Socket Mobile Inc (SCKT) 2009 Q4 法說會逐字稿

Greetings and welcome to the Socket Mobile fourth quarter 2009 management conference call. All participants are in a listen-only mode. A question-and-answer will follow the presentation. (Operator Instructions) . As a reminder, this conference is being recorded. It is my pleasure to introduce your host, Jim Byers of MKR Group. Thank you Mr. Byers, you may begin.

Good afternoon and welcome to Socket's conference call to review financial results for fourth quarter and year ended December 31, 2009. On line today are Kevin Mills, President and CEO of Socket and Dave Dunlap CFO of Socket. Socket Mobile distributed its earnings release over the wire service as of the close of market today. The release is also been posted on Socket's website at www.Socket Mobile.com. In addition a replay of today's call will be available at v-call.com shortly after the call's completion and a transcript will be posted on Socket's website within a few days. Posted replay numbers in today's the 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 this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Commission of 1934 as amended. Such forward-looking statements include but are not limited to statements regarding new mobile computer, data collection and OEM products, including details in the timing, distribution, and market acceptance of the products and statements predicting trends, sales and market conditions and opportunities in the markets in which Socket sells its products. Such statements involve risks and uncertainties and actual results could differ materially from the results anticipated in the forward-looking statements as a result of a number of factors including but not limited to, the risk that Socket's products may be delayed or not rolled out as predicted if ever due to technological market or financial factors including the available of necessary working capital. The risk that market acceptance and sales opportunities may not happen as anticipated. The risk that Socket's application partners and current distribution channels may choose not to distribute the new products or may not be successful in doing so. The risk of acceptance of new products in vertical application markets may not happen as anticipated, and other risks described in Socket's most recent Form 10-K and 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 will now like to turn the call over to Socket's CEO, Kevin Mills.

Thanks, Jim. I would also like to thank everyone for joining us today. I will first provide an overview of 2009 followed by our current outlook for our markets and business for 2010, 2009 was a challenging year for many businesses including Socket's. Our lower revenue in 2009 reflects the impact of a difficult overall worldwide economy. As well as the timing of upgrades and transitions of some of our key products, which we now have completed. Despite these challenges we made significant progress in a number of areas in 2009, that strengthen our business and outlook for 2010. We grew our SoMo business by 32% in 2009. While this was below our expectations, our current sales pipeline for potential SoMo units is the best it's ever been. We have maintained our key development programs and completed upgrade transitions with several key products, bringing new and enhanced products to the market. And we significantly reduced our costs and have carefully managed our cash and working capital with a focus on returning to profitability.

While sales of our SoMos grew 32% for the year, this was well below our expectations. Sales were impacted by delays or postponement in projects and deployments which were the result of the tight credit markets and a freeze in capital spending, especially on new capital equipment and programs. The good news is almost none of the projects were lost to competition or alternative solutions and they remain viable and significant opportunities within an improving economies in 2010.

Our data collection business was impacted by the poor economy with limited deployments throughout the year. This business was also impacted by the market transition towards 2D scanners which is attracting increasing customers seeking to both service new requirements and to future proof their investments. In 2009 as we were competing development of our own 2D scanner we saw 2D price point squeeze the price 1D scanner. To cope with these market forces we needed to restructure and reprice our 1D laser based product line to be more attractive for customers who only needed 1D and also get a 2D product into the market to take advantage of this market transition and new opportunities.

In the fourth quarter we repositioned this product line for growth and expansion in preparation for the introduction of our new 7X2D scanner announced this quarter and now shipping. Our OEM business was undergoing transition in 2009 as existing products were going end-of-life. And we entered into a new design cycle for our wireless LAN products. These factors combined to impact sales for the year. But we have made significant investments in our new wireless LAN products, we expect these products to generate meaningful revenue contribution this year.

In response to the lower revenue, we aggressively lowered our expenses throughout the year through reductions in work force and salaries and by cutting all non-essential expenses. However, we have maintained three critical R&D projects for development of key products representing significant growth opportunities as the economy improves. These include our two D barcode scanning, an investment that we view as vital to the health of our data collection business as the market is rapidly changing to 2D. We also invested in improving the core software on our SoMo mobile hand held computer, which is critical to the stability of our SoMo platform and long term importance of our PDA business.

