Socket Mobile Inc (SCKT) 2009 Q2 法說會逐字稿

Greetings. And welcome to the Socket Mobile Second Quarter 2009 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)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jim Byers of the MKR Group. Thank you, Mr. Byers. You may begin.

Great. Thank you, operator. Good afternoon. And welcome to Socket's conference call to review financial results for its second quarter ended June 30th, 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 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 a transcript of this call will be posted on Socket's website within a few days. We've also posted replay numbers in today's press release for those wishing to replay this call by phone. 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 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

Such forward-looking statements include but are not limited to statements with respect to 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 Socket sells 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 risks 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's integrator program and current distribution channels may not choose to distribute its products or may not be successful in doing so; the risk that acceptance of the Company's products in vertical application markets 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 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.

Thanks, Jim. First, I would like to thank everyone for joining us today. I'll begin by providing an overview of our results for Q2 2009 followed by our current outlook on our markets and business for 2009.

Despite the difficult economy, we continue to see increasing adoption of our SoMo handheld computer. In the second quarter, SoMo sales were up slightly over Q1 to remain at record levels. We sold 3,286 units, which is over 16% more than the number of units we sold in the second quarter last year. We are pleased with the continued SoMo sales momentum we are generating, particularly during a weak overall market environment and globally weak second quarter.

Overall our results -- our Q2 results -- reflect three elements -- SoMo sales, which grew 5% over the first quarter; our scanning revenue, which was down by $350,000 from Q1; and our OEM businesses, which remain in transition and was down by $250,000 from Q1. I'll now provide more detail and outlook on these elements.

Starting with the SoMo, we continue to focus on driving sales of this product line, which has continued to grow and represented 39% of Socket's total Q2 revenue. SoMo sales in Q2 reflect market traction in a number of different verticals with healthcare and hospitality continuing as our two strongest markets, where we remain strategically focused.

Within healthcare, we continue to build momentum with key partners, like Good Samaritan, and more recently deployment in a healthcare-related opportunity in Sweden with a government-funded organization that works to improve the quality of life for people with physical handicaps. We also saw deployments continue within the government and education markets working jointly with Plasco ID on a mobile ID solution for schools and EnvisionWare in the library services market.

Overall, we are pleased with the continued level of deployment, though these are proceeding at a slower pace than was originally anticipated, as we continue to see spending caution and budget restrictions, reflecting the current economic environment.

This slower pace has pushed many of the deployments we expected to close in Q2 into the third quarter. The good news is that we are definitely not losing these opportunities to others or alternative solutions. We continue to see companies completing their initial testing or pilot. And they continue to report they are happy with the solutions we provide.

In Q2, we began shipments of our SoMo 650Rx for healthcare applications. We shipped over 250 units to various customers, who are evaluating it for both new opportunities and as an upgrade to our existing standard SoMo 650 in the healthcare environment.

We are also seeing market acceptance for our no-radio SoMo, which provides our mobile computing solutions and applications where radios are not allowed or required for security and usability reasons.

As we look to Q3, we expect to see continued growth in SoMo despite the continuing economic challenges. This growth is expected to come primarily from increasing deployments to customers we already have in place as they continue to roll out their solutions. We currently have many deals in our pipeline that could generate some accelerated growth in Q3. But we are forecasting moderate growth based on our current visibility and are hoping to see some improvement as the quarter evolves. We expect improved momentum as we begin the fourth quarter.

Turning to our data-collection-related business, this business segment saw a decline in Q2 by approximately 20% or $350,000. This weakness was primarily related to our plug-in scanning business, where our SD and compact flash scanners are plugged into a third-party host device, like a iPAQ or Motorola MC35.

This business was down about 30%, which is in line with the general economic slowdown across the IADC industry. We feel the general slow pace of business is the primary reason for the lower results. And we have no reason to believe that we are losing this opportunity to competitive or alternative solutions.

