Socket Mobile Inc (SCKT) 2009 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Socket Mobile First Quarter 2009 Management Conference Call. (OPERATOR INSTRUCTIONS.) It is now my pleasure to introduce your host, Mr. Charles Messman. Thank you. You may begin.

Thank you, Operator. And good afternoon and welcome to Socket's conference call to review financial results for its first quarter ended March 31, 2009. 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 the 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 call's completion and the transcription 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 meaning 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 are not limited to, statements with respect to the distribution, timing, and market acceptance of Socket's products and statements predicting trends, sales, order activity, backlog, and market opportunity in the markets in which it sells its products.

Such statements involve risks and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements as a result of a number of factors, including but not limited to, the risk that shipments of 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 opportunities may not happen as anticipated; the risk that the company integrator program and current distribution channels may not choose to distribute its product or may not be successful in doing so; the risk that acceptance of the company's product in a vertical application market may not happen as anticipated; and other risks described in Socket's most recent Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. Socket Mobile does not undertake any obligation to update any forward-looking statements.

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

Thanks, Charles. First, I would like to thank everyone for joining us today. I'll begin by providing an overview of our results for Q1 2009, followed by our current outlook on our markets and business.

Despite the difficult economy, we continue to see increasing adoption of our SoMo hand-held computer. In the first quarter, SoMo sales were up slightly over Q4 to remain at record levels. We sold 3,256 units, which is almost three times the number sold in the first quarter last year and slightly above the number we sold in the fourth quarter, which is typically the strongest quarter of the year. We are pleased to maintain good SoMo sales momentum into the first quarter, which is often one of the weaker quarters.

Overall, our Q1 results reflected three elements - SoMo sales, which kept pace with the fourth quarter; our scanning revenue, which was up $700,000 over Q4; and our OEM results, where we saw a $900,000 decline in revenue over Q4 levels. I will discuss each of these elements in more detail and provide our outlook.

Starting with the SoMo, in Q1 this product line represented 32% of Socket's total revenue and continues to grow as a component of our overall revenue for our strategic goal. SoMo sales in the first quarter were primarily within healthcare and hospitality, two key markets we have strategically targeted. Within healthcare, opportunities continue to center around medication dispensing, asset control, and process control, and we continue to see further new opportunities in these areas.

One of our large healthcare customers, Good Samaritan, has supplied over 2,500 SoMo units to date and we are seeing numerous additional opportunities around the world. To give some examples, in Switzerland we have three hospitals about to place orders for SoMos in Q2 - one in St. Gallen, one in Thun, and the third in Basel. In Germany, a large group in Stuttgart is looking to deploy several hundred SoMo units for a voice centric application for doctors. Another German-based company is using the SoMo in a blood sugar measuring application and we are already in the process of deploying 1,000 units with another healthcare group in Sweden.

We are seeing similar opportunities in the U.S. with companies like Epocal, a developer of enterprise point-of-care blood diagnostic products, using the SoMo in a blood analysis meter. Data Technologies is using the SoMo for healthcare compliance. While ramp-up of these opportunities is typically a slow and steady process, especially in the current market environment, we are pleased with the positive market response we continue to see for our products in healthcare, which we believe is a validation of our strategic sales focus.

To further strengthen our position in healthcare we recently introduced a complete family of medical mobility devices - the Rx family - consisting of the SoMo 650Rx, a version of the SoMo made with plastic impregnated with antimicrobial material. This material helps reduce the amount of bacteria that can survive on the SoMo, thereby reducing the spread of bacteria. We also introduced a plug-in 2D barcode scanner, the 5XRx, and two versions of our Bluetooth cordless Series 7 Rx barcode scanners, all of which contain similar antimicrobial materials in the plastic.

The two cordless barcode scanners, the 7NRx and the 7XRx, can be used in conjunction with the SoMo or any tablet or notebook computer already in use at hospitals or other healthcare environments. The Rx family of products was well received at the HIMSS show earlier this month. The Rx family of products uses the same [guts] as the standard version and are therefore completely compatible, which will shorten the acceptance cycle for companies adopting the Rx family.