Lastly, we invested in our wire LAN OEM business. One of our core areas of expertise. Our wireless LAN development not only benefits our long-term OEM customers and revenue, it is also a core component for our next-generation SoMo devices. Maintaining our investment in all three of these high-tech areas was difficult to balance with our need to further reduce expenses elsewhere. With these investments significantly strengthen our business and the long-term health of the Company. These critical development programs have progressed well and on schedule and we expect these products will be major contributors to our revenues in 2010 and beyond.

As we look forward, we see exciting opportunities and anticipate a stronger 2010. I'd like to highlight some of the key opportunities that we expect to drive our SoMo business in 2010. The first is [Epocal], a Canadian firm focussed on the blood analyst markets. Epocal uses the SoMo as the computing platform for their device. They developed a product and began delivering it last year with hospitals and clinics primarily in pilots and doing limited deployments. In November, 2009, Epocal entered into an agreement with Inverness Medical to distribute their product worldwide. Inverness has also entered into a definitive agreement to acquire all of the issued and outstanding equity securities of Epocal for a total potential purchase price of up to 255 million if Epocal achieves certain gross margin and other financial milestones on or before October 31, 2014. We strongly believe that Epocal, with the help of Inverness, will be a strong growth driver of SoMo this year. We are currently in discussions with them under requirements for the next 24 months. We expect this opportunity to begin driving SoMo revenue in 2010 and to a greater extent in 2011.

We also see a reemergence of discussions and activity with [Hospira], which now seem ready to begin selling their [Verascan] medication dispensing system and has recently trained their sales team on the solution. As Hospira has indicated all hospitals will be required to have a closed-loop medication dispensing system such as Verascan in place by January 1, 2013. In addition, as part of the stimulus package there is a strong incentive for hospitals to deploy closed-loop medication systems as soon as possible, as the government is providing bonus reimbursements for hospitals that have a system in place before January 1, 2013. These bonus reimbursements are coming from the Obama stimulus package. In addition, the government will reduce reimbursements by adding a penalty deduction on all reimbursements after January 1, 2013. We believe these incentives should speed the adoption of this system and benefit SoMo sales this year.

We are also seeing increasing sales momentum in the health care market in Germany with over 60 hospitals having SoMo-based solutions in trials or limited deployments. Germany was the only country where our business grew last year, primarily on the strength of these trials and limited deployments. We expect our SoMo business to continue to grow in Germany and northern Europe in 2010. Finally, in health care we have a number of SoMo-based solutions under test in the national health system in the UK; many of which should move forward this year.

We're also seeing very good opportunities in the hospitality markets and expect to close a sizeable deal in the current quarter for a hospitality application we have been working on with a key reseller for six months. Our SoMo business remains very healthy. We are seeing many of the SoMo-based applications from resellers being deployed which we will believe increase as the economy improves. While the sales cycle has been longer than expected, it has enabled us to get close to our partners, be more responsive to their needs, complete numerous pilots, and know their solutions work well. All of this strengthens our understanding of our key health care and hospitality markets and will benefit us as a business climate starts to turn in 2010 and companies start to spend again. While we remain cautious about the pace of spending increases, we are seeing a definite improvement.

Turning to our data collection business. This business consists of two elements, plug-in scanning, which is increasingly driven by our SoMo sales; and our bluetooth cordless scanning products. Our plug-in barcode scanning business is becoming more robust and more predictable as some of our stronger customers like Epocal and Hospira use our plug-in data collection peripherals as an integral part of their solution. Our overall plug-in business stabilized in 2009 has companies like Dow and HP either exited the PDA market or reduce their focus on PDAs and we saw it replaced by SoMo-driven business. Now that this transition has completed, we expect our plug-in business to be more stable and predictable going forward.

Turning to Bluetooth cordless scanning products. In Q4 we reduced the price of our 1D cordless barcode scanners by approximately 30% which will result in higher unit sales going forward. This reduction was made in conjunction with our cost reduction programs and was accomplished without significantly impacting margins. While this change caused a temporary slow-down in cordless 1D scanning sale in Q4, we are seeing a significant pickup in Q1. In addition, we launched our 2D cordless scanner in January as planned, and we are aggressively promoting this new 2D scanner with good results so far in the markets. Our new 2D scanner, the 7X, is the smallest, lightest and most economically developed Bluetooth cordless scanner in the market. IT is also aggressively priced at the old price of high end laser scanner making it extremely attractive both to new 2D customers and high-end 1D customers who are likely to need a 2D solution in the near future.

