Socket Mobile Inc (SCKT) 2008 Q4 法說會逐字稿

Greetings and welcome to the Socket Mobile Inc. fourth quarter management conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). It is now my pleasure to introduce your host, Jim Byers, with MKR Group. Thank you. You may begin.

Thank you. Good afternoon, and welcome to Socket's conference call to review financial results for its fourth quarter and year ended December 31, 2008.

Online today are Kevin Mills, President and CEO of Socket, and Dave Dunlap, CFO of Socket.

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 website at www.Socketmobile.com. In addition, a replay of today's call will be available at Vcall.com shortly after 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 27A of the Securities Act of 1993 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, but not are not limbed to, statements regarding our new hand-held mobile computer product, including details on the timing, distribution and market acceptance of the product, and statements predicting trends, sales and market opportunities in the markets in which we sell our product.

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 our new product may be delayed or not rolled out 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 opportunities may not happen as anticipated; the risk that our integrator program and current distribution channels may not choose to distribute the new product or may not be successful in doing so; the risk that acceptance of our new product in vertical application markets may not happen as anticipated; the risk that evidence of strength in the mobile computing market may not be indicative of a trend; and other risks described in our most recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission.

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

Thanks, Jim.

First, I would like to thank everyone for joining us today. I'll begin by providing an overview of our business for 2008, and a breakdown of Q4 results, followed by our current outlook on our markets and business for 2009.

By many measures, 2008 was good year for Socket. We grew total revenue for the full year by 10% over 2007. This reversed the declining trend in annual sales we had over the previous three years, when we were primarily a peripherals supplier dependent on third-party device manufacturers. We have successfully transitioned our business to now operate as a systems company, meeting the objective we put forth at the start of 2008, and we see increasing success under our new business model as a mobile systems company.

In 2008 we generated sales of our SoMo hand-held computer of $4.7 million, representing growth of 350% over 2007. Today we have more than 10,000 SoMo hand-held units installed in a variety of mobile vertical markets that are running numerous applications to help drive our customers' businesses. In addition, many SoMo systems are using Socket's plug-in and Bluetooth Barcode scanners and peripherals, providing a growing platform for our traditional products.

In the fourth quarter SoMo sales increased slightly over the third quarter, despite the challenges of a very volatile overall economy. We sold March than 3,200 units in Q4, up from the 3,000 units sold in Q3, and we are encouraged by the strong traction we are seeing in the healthcare category, which represented 77% of total SoMo revenue in Q4.

The Good Samaritan Society continued their scheduled rollout by adding 850 more SoMos in Q4, and will be continuing their rollout through Q2 of 2009 to complete their 3,200 unit deployment. Good Samaritan has also agreed to participate in exhibiting their application with Socket at the Annual Healthcare Information and Management System Society, or HIMSS, show in April. HIMSS is the largest healthcare show of the year.

We also saw good SoMo growth in Europe during Q4. We shipped over 1,000 SoMos for the first time in a single quarter to Europe. Again, these shipments were mostly for healthcare. We are continuing to see strong interest from Europe in the SoMo, and have already booked over 2,000 SoMos for deployment in Europe during 2009. The global nature of the healthcare opportunity is underscored by our recent announcement of a newly-signed U.K.-based VIP partner, Dakota, who will be initially focusing on the U.K.'s national healthcare system.

We are excited about the continued market acceptance and growth of the SoMo hand-held product line, and the continued momentum it is helping us build in the business and medical mobility markets, where we have greater control over our business and long-term sustainable growth. In 2008 the SoMo product line represented 17 % of Socket's total revenue. While this growth has not yet significantly contributed to Socket's overall growth, we believe its impact will be more significant (inaudible) going forward, as SoMo sales continue to grow and represent a larger percent of our overall revenue.

Turning to other segments of our business. Our OEM business performed very well in 2008, growing 42% from $6.5 million in 2007 to $9.3 million in 2008. This growth was driven by our embedded Bluetooth module business, which benefited from an end-of-life situation primarily in Q2 and Q3 with sales to a major customer. The OEM business also grew its wireless LAN-related revenue by 75% in 2008, and we expect this portion of the OEM business to see accelerating growth in 2009. We do not anticipate Bluetooth business to experience similar sales this year, since there are significant market dynamics happening within the Bluetooth cordless area. In Q4, our OEM business performed as expected. Due to longer lead times and contractual obligations, the business was less impacted by the general economic and financial market conditions.

