Socket Mobile Inc (SCKT) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Socket Mobile's fourth quarter 2010 management conference call. (Operator Instructions). It is now my pleasure to introduce your host, Dave Dunlap, Socket's Chief Financial Officer. Thank you, sir. You may begin.

Thank you, Operator. Good afternoon, and welcome to Socket's fourth quarter and year-end management conference call to review financial results for its 2010 fourth quarter at the year ended December 31, 2010. Joining me today is Kevin Mills, President and Chief Executive Officer of Socket. Our usual host Jim Byers of the MCR (sic) Group had a scheduling conflict, so I'm handling the conference call preliminaries.

Socket Mobile 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 a transcript of this call will be posted on the Socket 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 27(a) of the Securities Act of 1933 as amended and section 21(e) of the securities exchange act of 1934 as amended. Such forward-looking statements include, but are not limited to statements regarding mobile computer, data collection and OEM products including details on timing, distribution and market acceptance of products and statements predicting trends, sales and market conditions and opportunities in the markets in which we sell our products.

Such statements involve risk 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 manufacture of our products may be delayed or not rolled out as predicted due to technological, market or financial factors including the availability of product components and necessary working capital. The risk that market acceptance and sales opportunities may not happen as anticipated. The risk that our application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so. The risks that acceptance of our products and vertical application markets may not happen as anticipated and other risks described in our most recent form 10-K and 10-Q reports filed with the Securities and Exchange Commission.

Socket does not undertake any obligation to update any such forward-looking statements. With that said I would now like to turn the call over to Socket's President and CEO, Kevin Mills. Kevin?

Thanks, Dave, and thank you for joining us today. In today's call, we will begin with a short review of our Q4 and overall 2010 results and then outline the business opportunities we see in 2011. Our fourth quarter revenue of $2.6 million was much lower than expected due to the impact of an industry wide shortage of LCD components in the quarter which caused us to defer shipments of over $1.2 million of SoMo related products into this year. The limiting factor in our Q4 revenue was the supply of material as opposed to demand for the products.

We have seen improved bookings in January which combined with our backlog carry forward into 2011 totaled more than $3.6 million in orders at the end of January that are scheduled for delivery in the first quarter. While 2010 remained a challenging environment for Socket as the overall pace of our business moved forward cautiously and slowly, we did see good growth in bookings for both our SoMo and Cordless scanning products particularly toward the end of the year. These stronger bookings for our handheld and Cordless Bar Code scanning products were offset during the year by declining revenue from our legacy plug-in type products that have been phased out resulting in the overall decline in 2010 revenue.

Late in 2010 we restructured our sales team and re-aligned our distribution channels to better position Socket for the business dynamics of today's rapidly changing mobile market place. The result is we are seeing greater visibility on our near term demand side of our business. While in the past we are waiting on customers to make a final purchasing decision prior to deploying our handheld or scanning products. Today we are in the position of having those orders in hand due to a combination of backlog and stronger than normal January bookings. We currently remain limited by supply, but feel the situation is being addressed as the worst of the supply issues will soon be behind us.

To give a little more color on the supply problems, they were initially caused by higher than expected demand for screens by Apple and other mobile phone suppliers. This resulted in industry wide consolidation as companies like Foxconn purchased LCD manufacturers to meet the higher demands from the mobile phone market. As a result of this demand and consolidation, the display manufacturers readjusted their capacity for priorities and smaller companies like Socket and many others were left without any production time in the short run. In an effort to address these supply issues, production was moved to newer facilities which resulted in additional delays.

Unfortunately, these new factories did not come on-line prior to Chinese New Year. As you may be aware Chinese New Year concluded at the end of last week, and the factories are in the process of coming back on-line. The supply issues are being resolved and we expect to resume normal supply of handheld products later this quarter.

For our Cordless Bar Code scanning business, we have seen significant market changes over the past three months that are having an over all positive impact on our business. During 2010 we continue to invest in Cordless scanning and, in particular, 2D Cordless scanning.

There is an explosion of activity and market growth around smartphones and tablets. As it appears, tablets are finally gaining acceptance as handheld computing devices. This is extremely positive for our Cordless scanning business. Our bar code scanning products add commercial grade rapid and robust data collection capabilities for businesses seeking to deploy these new devices for mobile solutions.

Our software and hardware development investments in 2010 are already positively impacting our revenue, and we expect this to increase throughout 2011 and beyond. Let me explain.

Beginning in Q4 we saw a significant increase in customers wanting to use Apple and Android-based smartphones and tablets with Cordless Scanners to control a business process. We have believed in this market for some time and are now in a stronger position to support it.