As we complete the current evaluation period, we expect to see sales of the 7X build in the March-April time frame. The new 7X has many new features and can be used to read barcodes off a mobile phone. It also has a presentation mode allowing customers to present their phone to the scanner so that coupons can be redeemed directly from a mobile phone. The combination of the ability to read all existing 1D barcodes and the ability to read 2D barcodes from mobile computers and paper, opens up some exciting opportunities for the scanner and we expect it to be a leading product and revenue generator before the end of 2010.

In regards to our OEM business, we have been re-engineering our solution on a new wireless LAN chipset. We spent much of 2009 dealing with end-of-life issues and developing the replacement radio with all of its advanced features that our customers expect from Socket. The development cycle for the replacement is just wrapping up and our early customers already have products and are testing. We expect to announce the replacement product in Q1 and believe this will restore our OEM business to more normal levels in 2010. To conclude, while 2009 was challenging, we have made significant progress in many key areas, while also reducing costs and improving our ability to leverage higher revenue. We enter 2010 as a much leaner Company with a strong portfolio of products that are gaining increasing acceptance in our key target markets of health care and hospitality. We have significant opportunities in Q1 and see growth over Q4. We are targeting cash flow positive operations by March and intends to keep our aggressive cost reduction programs in place until we achieve this goal. We are fortunate to have committed employees who continue to work very hard in these difficult times. With our broad portfolio of products and relationships with key customers, we anticipate achieving solid growth throughout 2010 and expect to be profitable before the end of the year.

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

Thank you, Kevin. Our revenue for the year was $17.1 million, a decline of 9.5 million, compared to record revenue of 26.6 million in 2008, $6 million of this decline was from our OEM business. OEM revenues increased in 2008 by over $3 million, due to last-time customer buys of Bluetooth modules that were being phased out in 2008 because the Bluetooth chip used in the module was discontinued by its manufacturer. The drop in Bluetooth revenue in 2009 from 9.3 million to 3.3 million, which represented 19% of our 2009 revenue, was primarily due to the absence of significant Bluetooth OEM sales in 2009. As Kevin noted, our OEM business also is completing a transition of its wireless LAN products to the latest 802.11, a/b/g chip technology, which is now being offered along with our Wi-Fi companion software with Cisco CCX Security extensions. OEM sales are design win business and with our product transitioning completed we are actively seeking new design wins and expect this business to grow over the next several years. Our data collection product family incurred a drop in revenue of 3.6 million from 9.2 in 2008 to 5.6 million in 2009, representing 32% of our 2009 revenue.

Lower data collection product revenue has been an industry-wide impact caused by business slow-downs in deploying or expanding new mobile systems, and in upgrading mobile equipment used in these systems. As Kevin reported, we've maintained our key development programs for our data collection products during 2009 and have transitioned these products for growth in three major areas. First, with the release of 2D cordless hand scanner this quarter, an area of growing customer demand because of the greater amounts of data that can be scanned with 2D scanner.

Second, with a release last quarter of the new highly ruggedized version of our cordless hand scanner, and, third, with a replacement of our entry level non-laser barcode scanners with laser barcode scanners at new attractive entry price points. All of these changes are attracting good customer interest and are a major contributor to our growing sales pipeline. Our third major product family is our SoMo family of hand held computers. Revenues grew 32% in 2009 from 4.7 million to 6.2 million, and represented 36% of our 2009 revenue, moving ahead of data collection for the first time. As Kevin noted, our base of application partners, particularly those focussed on applications in our primary vertical markets of health care and hospitality, continue to establish and expand their mobile applications using both our SoMo handheld computer and barcode scanners. Potential order anticipated from deployment of partner applications and health care and hospitality are becoming more significant contributors to our growing sales pipeline.

Our fourth quarter revenues were the lowest of the year at 3.6 million, reflecting further moderate reductions in data collection and OEM sales relative to the previous quarter, as customers evaluated our newest product offerings. All of our sales in Europe including planned SoMo deliveries were also negatively impacted by severe winter blizzard conditions during the middle of December that continued into the holiday break. Delaying sales out by which we measure revenue into the first quarter of 2010. As Kevin reported, our first quarter pipeline activity and orders and shipments to date, are all indicating growth and data collection and SoMo sales in the first quarter.

Our sales pipeline consists of potential orders from customers who are considering our products for their mobile application deployments. The opportunities in our pipeline today that could close over the next year are double the size of the pipeline measured at the end of the June of last year and reflect growing customer interest in new products and growth and expected deployments of partner applications that use our products. In response to lower revenue, as Kevin noted, we reduced our operating expenses in 2009, 31%, from 15.1 million in 2008, to 10.3 million in 2009, through a combination of lower head count, reduced salary levels for employees, and lower discretionary spending.