Within our data collection business in 2008, we saw our revenue decline by about 23%. Some of the decline was forecasted and expected. Our plug-in data collection revenues were anticipated to decline in 2008, since there was a significant reduction of available slots in the market. With Dell exiting the hand-held market and other manufacturers following suit, we knew that even with the growing number of SoMos, it wouldn't be enough to overcome the difference.

Our Bluetooth Cordless Barcode scanning products declined by 20% in 2008. This decline was disappointing, especially since we expected this market would grow. The Bluetooth Cordless scanning revenue declined for the year by approximately $700,000, or about equal to the two large returns we had in Q4. These returns can be directly attributed to the customer's inability to pay due to the economic downturn. Dave will discuss this in more detail in a few moments. Overall, we believe we should have done better in the Bluetooth Cordless data collection category, and have taken actions to improve our performance in this category going forward.

in 2004, the rest of our business slowed dramatically, as everyone put off or delayed purchases and deployment plans as companies froze initially froze spending, then cut expenses as quickly as possible. We did see increased booking in December, which carried forward to 2009, and allocated moneys were used, but very little came with urgent deployment needs. Overall, we view the 10% growth we achieved for 2008 as respectable but disappointing, based on the strong gains we achieved after the first three quarters. This is the equivalent of shooting a level par round with a triple bogey on the last.

In Q4 we saw the business slow in October, and slow very severely in November, and then resume in December, but not quickly enough to make a difference. So Socket, like everyone else, was and continues to be negatively impacted by the economic slowdown. As a result, we have taken significant actions to reduce our expenses based on the expectation that the slowdown will remain for a while.

I would now like to give you more detail on our strategic plans and outlook going forward. First, we have implemented substantial cost reduction plans, including reducing head count and reducing salaries to the remaining staff. These salary reductions range from 10% to 40%-plus, based on the current salary ranges of the individual. Based on these actions, we have lowered our cash break even revenue to $5.5 million per quarter, which is $2 million less than our previously required revenue levels to reach cash break even. We believe these lower levels are achievable in today's market.

Secondly, we have generated a substantial portion of our SoMo hand-held revenue from the healthcare sector. We have strategically targeted it, and believe this will be less effective than other areas in the economy during 2009. In addition, this quarter will complete the development of our medical mobility line of products, which will be launched at the HIMMS show early April. This includes our SoMo 650Rx and docking cradle, the SoMo made with a plastic impregnated with antimicrobial material, which helps reduce the spread of bacteria, an important consideration in hospitals today. The SoMo 650Rx has not contributed any revenue to date, but should provide a positive contribution going forward.

in addition, we are launching a medical Bluetooth Cordless Barcode scanner, the [7N]Rx, a a medical plug-in Barcode Scanner, the [5X]Rx, to complete the medical mobility product line. The fact that we completed the majority of these developments and initiatives in Q4 has allowed us to reduce expenses without impacting our ability to bring vital products to the healthcare market, thereby enabling us to maintain our focus and gain further traction and market position in the healthcare sector.

We also believe the economic stimulus package will help us going forward. In all, $19.2 billion is set aside for healthcare information technology, which significantly -- which includes significant incentives for both physicians and hospitals who make progress in moving to electronic healthcare records, or EHC. This is an area where the SoMo is already gaining traction and excels in terms of its processing power and portability. We are also anticipating other countries will provide funding in the healthcare area, as the problem is global in nature, much as the current economic crisis is, and government spending in this key area is very likely across the world.

In summary, we believe we are well positioned with strong products and markets, and the cost reductions we have completed will enable us to conserve our resources during these challenges times to emerge stronger when the economic markets improve. We have made significant reductions in our expenses to achieve break even at reduced revenue levels, and feel we have sufficient opportunity in our pipeline to meet these reduced levels.

I would now like to turn the call over to Dave for his comments

Thank you, Kevin.

As Kevin reported, Socket's annual revenue for 2008 was a record $26.6 million, up $2.4 million or 10% from 2007, despite the sales weaknesses that we experienced in the fourth quarter. The SoMo family of hand-held computers, first introduced in 2007, was our strongest contributor to growth, generating $4.7 million or 18% of our revenue, up a total of $3.4 million from 2007 levels. Our OEM product sales were also at record levels of $9.3 million or 35% of our revenue, up $2.8 million from 2007 levels of $6.5 million. Sales of our OEM Bluetooth modules and products grew by nearly $1.9 million, and sales of wireless LAN modules and products grew by another $900,000.

