced into improved productivity. Often what happens is companies will reduce their workforce and discover they still need to do the same amount of work or nearly the same amount of work and then offset the difference by increasing the productivity of the workers that they have remaining. That I think will drive our business, even if the economy is weak in 2009. I think you have some short-term issues where people, in times of uncertainty, are-- They're reducing their workforce and will just stop doing everything for 30 to 45 days. Those are blips we have to deal with. But I think the long-term health of the business is actually quite good.

One other thing. You've had a history, as do quite a few companies in your size level, that, at the end of the quarter or the last couple of weeks or whatever in the quarter, is kind of when a lot of bigger deals either happen or don't happen. Of course, this September quarter, the last two weeks, were really embroiled in this whole financial turmoil going on. And a lot of the companies that I've been talking to have said that a lot of those deals people just kind of sat on their hands like the deer in the headlights. Could you give us a little idea of what your experience was in that regard and then kind of what sort of feedback you're getting as to--? It seems like, at least, the financial turmoil-- The freezing up of commercial paper and a lot of the different financial components seem to be getting better, even though the stock market tends to be very volatile in here. What's your read on people's attitudes about where they were in those last two weeks in September versus where they are now?

We can tell you what-- Based on history, we've traditionally done 30/30/40, and Q3 was no exception. We did about 40% of our revenue in the September month. And we actually had a very good last two weeks. We did see some deals dropping out. But we really didn't see an enormous amount of business dropping out. I think we have seen people being a little bit cautious in early October. But, overall, I think a lot of our deals people have put in a tremendous amount of work and effort prior to getting the final products delivered. Often, it's not untypical that people are a year into a project before they deploy the hardware.

So I think people had the money and were looking for the productivity gains [were]far enough along. I think, in some ways, the uncertainty may affect us later, where people have stopped projects for periods of time now. But the ones that were in, I will say, the closing stages didn't seem to stop in Q3.

We believe we have enough deals to see us through Q4. But, obviously, we're monitoring the situation closely.

Okay. Along those lines, when you step back, quite a bit of your enthusiasm for the continuation and your momentum as far as the SoMo was concerned would be not only new deployments but just basically as you move through with all these customers. Some have planned increases in their deployment - ones that have already gone through the evaluations and what have you. That kind of gives you a bit of visibility going forward. So, from what you're saying, it doesn't sound like there should be a lot of movement in terms of that Q4 deployment is concerned as far as your SoMo.

Again, I think we're more insulated than most. You're not totally insulated. But we're more insulated than most. As Bob points out, 50% of the revenue of the SoMo came in the healthcare sector in Q3. And, certainly, what we see in these types of deployments is you get a department or a floor or a segment that first try the units automate some process. And, if it's successful, that's replicated out to other departments. Now, the ways in which it's replicated out-- There may be changes based on budgets. But, often, I think as I pointed out, these are productivity-enhancing type of solutions and often bring immediate savings and are often actually moved up the priority list when you can't afford the extra people that you may have in the hospital or helping with some of the process as people tightened their belts.

One more thing before I turn over to the rest of the world here. You mentioned the new product rollouts as far as your defense - Homeland Security and DOD-related things. My recollection was that you developed those products kind of in response to some RFPs that were out by various agencies. A number of other companies I've talked to have indicated some stretch-outs as we got close to, in September, the end of the fiscal year - that things were kind of-- government-type projects, a number of which were pushed out into either the new fiscal year or after the election. What kind of feedback are you hearing relative to expectations in these--- maybe the government responding either in Homeland or DOD to those--

Just, in general, we had planned to bring this product out in Q4 in order to get onto any type of government schedule, Product A must be generally available, et cetera. So we went through all those processes. It's quite nice to hear that the government pushed out some money out of last year's budget because we weren't ready. So, if they pushed into this year, we'll be in better shape because now we have the product they want. So, hopefully, we'll do better with it than maybe we were expecting.