In addition, we've closely managed our working capital to improve our cash balances. For example, we reduced our investment in inventory in 2009 by $1.9 million to improve forecasting and more frequent ordering to better align the receipt of inventories with the delivery of products. And we've continued to receive strong support from our distributors in continuing their long history of timely payments to us for our products. As is typical of economic recessions, our distribution channel in response to lower business activity, has reduced its stockage of our products to about half the levels we were holding a year ago which puts pressure on our cash as we are paid by our distributors when we ship products to them. As the effects of the recession turn around we expect to see shipments and distributor stocking levels to return to higher levels to the benefit of our working capital and cash balances.

An important element of our working capital is our working capital bank line that enables us to borrow against qualifying receivables and provides a working capital buffer to enable us to pay our vendors for inventory before receiving payments of the products that are shipped to our customers. I am pleased to report that our current bank line is being extended by a year to March of 2011. Its terms are the same as our present line consisting of our maintaining a $1 million in cash on hand, and meeting end of quarter revenue covenants.

For 2010, these covenant thresholds are, first quarter, $4.565 million, second quarter, $5.495 million, third quarter, 6.115 million and fourth quarter 6.265 million. Our priorities for 2010 are to grow our revenues above these thresholds and to achieve profitability, while we phase out our cost reduction programs and to maintain an active product development program for 2010 to continue to expand our product offerings with our major product families. We completed two capital-raising events in 2009, a common stock private placement in May 2009, that netted approximately $900,000. And the strategic sale of our serial business at the end of September which netted a gain of $450,000. Our cash balances at the end of the year, $1.940 million an increase of $1.2 million over the previous year-end, while our bank line draws at the end of each year remained level at $1 million.

While no one can predict with certainty the timing of economic recovery, over this past year we have made significant adjustments in our cost structures and we continue careful management of our costs and expenses and our working capital. We have done so with a support of our vendors, our customers, our bank, our partners and our employees and we are very appreciative of their unwavering support. And we particularly wish to thank our stockholders for their continued support. With that support we have been able to move forward with the essential programs that are continuing to establish SoMo handheld computer family with this data collection options, a system of choice in key vertical markets, particularly in health care and hospitality. We are continuing the development of central programs and product improvements to keep pace with newer technologies and the needs of our customers in the vertical markets that we serve. And we're maintaining Socket's standards of quality of products and responsive customer support.

We remain focussed on further building on the growing and active pipeline of customers showing an increasing interest in ordering our products. We are monitoring and supporting our solution partners' product development activities and their marketing progress, and providing an environment that encourages them to bring productivity enhancing solutions into the business mobility markets that we serve. We are looking forward to a much improved year in 2010 with a combination of new products, anticipation of an improving economy, a maturing base of productivity-enhancing applications, in our key vertical markets, and the experiences of operating as a lean organization.

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

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

Yes, I guess my -- kind of a general question, because your comments were basically given on the pretty much on the year as a whole, and in citing how much purpose up or down from the various business segments. But, I mean, when you look at the economy, it looks like the our as a whole first quarter was kind of the low point and then it's kind of been gradually recovering from there. And, yet, your fourth quarter was your worse. Other than your pipeline growing rather nicely what kind of comfort level can you give us from the standpoint that -- I mean, other than obviously this -- these series of numbers that you gave out that, that relate to your covenants on your bank line must relate to your forecast, the trend is in the wrong direction. So how do you respond to that?

Okay. Well, there was a number of questions in there. Q4 was extremely disappointing. I think you have to look at in the three elements of the business. Essentially on the SoMo side, I think we had a flat Q4, and it is normal for us to see some pickup in Q4, which we just simply did not see. And also as Dave pointed out, we had some weather-related delays, et cetera. But there really was no pickup. We expected that some of the people would spend the money -- either they had in their budget or had stored away, which was more historical and that simply didn't happen. I think on the data collection, I think as I pointed out, we needed to realign this business, because, A, there is a big trend to move to 2D, and we didn't have our 2D product ready yet, because we were still in development. And then we had to realign our pricing to, I would say, make the 1Ds more attractive.