Our SocketScan 7 software was architected to support a broad array of plug-in technologies as well as Cordless scanning and was primarily written to operate on Window's mobile platforms. During 2010 we completely rearchitected the software to meet these new market dynamics. Today we are very well positioned to service the rapidly growing markets that are now becoming available which Google, Apple, RIM, Microsoft and HP have enabled with a broad array of highly efficient mobile operating systems. We refer to the new software architecture as SocketScan 10.

The 7X, our 2D Cordless Scanner which also reads all 1D bar codes was developed as an extremely robust and reliable scanner. The design benefited from our experience of having been in the Cordless Bar Code scanning business for many years. In addition to incorporating many improvements, we were able to maintain the ergonomic appeal, light weight, very small form factor and long battery life which are critical for mobile users and applications. The 7X coupled with SocketScan 10 is a very powerful combination. As mentioned, SocketScan 10 is a small footprint mobile phone [tablet] application that allows for both ease of use scanning as well as the creation in deployment of robust application centric solutions.

The end result of our investment is we now have the best cordless scanning solution in the market today for mobile phones and tablets. The market is just beginning and we are seeing the numbers build, and we expect to ship a record number of 2D Cordless Scanners in Q1.

So supply issues aside, our current orders give us confidence in a solid start to the year. As we look ahead to 2011, we continue to see increasing interest for our SoMo handhelds and greater customer urgency than we have seen over the last two years. It is also clear many customers did not purchase any new handhelds in the past two years. They simply maintain their existing systems. This indicates the vast majority of the opportunities we have discussed in the past remain in front of us.

In addition, there are growing indications that HP will exit the classic PDA market during 2011. In a number of countries, Brazil and India being the two largest, HP now lists the iPAQ 200 series devices as discontinued. In addition, in Japan for HP states in their web page the product is no longer available.

We took the initiative and traveled there in December to meet with a number of HP iPAQ customers to both assess the situation and determine their going forward plans. All of the customers we met with were provided with a last time buy opportunity by HP during Q4 and all availed of the opportunity.

In all cases the customers' primary investment in the handheld solution was software, and in most cases the customer software was developed over many years and they were anxious to continue to use their existing software without having to do any redevelopment work. All the customers had tested and approved the SoMo handheld and intend to switch as their supply of iPAQs are used up even though the SoMo is slightly more expensive than the iPAQ.

For handheld SoMo business, we expect 2011 to be a very solid year and expect to ship a record number of units driven by the reemergence of the many opportunities which did not close over the past two years. In addition we expect to benefit from the impact of HP phasing out of the iPAQ. And there seems to be a general economic rebound taking place that we think will increase our customers' investments in capital equipment.

For our Cordless Bar Code scanning business, it is a fast-moving market that continues to show substantial opportunity. The selection of smartphones and tablets in each OS category will provide customers with numerous device choices as they automate their work forces. Customers are able to pick the device size that best suits their needs and also mix and match devices under a single OS strategy. Whether that choice is the Apple IOS, Google Android, RIM Blackberry, Microsoft Windows or the HP webOS.

The traditional weakness in all tablet and smartphones from a business application point of view has always been data entry. Both from an accuracy and time point of view. Bar code scanning is an excellent way to overcome this weakness and is often used where data accuracy concerns are high as well as user efficiency is required. The market for Cordless scanning (inaudible) for smartphones and tablets has not yet really developed.

For example, the extremely popular iphone did not support cordless scanning peripherals until recently and the Android operating system devices are just now getting their implementation of Bluetooth stable enough to support business usage deployment. We start 2011 with a completely different and vastly improved environment and market place for the deployment of business-related mobile applications. Today customers can choose their screen size, choose their OS, mix and match devices knowing the support of cordless scanning and other automated data entry mechanisms is robust and reliable.

We believe these factors will result in the development of a large and robust market for cordless scanning products such as the 7X. In addition, SocketScan 10 was developed so we could easily support multiple platforms and can quickly update us to stay current in this rapidly changing environment.

We will be the first to admit our Cordless scanning business has struggled the last two years since we were unable to support the popular phones being deployed. We would also be first to remind everyone of the solid sales we enjoyed in this category in 2006 when we were able to support the popular Windows mobile-based phones when they were wildly popular. History is repeating itself here, but in a much grander scale due to all of the technological improvements in screen resolution and touch inputs, operating systems, battery life, widely available applications and the general acceptance of smartphones and tablets as useful devices.

We saw our Cordless scanning revenue increase 15% sequentially in Q4 over Q3 and expect to see the rate of growth improve further in Q1 to 25% plus sequential growth which is exciting.

In summary, we are seeing a much improved business outlook both short-term and long-term compared to the challenges of the last two years. During that time we took a number of strategic steps to resize our organization to fit our new market and revenue realities, focused on development spending on the most strategically vital products, significantly reduced expenses and carefully conserved cash. As a result, we begin 2011 in our strongest position in years in terms of near-term revenue opportunities and market positioning. With continued execution and resolution of our supply constraints, we are confident in achieving profitability in 2011 resulting in greater shareholder value. I would now like to turn the call back to Dave.