Our cordless scanning business was up slightly in Q2, increasing about 7%. We saw significantly different results in Q2 between our more aggressively priced lower performance cordless scanners, like the 7M, where we saw an increase of 30% over Q1 as opposed to our higher-performance, higher-priced cordless scanners, like the 7P, where we saw a decline of 45% over the previous quarter.

In the third quarter, Socket is launching our new 7EL, an entry-level, laser-based scanning device using a new laser engine. This has excellent performance over a ten-inch range and is strategically targeted as an ideal solution for more than 95% of our customers. This new laser scanner is aggressively priced with an MSRP which is $150 below our current 7M scanning solution.

This new laser is targeted at the many customers who have repeatedly requested a lower-priced, laser-based scanner. Plus, it would also serve the needs of our current 7M customers. We feel that the 7EL will enable us to capture a good market share in this entry-level, highly-portable scanning segment. We believe it will enable us to increase our volumes and contribution from cordless scanning.

The launch of the 7EL coincides with the launch of Socket scanning products at ScanSource. As many of you know, ScanSource is the largest AIDC distributor in the world. And we have worked with ScanSource in Europe for many years. In fact, ScanSource was the largest distributor in the EMEA region last year.

We are delighted to now be working with ScanSource in the U.S. and are confident that with their extensive reach and 25,000 resellers we will see many opportunities for the 7EL as well as their other products. We expect the ScanSource relationship to help all our scanning products going forward.

Finally, our 7X, which is our new 2-D cordless scanner, is expected to ship in late Q3 and support the many 2-D barcodes that are becoming increasingly popular and put us in a position to expect revenue from this product in Q4.

Turning to our other segment of the business, our OEM business remains in transition. Our wireless LAN business continues to grow with wireless LAN revenue in Q2 increasing by 25% over Q1. The wireless LAN business now represents 67% of the OEM business.

Our Bluetooth business continues to decline and is now reaching a new state as we complete our end-of-life deliveries. And we expect it to stabilize going forward at the current lower levels. We expect the wireless LAN business and overall OEM business to begin to grow going forward and to be a solid contributor to our revenue.

Overall, the economic environment remains very difficult. While we see significant opportunities ahead, budgets and spending remain cautious, creating a higher level of uncertainty in closing deals. Given this economic situation and this environment and the current visibility, we are planning on moderate growth and will continue to lower our expenses to achieve cash-positive results in Q3.

Even though we have taken substantial action to reduce our expenses to achieve both cash positive and breakeven levels in the short term, we have done this without eliminating essential core expertise within the Company and have maintained our core structure so we can ramp up quickly when the economic conditions improve. I would now like to turn the call over to Dave for his comments.

Thank you, Kevin. Revenues for the second quarter of 2009 were $4,143,000, a decline of $629,000 or 13% from the previous quarter and a decline of $3.2 million or 43% from the second quarter a year ago.

Sales of our SoMo handheld computer of $1.6 million continued to grow, up 5% from the previous quarter and 56% from the second quarter a year ago. Handheld computer sales represented 39% of our total revenue for the quarter and, as Kevin mentioned, continues to reflect growing adoption of deployments by businesses, particularly in our primary markets of healthcare and hospitality, fueled by an expanding base of productivity-enhance applications from our many application partners.

Except for the SoMo, our product line sales were flat or down, reflecting continuation of the economic slowdown in business spending that continues to impact our economy.

As reported by many others in our industry that offer data collection products, customers on the whole are deferring the upgrading or expansion of current systems and the introduction of new systems or processes. As a result, our barcode scanning sales declined 21% sequentially from $1.7 million in the first quarter of 2009 to $1.3 million in the second quarter and reflected lower sales of our plug-in barcode scanners.

That orders are being delayed is also reflected in the growing pipeline of sales opportunities for our plug-in and other barcode scanning products. And we expect barcode scanning sales to increase going forward.

Our OEM business activity is the other major reason for our revenues declining in the second quarter as the OEM team completed its transition, phasing out Bluetooth modules that reached end of life and entering the early stages of a growing wireless LAN module business that will become the primary product line in our OEM business.