We implemented a 30% cost reduction in the November timeframe, but I think that many people don't buy scanners timeframe, but I think that many people don't buy scanners until they have tested them, and this is a process that takes, I would say, a minimum of 60 days. And a lot of the deals that we had, that we expected people to move to the lower cost 1D, they simply tested and they're now start to go buy in January, and we certainly lost momentum in the data collection business. On the OEM business, we were, and we had said in advance, that we had expected lower revenue. So obviously Q4 was disappointing and but I think that the data collection was probably the major contributor to dragging it down, plus weather-related, and we're seeing those opportunities moving forward to 2010.

And, Brian, by way of addition, we track very closely the opportunities that are either coming through our distribution channel or that we become aware of through some cases direct contact with potential customers, there were no, what we would like to characterize as significant deals in the fourth quarter. There was a plan -- there were -- the amount of SoMos that were held up through the winter delays, particularly in Europe, was probably would have increased our computer sales by at least 20% and would have made it the highest quarterly results for the year. And that simply has pushed out into Q1. You combine that with the comment that Kevin made, that we're in the final stages of working and closing a SoMo opportunity that falls in the significant deal category, I mean, those are the sorts of things that give us a lot of comfort that you're going to see a return to growth in the first quarter in the SoMo category. We're seeing the same thing with data collection. Again, a lot of the growth in the pipeline is coming from both newer products like the 7X. It's also like we're seeing a pickup in the entry-level area. We've actually had to scramble to get additional inventory in to build against that demand.

So the changes that were made in Q4 being evaluated positively by the markets, and that is now showing up in combination of orders, our data collection orders internally are actually ahead of our SoMo orders. That may not last because SoMo has been stronger, but it's a much stronger start for the data collection area than we historically have seen. So these are just some of the observations that we have internally that suggest that we should return to a growth picture in the first quarter.

Okay. But with the lower levels of inventory at the distribution, what -- how do you -- how do you increase your -- how do you significantly increase your revenues without them -- I mean, what kind of delivery times are they quoting? What's happening?

This brings up a kind of a bigger I would say concern is that throughout 2009 and all of the supply chain has been stretched. As Dave pointed out, we, I would say, were normally keeping about $2 million of reservation -- of reserve against about a $4 million inventory in the channel which represented basically 65 days. And throughout the year that has been reduced and reduced, and lead times get stretched out. I think we are good at scrambling, but certainly there is no ability in the system right now to instantly come up with big numbers, and we have been explaining these to customers and we expect that the orders will pick up because people need the product in the March-April time frame and the lead times really have gone out to five, six weeks.

We still have very good relations with our supply base, and they are very responsive, but it's not like before, where there was a buffer in the distribution channel. That has largely gone away. But it will need to be built back up this year because it makes operating quite difficult for everybody. But I think as the economy improves, we will expect that buffer in the channel to build, which will, I would say, reduce some of the pressures on our cash.

One of the hallmark of Socket's sales team and the relationships of the distribution channel is an open and proactive line of communications. And so we're we're tracking deals against individual customer situations. We're talking with frequently with a distribution channels in regards to how we will fill. And with that improvement in forecasting that's happened as we've moved through this last year, it's also allowed us to anticipate the orders that we anticipate will be coming in, and we have a steady flow of inventory coming in from our suppliers', as well. So it's only in the case where there is an unusual forecasted change that we would probably get caught short, and we would certainly work to expedite, given that there is a regular flow of inventory, you often can expedite, if you need to.

Okay. I'll let somebody else ask a question now and I'll come back if I have to.

As a reminder, ladies and gentlemen, it is star-one to ask a question. Our next question comes from the line of Bernard Fidel, who is a private investor. Please proceed with your question.

Hi, fellows.

Hi.

Okay. Well, I'm not concerned anymore of the last year, 2009, because that's history. And what I do is I'm looking for some questions for the future, which I think is more significant for every investor here.

Yes.

Now, Kevin, you did mention that you expect to be profitable in the year -- in this year, 2010.

Pretty much.

Correct?

That is correct.

Could you tell me at what point do you expect to be profitable? Would that be the second quarter, third quarter?

Well, I think that we want to be profitable by the end of the year. As I pointed out, and we have severely reduced our cost price, so I think our first objective is to be cash-positive, which we believe we could achieve by March in terms of that month, and we would be cash-positive for the remaining portion of the year. And as we have currently our employees on a reduced salary, and the plan would be, the plan is to basically get those employees back onto their normal agreed base salary and in the second quarter. And the third quarter is generally difficult because we lose our European business, and then we would be profitable as of the fourth quarter.