Thank you, Kevin. Our fourth quarter 2010 revenue was $2.6 million, a decrease of approximately $800,000 over revenue of $3.4 million in the previous quarter. As Kevin has noted, our ability to ship handheld computers is affected by worldwide supply chain LCD screen shortages due to increase demand by Apple and other smartphone manufacturers. These manufacturers essentially absorbed the capacity and factories that were producing our screens and converted those factories to smartphone component reduction. As a result, we deferred Q4 shipments of $1.2 million in products that would have been shipped prior to the end of the year, and had we done so would have resulted in an improving rather than a declining quarterly revenue trend. The good news is that the LCD screens are being produced, albeit in limited quantities relative to the demand.

We are shipping product as it is produced and we are working with our suppliers to obtain sufficient components to meet the rising demand for our handheld computer products. The order pace has been robust in the current quarter with shipments to date plus orders shippable in the quarter now at $4.5 million, but with only $1.9 million in product shipped to date.

With nearly half of the quarter to go shippable order demands should well exceed our break even point of approximately $5 million in revenue for the quarter. Our ability to report a profitable first quarter will now be determined by our ability to receive sufficient product from the supply channel to meet this demand.

Bookings in 2010 increased for our handheld computers and our data collection products. These products together represented 80% of our 2010 revenue and bookings were up 15% in 2010 over 2009. Our overall revenue in 2010 declined $3.6 million to $13.5 million from $17.1 million in 2009. All but $1 million of the decline was from legacy connectivity products, such as our serial cards and BCO Bluetooth modules that have been discontinued.

Sales of our handheld computer and data collection products would have been flat for the year had the LCD component shortages delayed shipment in the fourth quarter. We don't expect any significant further declines in legacy product categories in 2011 compared to 2010.

We are expecting growth in our handheld computer and data collection product families this year as reflected in our improved bookings and in our tracking of pending sales opportunities. As Kevin noted, there are a number of factors contributing to these growth expectations, and we have built these factors into our financial planning for 2011. I wanted to give you some of the highlights of these financial planning assumptions.

Sales of mobile solutions offered by our growing base of application partners continue to increase,particularly in our primary vertical markets of healthcare and hospitality. We have been very pleased with the successes in our customer [appakel] has been achieving with it's mobile blood analyzer system that uses both our handheld computer and one of our plug-in bar code scanners. Several large organizations have incorporated our products into their solutions including the VeriScan Medication Dispensing System offered by Hospira and the mobile library management system capability added by 3M.

We have highlighted in our press announcements and case studies, the growth and long-term healthcare management systems from organizations such as Good Samaritan, Lancaster Health Group, SigmaCare and We Care. We are working with the teams at Digital Dining to enable the expansion of table side ordering. Our handheld computer is also being offered as part of an events management system by [Red Tech] an events management company in the United Kingdom for processing major credit transactions at major events.

Other application providers we've highlighted include [Classical ID] with their student tracking systems for schools, TiVo software with their sales automation systems, patient tracking software from Cardinal Tracking, hotel room servicing by Minibar, health care staffing applications such as iBleep being used in the United Kingdom and others.

We are seeing an easing of the slow down effects of the economic downturn as many customer projects in our pipeline that were moving slowly or on hold are now moving forward to completion and deployment.

As Kevin noted, we are benefiting from new products introduced last year, including our light weight model 7X 2D Cordless Bar Code Scanner which has shown steady growth since its introduction last summer. We received in January an order for more than $300,000 in 7X Scanners for delivery in the first and second quarters of this year. Our antimicrobial version of our handheld computers is receiving increased interest from healthcare organizations. Also significant has been the release of SocketScan 10 which makes it easier for developers to incorporate bar code scanning into a wide range of applications for smartphones including our just announced release of SocketScan 10 for Android.

SocketScan 10 works on a number of devices including smartphones, handheld computers, notebooks and tablets using a variety of operating systems including Windows, Windows Mobile, RIM and Android. We will be further updating SocketScan 10 later this year to incorporate it's capabilities into Apple and HP's webOS devices.

As Kevin noted, HP is discontinuing sales of it's 200 series handheld computers in selected countries including Japan, Brazil and India, and we are aware of many HP customers in Japan that have qualified our handheld computer as a replacement product. HP has been the largest supplier of plastic PDA's for the consumer market and businesses that have been able to use these classic PDA devices are finding our handheld computers to be a logical replacement.

For the past two years, Socket has operated as a significantly leaner organization including fewer employees and extensive cost reduction programs reducing (inaudible) (technical difficulty) and discretionary spending. Our operating costs in 2010 were more than 10% below our operating cost in 2009 and almost 40% below our operating cost in 2008.