OEM sales of $668,000 in the second quarter declined $340,000 or 61% from the previous quarter due to lower Bluetooth product sales that now reflect the absence of end-of-life products and an increase in our wireless LAN product sales to $453,000 or 25% over the previous quarter. We also saw declines in our serial product legacy business.

As we look forward, we expect data collection sales to regain momentum as the economy improves with that momentum assisted by the addition this month of ScanSource as a distributor of our products in North America. ScanSource is the largest North American distributor of data collection products. And through them, we add the ability to reach the thousands of customers that they serve.

We anticipate continued growth of the SoMo handheld computer, reflecting more widespread customer adoption in our key vertical markets and the growth of productivity-enhancing business applications serving those markets. In addition, our OEM business, having now completed the Bluetooth product transition, should be growing as our wireless LAN products are designed into more and more third-party products.

Our sales backlog as we entered the third quarter for orders shippable in the quarter was within its normal range at about $1.2 million, reflecting normal channel stockage orders and continuing orders from OEM customers.

Our margins were also impacted by lower sales, including sales of lower-margin products, making up a higher percentage of our product mix and lower overall sales against which our relatively fixed overhead costs are applied. As a result, margins dropped to 41.4% in the second quarter from 46.6% in the first quarter. We expect our margins to improve with sales growth going forward.

Our operating expenses were $2.6 million in the second quarter, some 31% lower than operating expenses of $3.8 million in the second quarter a year ago and 9% lower than operating expenses of $2,864,000 in the previous quarter. We've continued to scale back our operating costs in response to current market conditions. Lower operating expenses are due to reductions in headcount in December and earlier this year, to continued salary reductions for current employees, and to a scaling back of discretionary expenditures.

We've done so looking to minimize the impacts on customer serves, essential product development, or sales. These programs will remain in place and then be phased out over time as our revenues and bottom line improve.

We strengthened our balance sheet in the second quarter through the completion of a common stock financing of approximately $900,000 after costs and expenses. The financing included substantial participation by management.

Plus, total cash flow for the second quarter was positive with cash increasing from $1.4 million at March 31st to $1.7 million at the end of June. Approximately $170,000 of cash was absorbed by operations. Another $100,000 was used for investment in property, equipment, and tooling. And we paid down amounts owed to our vendors and to our bank by nearly $900,000.

On July 7th, we announced a revised agreement with our bank that replaced a quick-ratio liquidity covenant that we were not meeting with two covenants that we are better able to handle. The first is a minimum-revenue covenant of $4.5 million in the third quarter growing to $5,355,000 in the fourth quarter. And the second covenant is that we maintain $1 million in cash on hand at all times. Again, our cash balances at the end of June were $1.7 million.

As we look back over the past several quarters, we believe we have made the adjustments needed to respond to the slowdown in sales caused by the effects and uncertainties of the worldwide economic slowdown. We've done so with the support of our vendors, our customers, our bank, our partners, and our employees. We've done so in ways that are enabling us to continue to move forward with the essential programs that are establishing the SoMo handheld computer family as a system of choice in key vertical markets, particularly in healthcare and hospitality.

We are continuing the development of essential products and product improvements to keep pace with newer technologies and the needs of our customers in the vertical markets that we serve. We are maintaining Socket standards of quality products and responsive customer support.

We look forward to the second half of this year, where we see a growing and active pipeline of customers increasingly ready to order products. We are monitoring and supporting continued product development and marketing progress by many of our application partners in bringing productivity-enhancing solutions into the business mobility market.

We're working closely with our newest North American distributor ScanSource in reaching out with our products and solutions to the thousands of ScanSource customers. And we continue to tightly manage our costs and expenses and our cash and working capital balances.

In particular, we wish to thank our stockholders for their continued support. Now let me turn the call back to the operator for your questions. Operator?