So that's our plan for the year. I don't think it's possible for us to maintain our employee base. They have been extremely, I would say, gracious in terms of continuing to work through the year at a reduced salary. So I expect to get them back on their agreed base salaries as of I would say April, and obviously if business is stronger or it would be profitable sooner, but the target right now would be October.

Our previous caller Dr. Fidel, Brian Swift, mentioned the bank covenants which I addressed. Generally he was looking at how that was set. Generally the bank looks at our going-forward plan and they have set these thresholds at the level that generally generate cash break-even operate operations for us, and that is with our planned expenditures, which includes research and development, it includes restoration of some of the cost reduction programs that phased in over time. Profitability is not a whole lot higher than those numbers, plus we have the ability by continuing the cost-reduction programs to lower the profitability point. But, for example, with the second quarter of about $5.5 million as the threshold, you can judge that the profitability level would be somewhere around $6 million. So the key for us is how quickly we can grow the business back to the $6 million level or above, and as we continue to grow to make sure the bottom line continues to grow along with the other programs that will come back fully into play.

So it's basically feasible that the things go well that you could be profitable even in the second quarter?

Yes, we would need to hit something in the $6 million level or curtail costs to bring that down.

Okay. Now, the pipeline, I believe you or Kevin mentioned that it has never been stronger, is that a fair statement?

That is a fair statement.

And you say it is twice as strong as last year?

Yes, I mean, one of the things we do is that we have a CRM system, and as we interact with potential customers we track our activities and those activities include the initial contact, the e-mails back and forth, their requirements, their timing, the application of various other things. So this is something that we have a system to track. And we can look to see what the expected pipeline is and the timing of various deals. Even though, as I think I mentioned, through 2009 we tracked a lot of deals that aren't lost. But what didn't close. And we continued to add deals as other customers have come in. So, yes, as we start the year, the pipeline is at twice the level it was this time last year.

Okay.

And the difficulty in this, is determining the raise of close. Customers get through a testing period, and they will I would say prototype and do pilot runs, and then they often have to go off and talk to the person who has the money to say we would like to deploy this. And I think we have a lot of deals stuck in that phase where the CFO or the accountant or controller has basically said to their respective teams, we understand it's a good idea, but money is tight, can we wait six months, wait until things improve? And we feel that once that starts to loosen up, we should be able to catch up pretty quickly.

Yes. Now, you mentioned something about that is a large order in the hospitality area for the -- that you feel is going to close in the first quarter is it?

Yes, that is correct.

Yes. What is considered significant order ?

I would say anything -- we would view anything over 500 units, right? As being significant.

500 units is equal to--

A $0.25 million to $300,000. And so would represent certainly more than 5% of the quarter's revenue. But, again, this particular customer hasn't made up their exact mind on the quantity, and but it could be in the 800-unit range. So you would be talking about, maybe, $400,000, which goes a long way to cover--

Significance.

Yes.

Now you said it is going to be a rollover buyout, you couldn't -- if it weren't for the bad weather in Europe, that you would have had a 20% increase in the SoMo, which is going to spill over into the first quarter. Am I correct?

Yes, that's correct. I mean, as you know we count revenue based on sales out of distribution.

Exactly. So that should really be quite significant for the first quarter then.

Yes, we expect some. We were disappointed in Q4 . A lot of the shipments that we shipped after December 15, didn't make it to distribution because of poor weather, and that happened essentially between December 15 and December 24, and most of Europe was closed thereafter. So that certainly impacted our revenue, and we will pick that up in Q1.

Well we really should hire a Vice President Gore with his bad weather.

We should. If we could control the weather, I would control a lot of things.

Okay. Noi, in for the first quarter you expect to be cash break-even, is that it?

I think we'll be close to cash break-even. I don't know that we get all the way. I think we'll be cash-positive from operations as of March. Historically January is the worst month of the year, and not a lot happens, everyone goes into a planning phase, and generally speaking it's a poor month. For us, in certainly in the US, our bookings in January were up 30% over the same period last year, so in that respect bookings in January at least started out as being solid. And but generally speaking people do not take a lot of deliveries in January, and as often people either have money they want to spend in Q4, or they haven't got their money to spend in the new year.

(Inaudible) % is quite significant.

Yes.

February, how is that doing?