Okay. All right. Fine. Thanks.

Thank you. Our next question is from the line of Paul Bornstein with Black Diamond. Please go ahead.

I'll give you one or two questions because I've got to run. I'm just curious in terms of sales and marketing. You spoke a little on the phone about maybe having to hire one or two or three more salespeople. Given the past year, I would have thought you have a lot of projects and a lot of sales and potential clients already in the hopper, because, if you're going to do a reverse stock split, you need momentum. So, no matter what the economics are, your stock prices has been cut in half in the last month. And now you're just doing the freebie thing by reversing it to get it back up. And it doesn't stay up unless you have momentum. So I would hope that-- If you need to hire a lot of salespeople, that tells me one thing. But I would hopefully, from all the work that you've done-- and it's good that you're cash flow positive. But you have to continue to be, even if it's a weak quarter, because you've had a year or two to re-aim your business. And stock splits don't work, unless there's momentum with the fundamentals, no matter what the economics are.

So I was just curious where that stands. Do you need to hire any new people? Are those in the plans? Or, do you have enough momentum to carry it through so that you can show that you really have solid momentum going forward?

All right. Well, maybe to answer your question, first of all, we believe we have already demonstrated some momentum in going from $6.2 million to $7.5 million to $8 million over the last three quarters. And we're continuing to hire regional salespeople, as we've been doing since the beginning of the year.

Bob Zink has built a sales organization that is more regional than we ever had previously as we entered into (inaudible) business. So, now, we have some coverage in Chicago and Dallas, as well as we have more people on the east coast. So, over the last two years, we've built that team. We don't believe we have to do anything extraordinary. We continue to add people as the business demands.

And we agree with your comments that a reverse stock split does nothing and is often done in terms of weakness. We believe we've demonstrated some momentum, and we're looking forward to keep that momentum going. I think the reverse stock split was a requirement to do a few things - primarily, keep us on NASDAQ.

But the other thing is that, with the cost of the trading of the share relative to the price and the number of people that really aren't in a position to trade the stock because of its low price, we feel that the reverse stock split achieves not only getting us back in compliance with NASDAQ but also makes the stock more available to people who would be interested in (inaudible), as well as reduce the cost of commissions and other costs associated with trading the stock, relative to the price of the stock.

I thought, at one for ten, you also have less shares out there in the marketplace. So that's going to have some impact.

And, lastly, your bonuses-- As a shareholder, I don't get paid to wait. So I lose money if the stock goes down. You guys at least get cushions with salaries and bonuses. How are your bonuses tied to this reverse split and (inaudible) going forward?

We have no compensation tied to the performance of the stock. All of our compensation is tied to the performance of the Company. And we're compensated both on top line revenue growth, gross margin contribution, and expense control. We never had have any part of our performance or salaries based on what happens with the stock.

But, Paul, every socket employee and, particularly with the officers, has significant holdings and the right to purchase stock through stock options. Today, those are all under water. So we have the same ability as investors have to benefit from increases in the value of the stock. We're certainly motivated to do the things, including to continue the momentum that we're showing now with the operations in the Company, to improve the value of the Company and move up the value so that we benefit just as well as the shareholders do.

Well, I hope you'd add at least one more fundamental, which is cash flow growth, because I really don't care that much about revenue. I'm more interested in cash flow. That would be a nice bonus so I know that, if you're positive, you get paid extra, and shareholders should get something. Right now, the shareholders got nothing for the last couple years. So the stock just melted down. And some of it's due to the environment. And hopefully the momentum continues. It's a little disappointing. If you don't have enough cash to pay a dividend out, the shareholders don't get paid until the stock moves in the right direction, and that has not been the case for I don't know how long. So you guys have a big job in front of you. It seems like you're motivated, but I'd like to see a little more motivation in the line of shareholders, besides options that you don't have to buy unless you want to.