In our plans for 2011, we expect to phase out the cost reduction program consistent with our goal of reporting profitable operating results while continuing to improve and expand our product offerings. We expect our margins in 2011 to improve with higher volumes to spread our fixed cost over more units produced. Socket continues to be highly leveraged both on the supply side where contract manufacturers have plenty of capacity to support growth and on the distribution side where our many distribution partners and application partners are interacting with customers around the world. Our focus is serving these established partner relationships to support their sales of our products.

In our 2011 planning, we intend to improve our working capital and cash liquidity in anticipation of financing growth. Operating at profitable levels is important as that adds cash from operations since our bottom line includes several noncash items including stock option expense and equipment depreciation. We have also implemented and will continue a number of working capital management steps to maximize cash liquidity including agreements with several of our customers for rapid payment of receivables, excepting inventory and smaller and more frequent lot sizes to reduce inventory balances and continuing to work closely with our vendors to ensure their support even though payments are extended beyond normal payment time frames.

We raised $1 million in the fourth quarter through the issuance of 18-month convertible notes. Qualified receivables and to the extent needed, cash are collateral for the notes. One unintended consequence of our shipping delays with the resulting lower receivables has been a requirement for us to hold a greater portion of the cash we raised as collateral.

Today we are holding approximately $500,000 in cash as collateral for the notes. We would like to get that cash into general business use and can do so as notes are converted to reduce our collateral requirements or as shipments increase our receivables levels. No notes have yet been converted.

Our annual meeting of stockholders is scheduled for April 27, 2011 at the Company's facilities in Newark, California. The record date for voting is February 28, 2011. Proxy materials will be distributed starting in the second half of March. On the ballot this year will be the election of Directors and ratification of our selection of Moss Adams to serve as independent auditors for 2011. I am pleased to report that all of our current Directors have agreed to serve for another year.

We continue to receive strong support from our vendors, our customers and our application partners, and we are particularly appreciative of the dedicated work and continued and unwavering support we've received from our employees and from our stockholders who share our vision of mobile opportunity in our key vertical markets of healthcare and hospitality, and the improved productivity that results from enabling mobile workers to collect and process information while mobile.

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

Thank you. (Operator Instructions). Our first question is coming from the line of Brian Swift of Securities Research Associates.

Hi, guys.

Hi, Brian.

I guess if I heard you right, you said with your shipments you have done so far for the quarter and your backlog orders whatever in hand that if you had the supply you could do $5 million this quarter? Did I hear that right?

Actually you heard -- we were $3.6 million at the end of January and right now I think we are at $4.5 million.

$4.5 million, right. The normal pace that we see coming in will easily take us well above the $5 million number in terms of what we are capable of shipping if we have the product.

So I think your question is if we have the products we would be in the $5 million range this quarter is a realistic expectation based on the fact of -- and we are at $4.5 million right now. Our concerns have switched rapidly from getting orders to fulfilling orders.

Right. So I would assume that you have a -- what is the normal amount of turns business that you do during the quarter? You usually don't have a big backlog.

A traditional backlog in and out of a quarter is about a $1 million. It varies between a $1 million to $1.2 million. We started Q1 with $2.4 million which is abnormally large. I would say we would exit Q1 with still an abnormally large backlog because of supply issues, but certainly demand seems to be very strong at the moment. The numbers would be very strong if we had the product.

So your cash flow break even going forward as far as the first quarter with the adjustments and stuff you have been making in the past, what is that now?

$300,000 to $400,000 less than our break even point.

So probably $4.6 million.

$4.6 million, $4.7 million, somewhere in there, Brian.

$4.6 million to $4.7 million is cash flow break even, right?

Yes.

Yes.

Bottom line profit is --

About $5 million.

About $5 million.

Now could you talk a little bit more about the SoMo in terms of -- we heard a lot about the proliferation of Apple and Android, RIM and other type of products that are giving customers a lot of choices as far as what to use as far as a handheld is concerned. What does that do for the outlook of SoMo granted if HP makes it widespread that they exit, that's an opportunity. That's also an opportunity for people to use these other more popular devices. What do you see happening on the SoMo going forward?

Very interesting question. We see some bifurcation in the market, if you will. All of the AIDC markets whether it be people using Motorola or Intermec type device, et cetera. Today that probably is supported 95% by Windows mobile-based device, and we would expect in the short-term that trend to continue. Many of those developers who develop applications for iPAQ or Motorola or Intermec type devices, SoMo obviously being one of them, will continue to leverage that software. Certainly in a Window centric world where you have a lot of database stuff, et cetera, the Windows Mobile OS in the business world I think has a very, very strong foothold. And we wouldn't expect to see a lot of Android or other devices coming in quickly for a few reasons. The life of the product is still expected to be I would say three to seven years, and certainly the newer OS' haven't reached the level of maturity that they are going to be stable. They are literally changing on a quarterly basis right now.