It is okay but it is still relatively early in terms of -- I mean, the quarter. So we expect to book kind of 30-30-40, which is our normal pattern. And right now I would say February isn't great, isn't bad. It's kind of neutral. But, again, we are expecting this order we talked about, and certainly if we got that, then February would also be ahead of where we were this time last year by a similar amount.

And orders to date, Dr. Fidel, are tracking, ship of orders in the quarter are tracking about where we are in the linear basis with the quarter. So we're about half-way to our first quarter goal, and we're about half-way through the quarter. So and if you -- if we do find, as we expect that the second half of the quarter is much stronger, that will pick up the pace and it will certainly be positive for us.

Right. One last question here. What do you -- are there any other large orders that you expect in the near future?

Yes, I think I highlighted Epocal we're working with them closely. They were just acquired by Inverness Medical and they're putting their requirements together, and we would expect them to be a driver of the business as part of this I would say we would expect to book a large order to start delivering through the end of 2010 and 2011. So I think we would be able to have a more definitive plan as regards Epocal. But bear in mind they only got purchased in November 2009, and as we pointed out in the call, they were purchased for a quarter of a million dollars, $255 million subject to meeting certain requirements, and they have pretty large plans and we would be able to tag on to those plans as they start to deliver more product.

What happened to England, that they were testing the SoMo in the hospitals?

We have a lot of hospitals continuing to test. I think the pace of deployment has been much slower than we expected, and we haven't either lost any of the deals; it's just that the testing has gone on longer and we still expect them to contribute significantly this year. We're also seeing a similar situation in Germany. And, again, certainly the UK's economy has only started to come out of recession, and again health care I wouldn't say, though, the quickest when it comes to spending money, but we are seeing continued tests and we're pretty hopeful that as the money does roll we'll be part of their plan.

And the trends continued to multiply, Dr. Fidel. For example, Kevin mentioned 60 hospitals in Germany. Many of those hospitals are still in early stages of deployment. So the volume of business into those hospitals and the expansion beyond the 60, all will likely continue to accelerate the summer activity in northern Europe. Kevin mentioned the National Health Service in his remarks. That's the lot of the UK business that we've talked about is involved with that discussion. You recall there was a press release last fall where we announced that a distributor, Dakota, was working with -- in getting health care applications involving our products into the National Health Service System. That has continued forward, and many of these opportunities that we're seeing today are a result of some of the work on the part of the distributor, which is Dakota, that we talked about last fall. So each one of these areas is continuing to grow. The other thing that's significant, again that Kevin mentioned, is that we're seeing orders coming in now for the 7X, which is the new product area, and we're seeing a nice pickup in entry-level orders for entry-level products.

It seemed like the fourth quarter people needed to take that time to evaluate the restructuring of our data collection product line, and so we did see a drop in the sales in the fourth quarter, but the activity in the first quarter has been at an substantially increased pace and we anticipate, again, the changes that we made in the fourth quarter will substantially benefit the first quarter and beyond.

So you expect for the first quarter record sales on the SoMo. Is that fair?

That I think that would be fair, yes.

Okay. Well, the way it looks to me is that we're starting the year off at -- at cash break-even and you expect to turn profitable by the end of the year?

I think that is a fair assessment.

Okay.

Thank you very much.

Okay.

We do have a follow-up question from the line of Brian Swift. Please proceed with your question.

Yes, in the, I got a couple things. In the larger potential deals, like with Hospira and Epocal, were those go-through distribution or would they be direct? Or do you have any direct-type of accounts?

Interesting question. Currently they're all going through distribution, right? And our requirement is to -- our preference is to sell-through distribution because it gives us good leverage and gives good flexibility to our partners. And so that's the general trend. In the case of Epocal, have some requirements and we're in discussion with them to do and to do an OEM-type deal, but it is early stages. We would expect through Q1 they will all go through distribution. One of their requirements is that they ship from their facilities in the US to customers overseas which doesn't set up well through distribution because we have some legal requirements in terms of the radio and configuration, and it's not possible to legally ship a product that is configured for overseas deployment through US distribution channels.

So right now the plan is distribution as they service North America, and but there is a good possibility that we will enter into a OEM-type arrangement with them as they try to service a worldwide requirement. Does that answer your question?