We also continue to see very good interest within the hospitality market for the SoMo, which seems to be increasingly viewed as the ideal waiter pad. The SoMo is perfect for taking orders at the table, which are then transmitted wirelessly via WiFi to the kitchen. Companies like Digital Dining, who have many independent resellers are now offering the SoMo as a recommended device. Unlike healthcare, which as an industry is more robust and likely to stay robust, the hospitality market is moving more cautiously in these times. But we believe it will be a key driver of the SoMo business as the economy improves.

Turning to our data collection related business, we saw this business recover in Q1 with sales levels improving though still lower than historical levels. In Q1, we did $1.7 million of business, about 33% lower than the same quarter last year, but up over 71% from Q4. The increase of 71% is an accounting aberration since we had a large one-time return in Q4, which accounted for our lower Q4 revenues. Without this one-time return, the Q1 and Q4 results were essentially flat.

The barcode scanning business has suffered due to the economy. The good news is we are taking steps to respond to the situation as the products arise and there are signs of increasing purchasing interest and activity. We have also recently released an improved version of our Bluetooth cordless hand scanner at a more aggressive price and relaunched our Bluetooth cordless ring scanner. We have added two new products to the Bluetooth cordless hand scanning range, the 7NRx and the 7XRx, both of which have antimicrobial plastic housing. These versions target the healthcare market and are ideal companion products to the already installed computers, or Computer on Wheels, or COWs, that are already used in the hospital. The 7X is a new 2D cordless scanner, which we expect to ship in early Q3 and supports the many 2D barcodes that are becoming increasingly popular in hospitals.

Turning to the other segment of our business, our OEM business performed much as expected in Q1 as we continued to complete end of life sales for our larger Bluetooth customers and move our focus to wire line. Going forward, we expect the wire line business to be the driving force of the OEM business. The wire line opportunity is both large and long-term, and we believe the complexities of wire line make our solution ideal. We are experts in wire line and have our modules certified to the highest standards, like CTX, to ensure that our SoMo can operate seamlessly in these complex environments. We are able to deliver the complete wire line solution to customers who need these capabilities and lack the engineering expertise to develop it themselves. Long-term, we expect the wire line business to be a solid contributor to both our core SoMo expertise and our revenue.

Overall, the economy is still very difficult. We see significant opportunities ahead, but in this cautious environment, customers are currently moving forward at a slower pace. Today, we are primarily servicing a smaller market consisting of those with urgent needs and [a budget], which is why so many opportunities are in healthcare. However, we see these opportunities as representing only the tip of the iceberg in terms of the long-term opportunities for Socket as conditions improve. In the meantime, we have taken substantial actions to reduce our expenses in an effort to achieve both cash positive and breakeven levels in the short-term, without eliminating essential core expertise.

In summary, we believe we are well positioned with strong products and markets and that the cost reductions we have completed will enable us to better conserve our resources during these challenging times to emerge stronger when the economic markets improve.

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

Thank you, Kevin. Revenues for the first quarter of 2009 were 4.8 million, a decline of $100,000 or 2% from the previous quarter, and a decline of 1.4 million, or 28% from the first quarter a year ago. Revenue is generated by Socket's computer and peripherals business and by its OEM business. Our computer and peripherals business includes our family of handheld computers, our data collection products, including barcode scanning peripherals; RFID and magnetic stripe readers; our legacy connectivity plug-in products, including modems and Ethernet cards; and our service revenues relating to these products.

Our OEM business consists of products designed into third party products, including Bluetooth and wireless LAN modems and cards, using the technologies that we build into our own products. We also classify our legacy serial products as part of our OEM business.