Paul, I have to-- strong on cash results and cash management, if you listened to my comments, as they are on bottom line results. And we recognize the importance of both of those.

Okay. Well, it seems like your job's cut out, and hopefully that will continue. You've drawn the line in the sand right now with the reverse stock split. So now you really have to perform. Hopefully you'll continue to do that. It looks like you've got some momentum and the wind at your back. So that's good. Hopefully, the market will recognize it.

We're hoping so too.

Thank you. Our next question is from the line of [Richard Seracusa] with Merrill Lynch. Please go ahead.

I just want to make sure I heard this correctly. There's going to be a one-for-ten reverse split tomorrow?

That's correct, Dick. The market will open at the new trading ratios in the morning.

I'm trying to understand the rationale underlying this decision. It comes at a time when you just finally reach cash flow positive. The NASD gives you another three months to achieve compliance, and, somehow, you decide to do a one-for-ten reverse split. What is the logic of doing that now, other than saving a few nickels and dimes and so forth?

Dick, let me comment on this whole topic. We recognize the topic of a reverse stock split is sensitive, and it's sometimes a very emotional topic for many of our investors. The underlying fear that, of course, drives that concern is that a reverse stock split drives the market cap lower.

Our research showed that, for many companies with a positive operating outlook, such declines, if they occur, are often of short duration. And we believe that most Socket holders appreciate Socket's potential and are longer-term holders so that, with the positive momentum that Socket is now showing over the last several quarters and with the expectation that Socket can become a major player serving the business mobility markets, the need now is to overcome some of the structural problems that our low trading prices actually create.

The broadest issues that we face today, in addition to building investor confidence that the Company is heading in a very positive direction, are the low trading volumes and the low stock price. As you know, many investors are not allowed to invest in stocks trading below $3 and $5 per share. And in today's market climate, there are fewer investors and fewer organizations with the ability to invest in stocks trading at these lower levels. Trading is also more expensive for shareholders at lower pricing levels, when you consider that the commissions are often based on the number of shares traded.

So, by moving the stock price into higher trading ranges, we open the opportunity of investing to more investors and subsequently reduce the cost of individuals investing.

Also overhanging investment decisions today are the concerns over Socket being delisted from NASDAQ due to the listing price.

That wasn't a concern. We know we got an extension until March. So that's not a concern.

It is a concern.

But we just got another three-month extension. Why wouldn't you wait another quarter to reinforce the positive outlook that you think--?

Would you like us to answer that?

Yes.

Okay. We had permission from our shareholders to do a reverse stock split up until December 31. That permission then expired. The extra time that we got from NASDAQ doesn't get us as far as our next shareholder meeting. So you could end up in a situation where you wait until December 31, and then you can't do the reverse stock split. So the issue you have is-- The extension, even though it was nice, didn't make a material difference, because we have permission up until the end of the year. And basically being forced into a stock split in March without permission gives us no option. Does that explain to you why?

No. It doesn't. You could have gone for approval beyond December 31 without--

Yes. But then a shareholder mailing and spend another ton of money to basically-- We had asked for permission. We had permission this year. We would have to ask for permission again for next year. You are absolutely correct--

Do you believe that the stock is going to stay at $3 a share or $3.5 a share?

Dick, we're not able to predict. Typically you'll see after a reverse stock split that the stock pricing and the market caps will typically come down. The question is how long. And, with the momentum that we're showing--

Well, the momentum has just started. It's just started. And I wanted to say to you, and I'm not going to debate this issue on the phone, this was terrible, terrible decision. And the stock traded at $0.31 today because somebody knew this was coming. And that's a reflection of what's going to happen tomorrow. So I hope you've got some support coming in here because you're going to need it. Okay? Thank you.

(Operator Instructions). Our next question is from the line of [Alan Lions with Bestel Venture Capital]. Please go ahead.