On the consumer side you have a very different situation. We believe the Apple, Android, RIM and other OS' will be used to help automate processes currently not automated, and people will use these phones in conjunction with peripherals, bar code scanning obviously being one of them, and to do business processes.

We are not really seeing many of our traditional SoMo customers looking for Android-based stuff at this stage. What we are seeing is a lot of people who have a big investment in their software, particularly that were relying on HP, and coming over and looking for the SoMo so they can leverage their software development.

We also continue to see people continuing to develop. We have a number of trials on going where people are pretty committed to large numbers of Windows mobile-based devices because they know they are going to get the stability over the next three to five years. So we don't see that impacting. I would say the Android stuff is lighting up a different section of the market and would only drive our impact sales of our Cordless scanning products.

You don't have plans to have these other OS' available on the SoMo? Just the use of the Socket 10 for your scanner type of products to be able to be universally used on Android.

That's correct. The SocketScan 10 will allow you universal adoption on multiple OS'. Certainly in 2011 our focus for SoMo would be Windows-based devices. That's not to say we would exclude in 2012 having a version of SoMo with Android, and we don't know. Certainly based on having been in this business for a little while, it doesn't move rapidly because there is a lot of software and development as well as deployment prior to a large rollout. I think we will have to look going down the road and having alternative OS choices for our customers, but we won't have anything that would impact SoMo revenue I would say in the next 12 months.

Okay. So how do you feel about SoMo growth prospects for the next 12months?

Actually what we have seen in the start of the year is a lot of the applications that we've worked on coming back. So we actually feel that the market for us will grow rapidly for the next 12 months on SoMo as we convert some of these opportunities into deployments.

We are also seeing, I would say a strong up tick from the departure of HP in certain areas, and should they exit globally which is our understanding they will do. I think that will have a hugely positive impact on SoMo sales in the next 12 months also. People are married to their software.

As I mentioned in my comments, I did go to Japan and meet a few of these customers. I asked how much time it would take them to just recreate their existing application on a different OS. The shortest answer was nine months. It is not easy as people think to change from one OS to the other. It is a longer term commitment. I would say many of the HP customers will come our way so they can leverage their existing investments.

Okay, and one more before I turn it over to the next guy. From what you know now, how would the mix of business look you think in 2011 as a percentage of sales from SoMo, scanners, OEM and legacy?

Okay. Well first of all let me just say that SoMo and SoMo related because the plug-in scanners today are 95% to 98% sold in conjunction with SoMo. We would expect that SoMo related would represent about 50% and that would include the SoMos and the plug-in scanners that plug into them. I would expect about 30% of our business by the end of the year will be Cordless scanning and probably 15% and 5% OEM and legacy, okay?

So into that we have lost a lot of the legacy stuff during the last two years. It doesn't make a material difference to our business right now. Two things driving our business are the SoMo and the Cordless scanning, and we would expect both of those to grow both in terms of numbers and percentages.

Okay. If I come back it would be to discuss a little about what is happening in OEM. You didn't discuss much about that, but I will let the next guy come in.

All right. Thank you very much, Brian.

Thank you. Our next question is coming from the line of [Alex Berger] from Hudson Bay.

Good afternoon, gentlemen. I just wanted to ask you if you could elaborate on the use of Socket products in the market place, specifically uses that you know of in the medical and restaurant spaces.

Sure. Certainly with the SoMo we are seeing, I would say, long-term healthcare as our primary medical category right now, and as we reported, we have 3500 devices currently and daily use at the Good Samaritan Society. We are also seeing others like Lancaster, Sigma Care, We Care, and actually when I was in Japan, the largest opportunity we discussed with the HP customer there was also in long-term healthcare. They, for example, had, if I remember correctly, about 4,000 iPAQs in daily use in this type of long-term healthcare environment. Certainly that would be our largest category.

We are also doing quite well in areas of medication dispensing and tracing and tracking samples within hospitals where people are scanning a sample within the hospital using the SoMo and that then being used as a reference and for creating and tracking it through the various hospital processes. We have also seen an up tick in the UK in orders for clinical related work as well as for what I believe is a doctor-nurse paging system all of which are SoMo centric.

And in the restaurant trade I think that we are continuing to see traction in table side ordering where people are bringing SoMo to the table side, or -- we did an announcement recently where [American] Movie Grill who have over 200 systems are using it to take orders and I think processing something in the region of 1800 people a day taking orders in movie theaters, et cetera.

So over the last two years I really think we have honed in and found where the SoMo is the best product. And certainly inside the four walls where you need a light, portable computing device, we seem to be winning strong. Again, the incumbent has been of this market as been HP which is a difficult adversary in many ways, and with their departure we feel that we will continue to penetrate the market. On the Cordless scanning side, we are seeing very different set of dynamics, but I don't know if you want me to extend the answer to include that as well.

Sure.