Partially offsetting these increases were declines of $2.8 million in sales of our data collection family of products, much of which occurred in the fourth quarter as part of a general business slowdown that began in near the of October and continued through November. The uncertainty caused by market turbulence in the fourth quarter, and the efforts by many companies to reassess their spending plans, resulted in delays but not cancellations of many of the products that we have been tracking. We saw a pick up of sales in December, but not enough to make up for the first two-month slowdown.

Fourth quarter results were also affected by an unusual return of $722,000 of data collection products from two retailers to two of our distributors, where anticipated sales to their customers had slowed down. Since we defer revenue recognition, no product is sold out of distributor inventory, these returns reduced our fourth quarter revenue recognition. Absent these returns, fourth quarter revenues would have been $5.6 million. Such returns within the distribution channel are very unusual, and there have been no further returns this quarter.

Our operating expenses for 2008 of $15.1 million declined slightly from operating expense levels of $15.3 million in 2007, and our operating expenses for the fourth quarter of 2008 of $3.6 million compared favorably to operating expenses of $3.8 million in the fourth quarter a year ago. We used cash for operations before working capital changes for the year of $1.3 million, of which $1.2 million was used in the fourth quarter due to the unanticipated sales slowdowns in that quarter.

As Kevin reported, because of the uncertainties associated with the timing of customer and partner program sales opportunities that we are tracking, we took the steps in the middle of December to reduce our workforce and to defer new hires. Our workforce today is some 18% lower than it was at the end of the third quarter. in addition, we have reduced compensation levels and deferred discretionary spending to bring our break even point in the first quarter down from revenue of $8 million to nearly $6 million, and our first quarter operating cash break even point has reached quarterly revenue levels of $5.5 million. We can and are prepared to reduce our expenditures further in the second quarter, should there be a need to do so. But we believe, absent additional unusual market conditions, and based on the customer opportunities that we are tracking, that we have pared back our operating expenses sufficiently to weather the current market slowdown that we have been seeing.

Our backlog at the end of the year, orders on hand that are scheduled to ship in the next quarter, were back to more normal levels of $1.2 million. Our shipments and shippable orders to date this quarter are now over $3 million. Sales momentum has continued to accelerate through the middle of February, and our outlook of March is for a continuation of this trend.

Our cash balance at the end of December was $757,000, compared to cash of $5 million at the end of December a year ago and cash of $4.1 million at September 30th. As I mentioned, we used $1.2 million in cash for operations before working capital changes in the fourth quarter, and with working capital contributing $200,000, used net cash from operations of $1 million. An additional $2.3 million was used in the fourth quarter to pay down our bank line revolving credit balance by $2 million, from $3 million to $1 million, and to pay off an installment loan of $300,000 with our bank. I'm pleased to report that our revolving credit line of $2.5 million has been extended to the end of March 2010. We also expect to bring down our inventory balances during the first quarter from end-of-year levels, as we adjust to lower sales activity, further freeing up our cash.

On the investor relations front, Socket will be participating in the Security Research Associates Technology Investor Conference taking place in San Francisco on Monday, March 9th. We plan to webcast that presentation, and we'll announce the time of the webcast about a week before the event; or you may view the webcast on a delayed basis anytime thereafter.

Socket's annual meeting of stockholders will be held on Wednesday, April 29, 2009, at the Company's headquarters in Newark, California. All stockholders of record on March 2, 2009, will be entitled to vote. On the ballot are the election of Directors and ratification of the selection of the Company's auditors for 2009. Stockholder materials will be distributed during the second half of March.

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

(Operator Instructions). Our first question is from Paul Bornstein with Black Diamond Advisers. Please go ahead with your question.

Hi guys. I guess you are making a little progress, at least on the cost side. I guess from the last call, business has slowed down. I'm just curious, what is your expectation of cash flow break even, given that you have reduced the costs? I'm wondering if you have reduced them enough? Have you guys reduced your salaries enough where there is enough incentive, because with your one for ten reverse, the stock really doesn't trade, and it really hasn't gone anywhere since the last call a while back.

So, I'm just kind of wondering, you know, what are the goals for 2009 in terms of financial goals? So we can -- so far you really haven't hit them. You know, it is not a disaster, but given where you were, and you just haven't been cash flow positive for a number of years. So I'm just kind of trying to understand where you think you're going to be going and no one -- I've talked to a lot of CEOs, no one can really predict what the economy is going to do the next three to six months, because there is just too many uncertainties. So I'm just wondering if you cut costs enough to get to the cash flow break even level?