By way of background, 2008 was a record revenue year for the company, up 10% over the previous year, despite a significant slowdown in our business that we reported in the fourth quarter and that we attributed to business cautions among our customers over general economic conditions. Though the fourth quarter sales declined, our 2008 results for computer and peripheral products compared to 2007 was essentially flat at 15.8 million in 2007 versus 15.6 million in 2008. On the positive side, our SoMo product family sales grew by 3.4 million to 4.7 million in 2008. However, our barcode scanning sales declined by 2.7 million or 23% and our legacy connectivity product sales declined by $850,000 or 35%, effectively offsetting the growth in handheld computers.

Fourth quarter barcode scanning revenues were also reduced, as Kevin mentioned, by a one-time return of $700,000 of product from resellers to our distributors, and that further reduced fourth quarter 2008 product revenues to 3.1 million. In the first quarter, computer and peripheral product sales increased to 3.9 million with sales of barcode scanning products holding at fourth quarter sales levels absent the one-time return.

2008 was also a record revenue year for our OEM business with revenues of 8.3 million in 2007 increasing to 11.9 million in 2008. $6 million of our 2008 OEM revenues were from the sale of Bluetooth modules that reached their end of life during 2008. Peak sales of these modules were in the third quarter of last year and as these sales completed we experienced a drop of $800,000 in the fourth quarter of 2008 and an additional drop of $900,000 in the first quarter of 2009. Thus, the increase in computer and peripheral product revenue of 800,000 in the first quarter was effectively offset by the drop in OEM revenue in the same quarter.

As we look forward, we expect our computer and peripheral business to resume growth in handheld computer sales, based on increases in activity in our sales pipeline, including the excellent exposure our antimicrobial model received at the recently completely HIMSS healthcare show. New data collection products, such as an updated version of our ring scanner that is now shipping, and antimicrobial versions of our cordless hand scanner and our compact flash card plug-in barcode scanner designed for the healthcare industry, are also expected to contribute to revenue growth.

Looking forward, the OEM group is completing an update of our wireless LAN technologies replacing 802.11bg technology cards and modules with newer 802.11abg technology cards and modules that are faster and work well in a secure mobile environment. These products are shipping in combination with our wireless LAN software that includes Cisco's CCX 4.0 extensions and are being adopted by a number of our OEM customers.

As we viewed the economic landscape in the middle of the fourth quarter, it was apparent that we needed to scale back our operating expenses in order to counter the effects from business slowdowns and get the company back on track to achieve positive cash flows and profitability at reduced operating levels. We initiated in December a number of cost reduction steps that have included streamlining our operations and reducing our headcount, which today is about 70 employees worldwide compared to 89 employees five months ago. We have also reduced employee salaries and discretionary costs. Some of these costs will be phased back in as our revenue levels improve. As a result of these actions, our operating expenses in the first quarter of 2009 were 2.9 million, compared to operating expenses of 4 million in the first quarter of 2008, a reduction of 28%.

Further cost reduction actions taken at the end of March and the seasonality of audit expense, which is concentrated in the first quarter, are expected to result in a further reduction of operating expenses in the second quarter.

Total cash flow for the first quarter was positive with cash increasing from $757,000 at December 31, 2008 to 1.4 million at the end of March 2009. We achieved positive cash flow from operations during the quarter resulting from improvements in our working capital balances. We also made higher draws on our bank line compared to year-end. As expected in a slower economy, we've decreased our inventory balances by $1 million and our accounts payable balances by $800,000 and we will continue to closely manage both our operating results and our working capital balances as we move through the next few quarters.

Socket will hold its annual meeting of shareholders a week from today on April 29, 2009. Seven current directors are standing for re-election and the appointment of Moss Adams to continue as our independent auditors for 2009 is also being voted upon. We will also be presenting to investors attending the American Electronics Association Micro Cap Conference on May 4, 2009. One of the 30-minute afternoon sessions will be webcasted, which will give us a chance to update investors on our progress. We will announce more details on the webcast as the conference date approaches.