On the Cordless scanning side, I think the market dynamics are very much -- people are out and about. They are using a mobile phone-based device with 3G, 4G coverage. They are adding scanning to control a simpler application whether it is take orders from customers, take RMAs from customers and defective material, order processes, stock shelves and merchandising and a lot of these are what I would describe as new applications where people previously were using pen and paper-based systems and now can switch over.

So we don't see a lot of overlap between I would say the dynamics of the Android Apple world and what people are trying to do. I would say the only area where we see overlap is probably with the i Touch in the restaurant trade. There is a lot of activity to use that. I think one of the difficulties of using consumer grade devices in the restaurant trade is it is a pretty abusive environment and within a short space of time we have seen that commercial grade product tend to be broken and misused and abused and therefore people even though they initially start with i touches, I think a fair percentage will return to a more dedicated device for the application.

Thank you.

You are welcome.

Thank you. Our next question is coming from the line of [Bernard Videl], a private investor.

Hello?

Hi, Dr. Videl, how are you doing?

Hi, how are you doing?

Good.

Okay. A couple questions. As far as the supply channels, when do you expect it to get somewhat normal, shall we say? Do you find the supply is coming in at this point?

First of all we are getting some supply, and we have shipped I think somewhere in the region of, we'll say a thousand SoMos so far this quarter. It is coming in. Obviously, Chinese New Year stopped things for two weeks. We expect the supply to continue to improve. Currently our VP of Engineering and Operations, Tim Miller, is in Taiwan with our suppliers and the screens are being made. However, there is a long line of people, ourselves included, looking for that allocation. We think the situation will continue to improve through Q1. I don't think it will get normal probably for another, I would say two months. But we don't need it to be normal. We just need it to get back to a situation where we can get a reasonable supply to clear our backlog. I think that will start happening starting in March.

Okay. You mentioned that you have orders for $4.5 million, is that right?

That's correct. The way we track things is we have orders on hand that are shippable in the current quarter, and obviously we started this quarter with a larger than expected backlog due to the material shortages. We have also seen a general pick up in business, plus we have seen some larger orders land. Today if we receive no more bookings and we only shipped what was available based on orders currently received and available to us and the number for Q1 assuming supply would be $4.5 million.

So, I'll tell you something, if this is the middle of the year -- middle of the quarter rather, and if you go further we still have another month and a half, those orders would probably be in the $6 million to $7 million.

Yes, we would hope they would continue to carry a big backlog into Q2, but yes, I think the order pace has picked up. I think a lot of the uncertainty that seemed to be in the market for the last two years has abated, and there seems to be a little bit more urgency with our customers. The rate of orders is very encouraging.

Unlike previous calls where we were always chasing the order and the hope that would come in time, and we would ship rapidly as we were able to do. Right now the situation is very different. We have the orders. All of our focus is on supply, and the orders keep coming in. We are pretty pleased with the order side of the business, but as we pointed out on the supply side, we have a whole new problem.

When do you expect to be able to ship in the first quarter?

It is very difficult to say because we are dependent and this is one of the things that happens in a supply situation. We are dependent on the information we get from our factory who in turn is getting information from the screen manufacturer. The information has not been what I would describe as highly reliable unless outside factors have influenced allocations of those things at the last minute. I think the short answer is I don't know.

And if we believe right now the current available information, I think we could ship another I would say 2,000 to 3,000 SoMos this quarter on top of the thousand we shipped which would put us back in the 3,000-unit range, maybe a little bit higher if we can clear all the backlog. So I think we will still be constrained by supply.

And then our scanning side has been stronger than we expected. Where we are not constrained by supply, That's also helping. I really don't know is the short answer. I want to let you know that every effort is being made to make sure that we can ship as much as physically possible in the quarter.

So you expect to be profitable for this quarter, is that a fair statement?

I can't say that with great certainty. I can say that I will have the orders to be profitable this quarter, and I will be working hard and we will be working hard to make sure we ship as much as possible. I think it will come down to the last week. I can see us shipping 20%, 30% of the quarter's requirement in the last week of the quarter, so I don't know. We certainly will have the orders to be profitable, yes.

Okay. Good. Just go over a couple of things here. How are you doing with Hospira?

Well certainly since the start of the year we have not had a lot of opportunity to reach out and talk to many of the customers as we have had other issues on our minds. But I would say in general we have seen a general pick up. Hospira is still selling our product. They didn't have a particularly good year, and I did speak with them late in 2010 and they felt the hospital market really wouldn't flourish for them until I would say mid to late 2011 because the regulations that are driving the [closed loop] medication dispensing system don't come into affect until January 1, 2013.

Generally people have other, I would say, issues ahead of that in their IP priority list. I think they are doing okay, but I don't think they are doing great. They strongly believe in the solution and expect it to, I would say, drive a lot of business prior to the laws coming into affect in January 2013.