Thank you. (Operator Instructions). Our first question comes from Brian Swift, Security Research Associates. Please proceed with your question.

Okay. Could you give me a little better idea of what your -- what you anticipate your breakeven cash level will be or if we should anticipate for Q3 as your margins were lower than what you had been historically? I assume was partially by what you were talking about with the lower-margin products but also from just factory utilization as well.

Brian, at the $4.5 million revenue level, we would expect to be breakeven on cash from both operations. I think our working capital at those levels would also be probably slightly positive. So I would look at our $4.5 million revenue level as being the approximate cash breakeven level.

And that -- does that assume further reduction from the $2.6 million operating expense number that we saw for Q2?

Yes, I think you'll see our expenses in the third quarter dropping by about the same amount we dropped between the first and second. So I would look for expenses to be somewhere in the $2.4 million range, perhaps even a little bit lower.

And can you give us an idea of -- your OEM number, you think now as far as the Bluetooth portion of it is going to be kind of flattish going forward. And what do you see as far as your pipeline? I mean, you only have a handful of customers. So your visibility ought to be fairly reasonable on --

Yes, we were like -- I think we were off about 25% Q1 -- I mean, Q2 over Q1. I think we'll be about the same on the wireless LAN portion.

Okay.

So and again -- so we expect -- we believe we've passed bottom on the Bluetooth. And now we're in a flat section. And wireless LAN grew 25% last quarter. And we'd expect that trend to continue and then I think as we get into Q4 some acceleration.

So that's roughly about 100,000. So the SoMo handheld, now what do you -- you say you've got a new distribution agreement with -- for the US anyway -- with ScanSource.

Well, we wouldn't expect a lot to come out of that on the SoMo side. I mean, on the SoMo, we already have a very healthy pipeline. And we have a number of customers that have completed both trials and pilot programs and are either waiting for funds or delaying deployment for the -- waiting for the economic situation to improve.

As the sales cycle for SoMo is approximately I would say a year, the distribution we had with ScanSource won't impact SoMo so quickly. Yes, we'll get more units out in terms of new customers and new trials beginning, et cetera. But we already have a pretty healthy pipeline that if any of these deals should close, we would see that picking up.

We think ScanSource will help a lot more on the scanning side as the sales cycle is substantially shorter. And they have a tremendous reach on the scanning side. Plus, as I mentioned, we're introducing a more aggressively priced laser-based scanner, which we feel will do very well.

Yes, one other observation, Brian -- the SoMo began shipping in volume about at the end of September two years ago. And you typically see in the third year after you've established these products that you see some acceleration of growth. We're believing that we'll see that because of the number of applications that are now maturing that are being established in the market and because we continue to be a good replacement for Dell, a good replacement for the Siemens computer systems, the Lux that has been pulled off the market. And I think we're being favorably looked at even by a number of Hewlett Packard customers.

One factor that will moderate that growth in Q3, although we still expect growth will be that Good Samaritan, which has been buying units from us each quarter for the past year, is wrapping up now its full deployment with over 3,000 units deployed. So they'll be at a lower level in Q3. But again, with the other momentum, we're expecting to see continued growth.

Okay. Just doing the math when you were saying in the opening remarks the amount that the two other businesses were down -- one was $250,000. The other was like $350,000. And then but the -- and the scanners were up. It seems like that your overall revenues were lower sequentially from that. So what am I missing here?

Let me just clarify that point. Our cordless scanning was up. Plug-in scanning was basically down by the $500,000. So the plug-in scanning is obviously where we're plugging a SD or compact flash scanner into a third party. And we saw that fall. Cordless scanning is actually driven more by tablets and smart phones, et cetera. We see that rising. But even within that, we saw the lower priced versions of our scanners rising much quicker at 30%, which indicates that people are I think being very cautious with their dollars.

What's nice about that is that our new 7EL is actually moving the price point of our laser scanners down by another $150 a unit, where we think that there's even a better sweet spot. And therefore, I think that we're expecting some uptick in that area.