Dave, in response to the prior concerns about doing what you're doing, and I've expressed it before, to me, this [page] of time is ridiculous. You've got 32 million shares out. You're going to wind up with roughly 3.2 million. Illiquidity is going to be even worse. And the cost of trading is nonsense. I trade in lower stocks and discounts. It's just nonsense. To me, if you had to go out to shareholders, you've got more time, with momentum. Hopefully, you could do less than a one-for-ten reverse split. So this is just ridiculous. I've given up.

Alan, we accept your comments. I think this matter has been deliberated very extensively - by management, by all the members of the Board of Directors of Socket. We've gotten feedback from many, many of our investors. All of that has been assimilated. This was a unanimous decision on the part of the Board - that this was the appropriate--

(Inaudible). But why would you bring yourself down to 3 million shares outstanding? I've never been involved with a public company-- It's like you should be private, if you're going to do that. I mean, it just doesn't provide any liquidity out there. And to worry about $3-- I mean, people could care less right now. To me, it would be worth the expense to wait and see if you had the momentum and wait and go out for another vote. So the cost is what it is. Things change; you got more time.

Alan, on the issue of liquidity, when a company has 30 million shares outstanding, if somebody wanted to take a 5% position, they'd take 1.5 million shares. If we have 3 million shares outstanding, based on a one-for-ten reverse split, then the 5% position becomes 150,000 shares. The ability to take either 1.5 million or 150,000 is still the same percentage of the total company - in this case, 5%. So the issue on numbers here is, I think, is certainly an issue, but the broader issue to us is also the low trading volumes that we've been seeing.

(Inaudible). You're seeing low trading volumes in front of your (inaudible). There's no liquidity. There's no buyers. I mean, that's not relevant to the price of your stock right now. It's just relevant to the marketplace. To me, to wait-- That's my thoughts; you can have your own thoughts. But going one for ten, just for me, is, in terms of the numbers of shares that you're left with outstanding here, is a definite detriment. Forget about the 5% - whoever is taking 5%. I'm not going to get excited whether it's that or not. I just don't think that it provides for adequate long-term liquidity at those levels. And to me, to wait and to see made a lot more sense. I know your December 31 situation. But you would have been in the perfect time to say, Look, I'm going to go out now. We've got the momentum. We want to see if we can continue the momentum. We hope to continue with stock - hold back [to $0.60 and] you do one for five or something. But one for ten is way too much, especially when you have time. You could have had more time. It makes no sense to me.

If your Board is unanimous, so be it. I think it was irrational when I heard it in the first place, back last, I believe, February. And, to me, it's the most irrational decision I've ever heard you guys make.

Well, I think time will tell. So we'll just have to wait and see. The decision has been made, and we're moving forward.

Our next question is from Brian Swift with Security Research Associates. Please go ahead.

Well, since I'm always considered to be the contrarian, I figure I'm compelled to chime in on this whole reverse (inaudible) issue. You've talked about it. And I think it's nice to get it behind us. It shouldn't come as any surprise to anybody. Yes, there was a reprieve, but I think you've answered the idea of how the reprieve to January doesn't do you much good.

The real analysis here is that you take the market cap of your company-- And if people want to sell it to even lower than $9 million or whatever it is for the whole company, then so be it. Let them do it. It's an opportunity for the rest of us. (Inaudible). What do you have? What's proprietary in your company? What have you done with the company? And I think you've taken it in a new direction, and you're demonstrating the ability to grow the company.

And more often than not-- I'm just looking at a company that went through this years ago called eBits. And they sent themselves down to like a 3 million share-- And now it's-- Well, it was a $100 stock; it's probably not anymore. But anyway, I just think it's a lot of emotions on the part of people. But the reality of it is, you're either going to grow the business and the stock will take care of itself-- And if people want to get out, that's fine. It's better for the rest of us.

We appreciate your comments and support.

Ladies and gentlemen, we have no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Okay. I would just like to thank everyone for participating in today's call. And we look forward to reporting our full-year results in February. And I wish you all a good day. Thank you.

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