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

Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from the line of Brian Swift with Security Research Associates. Please proceed with your question.

Hi, guys. My recollection was that the Good Samaritan order that you got a year ago was going to be fairly well spread out and coming I think to completion in Q2. Can you bring us up to date on that and what maybe you might have lined up to be replacing that? Because I guess the one silver lining in the quarter was the fact that the SoMo revenues are holding up. And hopefully, as we kind of regain footing in the economy, that will resume the growth period, but I--or the growth rate that it had.

And so, I'd just kind of like to see what you have, what your pipeline is like, and what kind of comfort level you have that we'll be able to see another growth spurt in the SoMo handhelds. I know you have the Rx models coming into play. And I did talk to somebody over in the U.K. for that application over there for barcode scanners in--for patients going into their hospitals over there. So maybe you can give us a little idea how all that's going to fold in, in relation to one of those steady customers that you're--.

--Okay. So I think that we said that Good Sam had a rollout of 3,200 and right now they're at 2,500 and we expect that they deploy the next 700 units in Q2. We don't know if they will have further deployments or if they will upgrade any of the units to include barcode scanners or other things going forward. Obviously when we started Good Sam was a large percent. When we started their 500 units a quarter out of 1,000 represented 50%. Today, their 700 units out of 3,500 represents a smaller number.

We are seeing similar opportunities from a number of sources, including in Europe. I mentioned that we have a rollout beginning with a company in Sweden. They have placed an order for 1,000 units of which I believe they have only taken 135 to date. And we would expect them to be picking up the pace by the time we get to the end of Q2. We also have a large opportunity in Germany, where again the order has been placed. The order was actually combined with another hospital. So the total order was 1,000 units also, but they're expecting to take 500 units again in Q2 and Q3. And again, today we only have deployed I think somewhere in the range of 10 to 15 units.

Today, we do have a lot of opportunities, both in the medical space and the hospitality space. So I'm pretty confident that we will be able to replace the Good Sam business going forward, as we have a lot of people who are very much in the early stages and have been I would say moving forward slowly, but moving forward. And then, with any type of up tick in the economy we think the pace of these will pick up.

Okay, thank you. And that U.K. opportunity that I mentioned, I think the mandate is effective July 1 of this year. When do you anticipate people will start gearing up that it might start impacting your--?

--Well, we're actually at the large healthcare show in the U.K. on the 28th, 29th, and 30th of April. If the HIMSS show in Chicago was any indication, I think that there is [budget] in healthcare and people are I would say at the latter part of making decisions. And generally speaking, I think people leave these things go till the last minute. So I think a lot of people will make decisions after they've gone to the healthcare show (inaudible) in the U.K. And I would expect to see activity in the June timeframe. Generally, once you've started you're in compliance.

We did also announce earlier this year that we had signed up with Decoder, who is the largest provider to the national healthcare for some of these applications and they will be both at the show as well as demonstrating our product to the National Health Service, or NHS, in the U.K., I would say at the end of this month and in May.

Yes, they're the--that's the one that I talked to. They're--.

--Okay--.

--Quite enthusiastic about the opportunity. Of course, they're selling the--.

--Well, one thing that was very evident both at the--what we're seeing across the world as well as at the healthcare show, HIMSS, is that the problems are very real and people are genuinely looking for solutions. They are finding that a hand--small handheld, like the SoMo, is an ideal complement to the nursing staff. Many have tried Computer on Wheels, and even though that brought a big improvement, the lack of portability has been an inhibitor to both adoption and effectiveness. And having a small handheld device allows them to be closer to the patient when they dispense medication. The information is less I would say visible to visitors in the hospital, et cetera, and there's a little more discretion and it's easier for the nurses.

So we do see a lot of opportunity because of those. And it's pretty universal. As I mentioned, we're seeing this in Switzerland, we're seeing this in Germany, we're seeing this in the U.K., as well as here. So as this problem I think gets solved, it will bring a lot of opportunity for us.