But data collection, Brian, is very key to our overall results. It was probably the biggest driver of our lower margins because of this product mix shift to our -- more of our entry-level products. And if you look into the pipeline, a number of the larger deals that are staged out there are actually data-collection-product deals. That seems to be where we're seeing more of a slowdown, obviously, than we're seeing in our other products. So that could become a very pleasant upside surprise for us. But how it goes can very well determine ultimately how well we do in the third quarter.

So are you -- I mean, is your goal to at least achieve breakeven cash flow for Q3?

Yes.

Yes.

And ideally substantially better than that.

Okay. Thank you.

Thank you very much, Brian.

Thank you. Our next question comes from [Bernard Fidel], private investor. Please proceed with your question.

Hello?

Hello?

Hi, Dr. Fidel.

Yes, hi. How you doing?

Good. You're live and on the conference.

Okay. Okay. You know we did not as well as we really expected to for this quarter. I'm very -- I think your SoMo that you people introduced two years ago is becoming a quite accepted thing in the market.

In particular, I understand that there's a government multibillion dollar stimulus program for medical technology, which'll become the end of the next several months. How would that affect us? Have you thought about that how that would affect us as far as the SoMo in regard to the medical use?

I think a lot of that stimulus -- those stimulus funds now -- and there are a lot of pieces that are going in a number of directions. But for healthcare, a lot of it's focused on electronic health records and the encouraging medical organizations to put electronic health records fully into operation.

And of course, once you have that, including the networking structure, normally in a hospital or clinical building, or the like, wireless LAN is typically used. From there, you need access. And the SoMo itself creates an excellent access vehicle to electronic records.

We know for the many years since Palm introduced it's Pilot a decade or so ago that the devices in the format of the SoMo are highly preferred by professionals, doctors, and others because they fit will with their tunics and yet they're bright screen and easy to use. And so we would expect that the increase in the use of electronic health records in the healthcare industry would certainly have an extremely positive effect on the sale of the products that integrate into that, including our SoMo.

Okay. All right. In the last conference, you people mentioned about large orders from Sweden, Germany, and I think it was Switzerland. How -- have those been completed? Or is that something that is an ongoing thing?

It's something that's an ongoing thing. And I think I mentioned today that the deployment in Sweden has started. We have seen the deployment in Germany start. And the ones in Switzerland have been deferred. But we are expecting them -- some of them this quarter.

I think, generally speaking, things could proceed at a slower rate because everyone's a little more cautious. We don't know the full extent of the deployment in Sweden. But I believe that we did something in the region of 250 units of an expected 1,000-unit deployment in Sweden. And we saw some units go into the German hospitals. But we believe there's a lot more.

The Switzerland deployment we had fully expected to come in, in the May timeframe. They basically said they're didn't -- they're behind in their budgeting. And now they're talking about doing this in early August.

And I think this kind of reflects the general slowdown. None of the deals have gone away. But they're not coming in at the pace that people originally said. Things seem to drag on an extra few weeks or few months as everyone seems to be spreading their dollars out over a greater period of time.

Right. Now it's my understanding that Siemens, who was one of your large competitors in Europe, went out of the so-called handheld computer.

Yes, we continue to see that companies like Fujitsu, Siemens left the market. Their products were used in this area. And as people are looking to upgrade or replace, they are now looking to the SoMo. And we're seeing this not just from Fujitsu, Siemens, but obviously from Dell customers as well as -- and some cases from the HP customers. So I would say that our plans as we outlined them continue to come true but at a slower pace than we originally anticipated.

Okay. Now I know it's pretty early in the third quarter. It's only about three weeks. Have you seen any shall we say improvement?

I would say it's too early to say. I think things at the moment are stable. They're not much better. They're not much worse. But we did see the I would say situation being worse. Probably in April was probably our lowest month. And things have gradually got better, but much slower than we expected. We think that July will be I think okay. I think the bigger test will be August because with vacations, it tends to be a quiet month. But based on this economic climate, we're expecting a lot of people not to take vacations.