You had a number of questions in there, Paul. Let me try to answer them, and Dave can also assist here. First on our cash flow break even, we reduced our number so that we'll be cash flow break even at $5.5 million. We were, and again Dave can correct me, we were positive cash flow both in Q2 and Q3 of last year. So we had been cash flow positive as we entered Q4.

in terms of salary reductions, the amount of salary reductions varies, but I would say among the executives or higher earners, our average salary reduction is probably in the 30% range per person. So that's substantial. Yes, we believe we have reduced our expenses to be in line with our revenue.

We are seeing, I would say, some uncertainty in the market. We are seeing less uncertainty in certain segments, particularly healthcare. And as we pointed out in the call, we added 77% to our revenue, which was the revenue that seemed to be least impacted in Q4, in the healthcare sector. We, I think as Dave pointed out, can reduce further, but I think we have reduced to the point where further reductions could seriously impact the long-term benefit of the Company. We have not reduced our sales force. We have not reduced investments in what we view as being core technologies, like the SoMo, wireless LAN and data collection.

So right now we are pretty lean, and to give you some perspective, our expenses have been reduced, we believe, by about $1.2 million, $1.3 million off a base of $3.8 million, so you are talking about an overall reduction in expenses of about 30%. It is aggressive, and we feel at these levels we will be able to get our revenue above our cash break even point.

Paul, Socket is highly -- continues to have a highly-leveraged business model. Because we do contract manufacturing for our major components, we can change the volumes fairly quickly up or down, and in terms of upward we can do that at a lower unit cost as the volumes grow. We don't have a lot of capital expenditures or other things required on the manufacturing side, and there's lots of capacity.

On the sales side, because we use the general distribution channels for all but our OEM business, we can double the volumes through the distribution channel, and we have the infrastructure in place to manage it. So once again, most of the benefits of growth go through to the bottom line. By cutting our expenses, we brought the base down. Therefore, as we start to see revenues grow again by keeping our expenses in line with that revenue growth, you are going to get that leveraging effect. Our goals haven't changed. We are looking to generate cash from operations, and we are looking to run the Company at a growing and profitable level. We have, at this point, a much better opportunity to do that by starting from a much lower expense base.

One last thing, just on the reverse stock split. I haven't looked at the numbers yesterday or the day before, but certainly for our Board meeting, it was interesting because we did a little bit of a look back, and the average volume has increased by 70% since we did the reverse stock split, right, which I know is contrary to what people expect, but we have had more volume in the stock after the stock -- the ten-for-one reverse split than we had prior, for the six months prior, at least.

Okay. I guess when you start off at a very low level, I guess you can have a big increase in volume.

Well, yes, but it is going the right way.

Yes, well, I mean if you are a shareholder you like to see the stock go up with a little volume or more, so we haven't seen that yet. Hopefully you have the leverage here now to make it happen, and on a continual basis be cash flow positive, because you don't have a lot of cash left. And so you can't be negative anymore.

We understand that.

Okay. All right. Hopefully things will improve significantly in the next two quarters.

(Operator Instructions). The next question is from Walter Ramsley with Walrus Partners. Please go ahead with your question.

Good afternoon. Thank you for taking the call. In the press release you indicated there are approximately 200 either current or developing business applications for the SoMo. Can you quantify how many are actually done and operational and how many are still in development, and what you think the ones that aren't being sold will turn into?

Okay. I would say of the 200 VIP partners, we probably have less than -- about 20% currently contributing, okay? So, we still have a lot of people who are finishing applications or beginning rollouts, whether they be internal or to the markets. So, I would say, we probably are on the 80/20 rule right now, where we have 20% generating most of the revenue. We are seeing opportunities, as we pointed out, in the healthcare opportunity, and there is a number of companies with programs to help automate various processes, whether it be drawing blood or dispensing medications, et cetera. We are also seeing a lot of traction in hospitality. Those two, I think, are beginning to stand out as the two categories where we are seeing the most.

We have announced a number of initiatives or customers who have done applications in the education market. We announced with Plasco, who have a truancy student monitoring system which they have just started. I believe we have 100 units sold. They just started in Memphis, Tennessee at the school, and now they intend to bring that application to all the schools that they can reach out to across America. We also have a very good application in the library space.

We have worked with a very good partner in Vision Wear. They have just completed their software. Again, they bought maybe 100 units so far. They are installed in 6,000 libraries with their mobile library system, and they are currently going through final trials. They have hired more people to sell this. So we expect companies like that to really help us generate more revenue going forward.