And the [Epicoll], I mean are their [over] sales picking up?

Their sales are great. We are in backlog to them. They are in backlog to their customers. They have really done very well and we are a little apologetic to them that we can't support them better, but this is the reality of the situation. I don't know the exact number, but our business with them was probably up 200% or 300% last year, and we expect it to be up again that amount this year if we have the supply to meet them. They seem to be doing quite well in the market and they are in backlog. Yes, that's very good.

What about the Australia -- the nursing homes in Australia? Are we getting orders from that?

Yes, right now actually we are getting orders from everybody. That's the good side of the problem. Everyone now is going, yes, we have struggled for the last two years to get the orders as you are well aware. And then all of a sudden people are going, yes, I'll take it now, and we are going, okay, can we get back to you in six weeks? The good thing is many customers are pretty committed because of their software development investments, and therefore the customers are waiting. We could go through a long list. Yes, most of the people we talked about are beginning to order, so on the order side, things haven't looked this good in a long time.

Okay. Remember the order last year about this time from the hospitality from England that fell through?

Yes.

How is that working out?

Again I haven't actually physically spoken to them since I think December. They seem to be doing fine. We haven't received any order from them. We will touch base with them in the coming weeks, but literally I haven't been able to get out to talk to some of those people due to the fact that we have been working so hard with supply.

I remember during December it was a large order pending the weather for nursing homes in the United States.

Yes, that is still pending. They should finalize the test this month. We have had weekly calls on going with this hospital chain. It is pretty large and substantial. On the last five or six calls they've reported no issues. We believe they will make a decision towards the end of Q1. I would say it is going particularly well. We expect to win this business, and I think winning this business will substantially strengthen our SoMo business in 2011, but if it comes in any sooner, I don't think we will be able to support it.

Okay. Three more questions. The OEM, how is that coming along?

We moved our Ring Scanner over to the OEM group and our wireless. They are actually having a pretty good start to the year also. We have got some solid Ring Scanner orders now. We are working with a few customers, and on the wireless LAN side we have a number of customers testing. We have not had any major deployment. We have had one medium sized deployment in Japan which we are now servicing. I think that's pretty solid and dependable as it has been. I don't think it has the big numbers it has just yet, but I feel that briefly on the wireless LAN side it is starting to grow again.

I notice you are paying your people for developing applications.

Well, we are not paying people for developing applications.

Well I am probably using the wrong terminology.

Yes. We put together a program whereby developers of applications who use or embed the Socket Scanners, we can provide them with some additional revenue for selling that scanner.

That's what I meant, right.

One of the things that is difficult in the development environment is for people to have an incentive to use your stuff. A lot of developers are very agnostic and want to support everything and as a way to make sure they understand the benefits of our products and how robust and reliable they are, we've basically incorporated in our software the mechanism whereby should an application, and we will take something like book selling application or car selling application, basically require a scanner, and that scanner is a Socket Scanner. We are willing to pay the person who developed that application a bonus for doing that.

How is that going, by the way?

It is just starting. With all software development --

No, it is a good idea. There is nothing like an incentive.

Exactly. Essentially if we care more, the developers will care more. And that is in the new [cs] case we are just rolling out now. I would say the [sc] case for Android and Blackberry and Windows Mobile, et cetera will support this new feature. It will take developers probably 90 days before they have applications in the market, and then we will see how it goes. But certainly it gives us more of a reach into the developer community, and this is an area where we really want to work more closely with the developer community to make sure that we are meeting their needs for data collection products.

Just two more questions and then I will let someone else. You mentioned that Dell dropped out in Japan, India and Brazil, I think it was.

Brazil, yes. And it was actually HP.

You are right, HP. Okay. Now, when will that relate to orders in the [pie] factor toward our SoMo?

Again, we can generalize, but one of the things I did was I actually went and traveled to Japan. We have a very good distributor there. I asked to meet with people who were long-term HP customers to see the impact. What they did was -- they worked closely with HP. HP had advised them and they all had been given the opportunity to do last-time buys. All of them availed of that opportunity, and that really happened in November. I was there in December, and we have seen orders starting to pick up from our Japanese customers in late January, February, and today I would say that two of the three customers have started to switch over to the SoMo, and we expect the third switch over in March. And so I would say it is going to take three to four months when the supply stops.

Now, the other thing that's happening is -- and it depends where you are in the chain. If you were a small customer of HP and buying 10 or 15 units, the product just goes away, and you don't get a notification, and those customers come in and start buying from us more quickly. And we are seeing a combination of both, but I would expect to see HP phase out over the next quarter to quarter and a half and we should see a much stronger second half to the year based on HP's departure than the first half. As you know the first half we are pretty much -- we have got the orders we need anyway.

How many units do you estimate will come our way with HP leaving Japan?

Just Japan?

Say Japan for instance.