So I would say right now we're kind of on track. Q3 has always been a difficult quarter because of the summer period. And a lot of things happen in the latter part of Q3. But right now, I think we remain cautiously optimistic.

We're also in pretty steady contact with a number of our most active partners and others who have expressed an interest in deploying. We do that for not only to ensure that they're getting through their evaluations and that everybody's being responsive. And because of that, we get pretty good visibility of what people's intentions are. And so as long as those intentions are filled, those are the basis under which we're expecting moderate growth in this quarter.

So would you say it's fair to say that in the third quarter you do see some growth as compared to the second?

Yes, but we -- Kevin mentioned and I did as well that we're expecting moderate growth. And it's based on a lot of feedback from the pipeline. The pipeline has actually been growing. You indicate where the activity is. The activity's certainly in the pipeline. And we do track as customers move down their evaluations. And that process is actually continuing. It's the last step, which is placing the order where things tend to be closely evaluated by companies in terms of the priorities for the use of their funds.

Okay. Just two more things and I'll let somebody get else on. The one thing that what is -- what I wish you people would be working on is getting out the word in regard to this company. This is almost like a sleeping giant where the potential is absolutely tremendous. I figured out that in the event in the third quarter of last year, you people had sales of $8 million. And this is -- and I know there were some various things. And this is before the SoMo was even anywhere where it is right now.

I figured out with your new structure with low costs, if you ever hit $8 million again, we're talking about close to about $0.30 a quarter, $0.25, $0.30 a quarter in profits. And that would be like -- so it's like phenomenal. And if you had true growth and if you ever went to something like $10 million, $11 million, you would have something like profits of a couple of dollars a share for the year.

Yes, we've frequently pointed out that Socket's business structure is highly leveraged. And because we work with contract manufacturers in Asia for the major components, we can produce more without increasing our needs for capital equipment. There's plenty of capacity. And on the sales side, because we use general distribution channels, we can certainly increase the volumes without needing substantially increased support that is required to move those sales forward.

So it does give us the chance to step up and move a lot of those extra dollars through the bottom line. We are looking for the opportunity. We have reduced our expenditures in a number of discretionary areas, as we noted. And one of those areas is in our marketing, not so much the marketing to our customers. We've been very careful not to diminish that area.

As an example, in the second quarter, we had a significant booth at the HIM show, which is the large healthcare management show that we attended in early April. And that outreach has paid off in terms of a number of new contacts and certainly increasing the awareness of the Company to our customers.

In terms of the awareness to our investors, we will put that back into play much more actively as we see things moving back up again. So hopefully, that's not too far off.

Well, I'm very encouraged, particularly since management bought the stock. And you guys know exactly what opportunities are transpiring. One last thing and then I'll get off. At what level would we be profitable?

I think we'd be profitable about 5.3, 5.4, so in or around that level.

You think we could be profitable this year?

Yes, as I said in my remarks, I mean, our dilemma here is that we certainly have deals that could come in and accelerate our growth quite substantially. The difficulty in this environment is to determine the timing. Even people that you believe will pull the trigger, what we have been finding over the last six months is that either their controller or CFO or their board have cautioned them to say can you wait another month? Can you wait another quarter? And we haven't seen people loosen up their purse strings to actually place the order.

We're going through the evals. We're getting very high marks. People are very happy with the solution. But ultimately, you have to spend the money. And the environment is such that the rate of spending is not great. As people loosen up the purse strings, we would expect to catch up. And we don't know when that will happen. But I think when it does happen, it will cause us to have some accelerated growth.

That's good. Okay. Good luck. And keep working on it.

Okay. Thank you very much, Dr. Fidel.

Thank you, Dr. Fidel.

Thank you. Gentlemen, at this time, there are no further questions. Do you have any closing comments?

Yes, we'd just like to thank everyone for participating in today's call. And we look forward to the next report in October. 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.