The list is quite extensive. We are trying to put as much as we can up on our web page, and help to categorize into different areas, and we continue do that. This is why, I think, we have a very good leverage sales model

I think the count, Walter, on our web page will give you visibility on about 160 of those partners, so that's a good place to certainly take a look.

Okay. Now last year the SoMo contributed a little less than 20% of the total revenue. Do you have an idea of what it should do this year?

Yes, we would expect it to be up in the 40% range. We expect the SoMo to be the driving force. When we did the SoMo two years ago we were, at that stage, a 100% peripherals company. We said back then, and it is still true now, that once SoMo passed about 30%, then it would really start to be enough of an engine to drive the Company. We were close to that in Q4, but we are close to that for the wrong reasons because the rest of the business basically suffered in the economic situation. But I believe by second quarter we'll be in the 30% range, and then I think you'll see a better acceleration of growth.

And the international business? Is that showing any more life than the domestic? Or how's that doing?

Actually, I would say the international business has not been as badly impacted as the domestic business. The dip in Q4 wasn't as severe, and they have seemed to recover. As I mentioned in my remarks, we've already booked over 2,000 SoMos for deployment in Europe, one in Sweden, one in Germany, and again those will roll out in 100 units a month. But they are both good long-term prospects, and we are seeing good traction in the markets in Europe, particularly with the SoMo.

There are a couple of factors, Walter, that have helped in the international space. One, we added foreign language support, international language support last Summer, and particularly in countries like Germany, the availability of the German language on the SoMo has been very helpful.

In addition, as we have seen some of the larger computer manufacturers changing their emphasis and moving away from the classic hand-held computers at the consumer level, Siemens was one of those in Germany that's done that, and their Lux has come off the market. That was a very popular model in Germany, and the SoMo is an ideal replacement for that particular device. So we saw orders in December, for example, from several hospitals in that area that are looking to begin deploying the SoMo as a replacement for either HP units or for the Lux.

And then the two resellers that returned $700,000 worth of products, did they go out of business, or what was their story?

Essentially, there was an inability to pay. I think as Dave pointed out, it is a very unusual situation. We are pretty conservative in the way we recognize revenue, in that we only recognize revenue on sales out of distribution. Certainly in the last 14 years we have not had this situation. But ultimately the reseller told the distributor, I cannot pay, do you want the product back or do want the bad debt? So that's the situation, so they took the product back

In the largest case, I think the reseller had purchased the product from the distributor in anticipation that it would move on to the customer, and then the customer apparently ran into some unanticipated delays, and the ability of the reseller to pay for that product while holding it in inventory apparently was limited. Most of our distributors, all of our distributors in fact, have very limited return rights. But in this case, I think they made a business decision, faced with the inability of that reseller customer of theirs to pay.

Because we have a rather conservative revenue recognition policy of waiting until product ships out of the distribution channel, because we very seldom see any type of returns, that's been a pretty good policy for us. But in the case where -- in this case where product did come back, then it did have an offsetting effect.

Then just one last thing. Maybe I heard this wrong, but during the presentation did you say that orders so far in Q1 were already $3 million?

Yes, orders on hand that are shippable this quarter have now passed through $3 million mark.

That sounds fairly high, so that's why I was wondering.

Well, it starts with $1.2 million in backlog. So recognize that orders that come in the latter part of March often are products that will ship in the following quarter. But we also tend to find that the second half of the quarter becomes a stronger period. First quarter has that typical pattern. Our own internal views of the business that we are tracking is suggesting that that pattern will continue. So we are looking for further acceleration of orders coming in over the next six weeks.

We have seen, I would say, a pickup in the pace. The first two weeks of the year were extremely light. We saw an increase in sales activity, I would say, over the next two to three weeks, without receiving a lot of orders. But we are beginning to see orders now coming in, as people are making decisions to proceed cautiously in this environment.

So the odds are reasonably good you can make the $5.5 million this quarter?

I think they are reasonable. Again, I just would caution there has been uncertainty. We are being very transparent. We are telling you where we are, and we feel good about it, but -- and we are halfway along, at the halfway point, which is not a bad spot to be in.

Sounds good, actually. Okay, anyway thank you for taking all the questions. Appreciate it.

(Operator Instructions). There are no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Okay, we'd just like to close by thanking everyone for participating in today's call, and we wish you all a very good day. Thank you.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.