And Brian, even security is a motivator to use a product like the SoMo. Not only do we have the CTX capabilities for--within a Cisco environment, which is probably the largest number of health--wireless LAN environments used in healthcare companies. But the traditional way of even nurses entering data at a nursing station leaves that data available for people to see the screen and it potentially compromises the security of that information. And they have to log off many times when a nurse has to step away to come back to taking care of the patient. Whereas, using the SoMo, you can put it into a cradle. You can still use a keyboard and a mouse, enter the data, and then when you pull the SoMo from the cradle, the data screen obviously goes blank and the data's been entered and security is maintained. So these are just examples of where the SoMo becomes very attractive in a hospital environment where security is an issue.

And just maybe one last thing. I think the fact that we have done the Rx version--and I was surprised I must say at the HIMSS show about how many people came up to our booth and said, oh, here are the guys with the Rx--with the antimicrobial version. I think it really has kind of hung a sign out for us that we are interested and focused on the healthcare space. And I believe we are the first company that really has focused on this space with a product that's more designed for the nursing staff and the clinicians, et cetera. And I think this is much appreciated and we got a lot of very positive feedback at the healthcare show about it.

Okay. And switching to the hospitality side, or--it sounds like you're--the indications are that this is like in hotels that they're being used in the restaurant operations of these hotels. Maybe you can elaborate a little bit more on--.

--Yes--.

--Because there have been some handhelds that have been in use for quite some time now in the restaurant industry. Are you getting (inaudible)?

Yes. And we can elaborate a little bit more on that. We're seeing really three areas for hospitality - areas like restaurants whether they be standalone restaurants or in hotels, and we're also seeing areas like mini-bars where people are managing what's going into rooms, as well as some customer-facing applications where people are using loyalty cards and they're using a handheld to sort people into whether they're gold, premium, platinum, whatever the various programs are.

In the restaurant trade, there is a greater desire to have an electronic device at the table, so that orders can be sent wirelessly to the kitchen. Historically, people have used I would say a symbol device, whether it be the MC50 or the MC--the 8800. And generally, those devices have been, okay, in the $1,000 range. The penetration rate is probably just a few percent, maybe less than 10%. And what we're seeing with the SoMo is that unlike many of the Motorola devices, which had a built-in scanner that was never used, the SoMo is much more attractively priced at around I would say the $500 range. It doesn't have a built-in scanner, but in the restaurant trade they weren't using it anyway. And it's light and portable and the battery life, plus it meets all of the requirements for wireless LAN.

All of these solutions are application-driven. And the big application providers are people like Digital Dining and ACS. And many of them have qualified the SoMo and are now having their franchisees or promoting them themselves. And the I would say workhorse in this area was the MC50, which was a Motorola product, which has recently gone end of life. And they have moved up to the MC55, which I think is less applicable to the restaurant trade. It's a little bit bulkier, a little bit heavier, a little more expensive, and it's got a keypad on it, which is often not used in the restaurant trade, so it's less applicable. And the cost difference between an MC55 and a SoMo now is almost 50%.

So we're seeing a lot of interest. I don't think that the hospitality market is as robust as it could be, based on this economy and what we are selling into that. And I think last quarter we did about 20% of our sales into that market. We haven't compiled all the breakdown for numbers this quarter, but we will do that. But we think it will, again, be a good number in the 30% range.

It's also interesting, Brian, to see how sometimes these applications cross industry lines. One of the applications we understand for some of the European hospital purchases was actually being--taking patient orders for meals, which then get transmitted down to the kitchen. So these applications--.

--Yes--.

--Become somewhat widespread.

We have one company in Germany that is in the process of deploying 500 SoMos purely as a hospitality application within healthcare.

Okay. Well, I will get off so somebody else can ask you a question.

Well, I appreciate it, Brian. Thanks.

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

I would just like to thank everyone for joining us today, and to wish you all a good day. 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.