I see. But that was kind of a unique case and is essentially you're going to try to service this market through your--

I mean, we have good distribution partners, and for the likes of Hospira, for example, they generally will use local distribution to buy both the SoMo and the RFID plug-in scanner on an as-needed basis. And their business model would be that as they sell their software to a given hospital, that hospital may deploy 100 units, right? And as they buy those units, they will get their training and then they would be delivered locally to wherever the hospital is in Kentucky or Virginia. And this works well. It provides the buffer that we talked about. So there is product available in the channel. They don't have to wait too long, et cetera. So our distribution strength is a big plus when we go into these deployment phases.

The only exception, Brian, in our OEM business we always ship-direct. You got fewer customers and their requirements are generally unique enough that it's not a logical step to stock those component parts that go into other manufacturers' products in the distribution channels. That number is now at a lower point, 19%, as we move through this next year and couple of years, we expect that number could easily grow although it will be in competition we would like to think with growth in our other product families, as well. But we do ship directly to OEM customers.

All right. Yes, well distribution is good , I guess except when they carry on unusually low levels of inventory.

And again, just going back to that point. Between our inventory and distribution, the last year at this point, there was $6 million in inventory. Now there is $3 million. So this will get corrected. I don't think the current levels are the right levels, and certainly if there's any pickup in business. And so we would essentially see an improvement in that.

For those of you who like to track this area on the balance sheet, we report deferred income on shipments to distributors, that is the net of the our selling price and our cost of goods. So it is essentially is the profit margin if you just for ease assume 50% profit margin, or then on these products, then you would see that at the end of 2008 there was about $4 million in the channel, and about $2 million in the channel at the end of 2009. So each time we report on a quarterly basis you'll see how those numbers are fluctuating. We also now because it's becoming more significant broken out our deferred service revenue, and as we are offering extended warranty and service contracts on a number of our major products, data collection and SoMo, and we recognize the revenue -- we get paid up front and recognize the revenue over the service period, which for our premium Socket care service is three years. So as we move forward, you'll see deferred service revenue as also being a balance sheet element and that will come in over time.

Okay. And just maybe finalize on distribution. I mean, as a company, philosophically, we are very much a distribution company and distribution is very effective and from a cost-delivery point of view provided you're shipping what we call standard products which is what we primarily ship with SoMo and our plug-in scanners. And when the product become unique to a customer then they really are more suited to OEM which is why we do our wireless LAN and other things. And, again, we would expect that over time to be about 25% of our business. With 75% being pure two-tier distribution.

Okay. You described the -- you're UK and Germany, what's your programs are going as far as trials and hospitals, what's happening domestically here in terms of what kind of penetration or is that something that's still in the future that like--

Again, I think it's been slow in the US. I think, we can give the example of Hospira. I mean, they essentially bought up a company to go after a specific medication dispensing market. We had high hopes for them at the beginning of 2009. We had discussions with them in 2008, 2009, but nothing really happened. In our more recent discussions I think some of the reasons things didn't happen is there still is confusion on the impact of the stimulus program and who pays for what and what are the benefits? And they recently, I would say, trained their sales people and now have a more concrete plan to attack this medication dispensing opportunity, and the stimulus money is being used to incentive that. The overall electronic health records,things are slow due to the uncertainty and as the uncertainty decreases I think some of this will pick up. We're tracking many, many applications in health care in the US, but they have been moving slower than we originally expected.

In Europe I think that is -- we probably had lower expectations in 2009 and they have been much steadier, but it is a government-run program, and there hasn't been the stimulus money and they have systematically gone down the path to deploy certain applications whether it be this doctor monitoring system with I believe where you could page doctors. We have a lot in the food services business, within hospitals where people are using the SoMo to order lunch and dinner and various other hospital meals, as well as doctor-related activities. So I think the US will catch up this year, but it's slower than we originally expected.

Do you think it will follow the same pattern, do some test marketing or test out the operations of the device, and then deploy after some--

Well, I think actually we're further along in the US. A number of people have done their test marketing and actually have, I would say, validated their applications. And it's a little bit slower, I think, because of lack of funding as opposed to technical issues. And some uncertainty relative to the flow of money. So again I think once it starts to go, it will actually go quicker. Because in all of these things, I would say probably 50% tops is technical related issues and there is 50% related to administrative and money-related issues. And unless both sides are, I would say, put to bed, nothing really happens. People have done a lot of work on the technical side and now we're stalled. And when we get some clarity I think things will move quickly.

Okay. All right. Well that's it for me. Thanks.

All right. Thank you very much, Brian .

There are no further questions in the queue, I'd like to turn the call back over to management for closing comments.

Thank you very much. We would just like to close by thanking everyone for participating in today's call and to wish you a good day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.