I would estimate -- we could sell 3,000 to 4,000 units in Japan this year as opposed to the 10 we sold last year. So it is big numbers.

Well that's quite nice. And same thing for India and Brazil?

Again, you can extrapolate this. There are 138 countries in the world, so the numbers can get big. But based on what we know, that's what we know right now. I don't want to over sell us. I haven't been to India and haven't been to Brazil. I haven't talked to people. That would be more conjecture. In the case of Japan, I actually went there and I talked to different customers. I think the 3,000 to 4,000 units for Japan is a realistic estimate of what might happen based on the conversations, the fact that it is now not available and what orders they have started to send our way, and then I leave it up to (inaudible) (technical difficulty) you and others to extrapolate.

And the last question is, it is a great, great story, okay, even though we have been disappointed every quarter so far, but I think the way you are presenting it right now, I am very optimistic for -- this is like the beginning of the beginning type of thing. Now I think a lot of people are not even aware of Socket. Is there any plans to do some public relations or get a report out or something to that affect?

Yes, we will do all of that. We have to do that to tell the full story. But before we do that, I think it is important that we have sufficient funds to buy the product and ship the product. I think we are only still in the game because we aggressively reduced our expenses over the last two years and conserved every penny that we could. I think we asked, we will spend money, we will do PR, we will reach out to investors, we'll do road shows.

But I think our first and foremost responsibility is to get our supply chains lined up, make sure we have sufficient funds to pay our suppliers and ship our product. Once we have that done which we hope to have achieved by Q1, we will certainly be on the road and telling the story in a much more positive way. And we do share -- it has been a longtime coming, but I do feel that there is more momentum in the business than we have had I would say anytime in the last three to four years.

Are we looking for other suppliers if this person can't provide us with enough?

Yes on the supply side, believe me, we are doing everything to both have additional suppliers, but all of this costs money. Again we have been managing our limited cash very, very tightly to make sure that all this happens. All of the money must stay in that direction until we have the supply chains clear.

Okay. I think That's enough. We will go -- oh yes, when was your next release of earnings?

I think the shareholder meeting is on April 28?

27.

27. So we would -- I don't know where we will be on Q1.

Typically we would release earnings either right after or even perhaps as much as the week before. A lot of it depends on the closing schedule and we haven't set any of that yet, but we will set it as we get closer.

Okay. All of my questions have been answered. Someone else go.

Thank you very much, Dr. Videl.

Thank you. We have a follow up question coming from the line of Brian Swift. You may ask your question.

Yes, two things. You did elaborate a little bit on the OEM side of the business, but maybe you can tell us what -- briefly what is there that's compelling that would make an OEM want to use your solution in the wireless? And then the second question would be last year there was all this excitement when you announced a deal or 3M announced they had selected your product, and then we never heard from them again. Where are they in this scenario?

So two questions. First on the OEM side, I think the compelling product we have in OEM is our wireless LAN which we provide in both SD form factor -- well, we permit primarily in SD form factor, and it allows somebody to design a product and add wireless LAN capabilities to some, but not all of the products. And we do a particularly good job on the software elements, and when we sell it is provided with CCX which is the various levels of encryptions that are required to support SISCO and other -- well, that one is SISCO, but other infrastructure. So we spend, I would say, $1 million a year in staying competitive in wireless LAN. A lot of it is so we have the best wireless LAN in SoMo, and then we leverage that by providing it to third parties.

Because of the downturn there was some unexpected end of life which resulted in us -- what I would describe as missing a design cycle. We are now back in the new design cycle and we will grow that business back up. That really is on the OEM side.

We've also moved the Ring Scanner over there and we are working with a few strategic accounts. The Ring Scanner even though it works tremendously well and provides enormous productivity benefits to people is a difficult product from a sales point of view. We were the bridesmaid in many, many opportunities but never seemed to be the bride. We pulled it back from distribution. We are working directly with a few customers. We still deliver everything through distribution, and that now is in the OEM category.

As regards our friends of 3M, yes, unbeknownst to us they had developed a product for acid tracking and decided to target that market using the SoMo. They did a press announcement and our stock went crazy. They subsequently disbanded the group and nothing ever happened. They have taken the SoMo product and moved it over to their library systems and basically are now selling a library-based portable system based on the SoMo.

We haven't done a press announcement on this. We would like to see them get a few successes under their belt. If they do, we will certainly do a press announcement. The last time the excitement certainly didn't turn out to be warranted, and we are reluctant to do that again. But they seem pretty committed to this new product, and they do literally own the library market in terms of controlling books in and out and checking people in and out, and their current solution looks quite compelling on the SoMo. That's where we are with 3M.

Thank you. There seems to be no further questions in our queue screen. Do you have any closing comments?

Yes, I would just like to thank everyone for their continued interest and their time today and I would like to wish everyone a good day. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.