Socket Mobile Inc (SCKT) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Socket Mobile 2011 annual fourth quarter conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jiim Byers, at NKR Group. Thank you, Mr. Byers. You may now begin.

Thank you, Operator. Good afternoon and welcome to Socket's conference call today to review financial results for its 2011 fourth quarter and full year ended December 31, 2011.

On the call today from Socket are Kevin Mills, President and CEO; and Dave Dunlap, Chief Financial Officer. 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 Socket's website within a few days. We have also posted replay numbers in today's press release for those wishing to replay this call by phone. The phone replays will be available for one week.

And before we begin, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, but are not limited to, statements regarding mobile computer data collection and OEM products, including details on timing, distribution, and market acceptance of product; 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 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 risks that market acceptance and sales opportunities may not happen as anticipated; the risk that our application partners in current distribution channels may choose not to distribute the product, or maybe not be successful in doing so; the risk that acceptance of our products in 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.

Now, with that said, I would like to turn the call over to Socket's President and CEO, Kevin Mills.

Good afternoon, everyone, and thank you for joining us today.

In today's call, I'll begin with a brief review of our progress in 2011, then discuss the business opportunities we see ahead, and our outlook for 2012. We made substantial progress in 2011, and believe our initiative to strengthen our overall business and enhance our product offerings have set the stage for meaningful growth ahead. Our full-year revenue for 2011 was $17.5 million, up 30% over last year; and includes solid, year-over-year growth in revenue from both our handheld computer and cordless scanning family of products. On a year-over-year basis, we also improved gross margins, reduced our operating expenses, and strengthened our balance sheet. Our 2011 annual EBITDA performance also improved significantly to a loss of $154,000, or $0.04 per share, compared to a loss of $2.5 million or $0.66 per share in 2010.

Overall, 2011 was a good turnaround year for Socket Mobile. Our revenue for the fourth quarter was $4.4 million, consisting of $2.4 million of SoMo related sales; $1.7 million cordless scanning related sales; and $300,000 from service and other legacy-related products. While the Q4 total is up significantly year-over-year from the $2.6 million in Q4 last year, we are disappointed in Q4 revenue, which was impacted by less-than-expected sales of our SoMo that we believe is primarily a timing issue and not related to underlying market demand.

We were able to clear our longstanding backlog of SoMos in Q4, and shipped almost 6,000 SoMo units to our distribution channel in the quarter. Unfortunately, a significant portion of these units did not clear the channel prior to year end, and therefore didn't count from a revenue point of view, for our revenue recognition policy. The good news is that our supply problems are finally behind us, as confirmed by the SoMo shipments we made in Q4. We continue to see strong market acceptance and opportunity for our handhelds, but certainly our SoMo supply problems in 2011 impacted our otherwise long-standing reputation with resellers as a solid and dependable supplier. We are working hard to restore the confidence of our resellers and distribution partners in our ability to be a solid and dependable handheld supplier.

With last year's supply problems firmly behind us, and significantly improved product availability and delivery performance, we have been aggressively ramping up our marketing activities, especially towards Hewlett-Packard customers, to encourage them to transition from the HP iPAQ to the SoMo handheld. We have been actively reengaging with resellers and distributors to gear off their sales support and promotion of our products and build confidence in the market that Socket is committed to the space and a reliable supplier of handheld products.

Earlier this month, we announced the upcoming availability of a new and improved SoMo Model 655, the next generation of our handheld computer, featuring significant upgrades and enhancements that address the need of the business mobility market, and reflect feedback we have received from the market. Importantly, the SoMo 655 will remain available for at least three to five years, which is a requirement for requalification for many customers. It also firmly underscores Socket's commitment to the handheld space. With its many new and enhanced features, long life, and professional service and support options, the SoMo 655 enables Enterprise to maximize the return on investment, and is an ideal replacement for users of the HP Model 200 series iPAQ handheld computers that HP discontinued last year. The standard version of our SoMo 655 has an MSRP of $648 and will be generally available in the US starting in the second quarter, with worldwide availability expected in Q3 of this year. Typically, street prices are 5% to 10% lower than MSRP.

We are very focused on continuing the strong sales momentum we have built up with the SoMo, and gaining further traction in the market, especially within our key targeted verticals, and with the significant opportunity we see with the HP customers as a result of HP's exit from the classic PDA market. In 2011, revenue from our handheld computer family of products and related plug-in scanners and accessories grew 21% over the prior year, from $8.2 million to $9.9 million, and represented 57% of our 2011 revenue. During the past four years, we've sold more than 50,000 SoMo Model 650 handheld computers into the mobile business market, particularly for use with healthcare and hospitality applications.

Surpassing the 50,000 unit mark in SoMo sales is a respectable ramp-up, when considering that these sales occurred in a less-than-robust economic climate; that customers had the alternative choice of purchasing an HP iPAQ for about $100 less; and that the SoMo 650 was Socket's first-generation product, and we were a new supplier to the handheld computing market. Our SoMo 655, which incorporates many improvements from lessons learned in the market over the past several years, will include many new features and be sold into a more robust economic market that will no longer have the lower cost HP iPAQ available. In addition, the SoMo 655 is fully compatible from a software point of view with the iPAQ and the SoMo 650. We believe all these positive elements will contribute to significantly stronger sales of SoMos over the next four years.

Turning to our cordless scanning business -- cordless scanning family of products grew by 181% in 2011, compared to the prior year, from $1.8 million to $5.2 million, and represented 29% of our 2011 total revenue. The majority of this growth came from our 2D bar code scanners introduced in late 2010 that work with Smartphones and tablets using the Apple, Android, BlackBerry, or Windows operating systems. Socket offers an easy-to-use software development kit for each operating system, to enable the integration of bar code scanning into a wide range of software applications. We continue to introduce [inabilis] solutions within this product family that increase our available markets.

As I noted on our last call, early last quarter, we introduced our 7C scanner, a robust and dependable cordless scanner, that we expect will help us break into the sub $200 category and be a volume product for Socket in 2012. More recently we introduced that our Bluetooth 7Xi and 7XiRx cordless scanners had been certified by Apple for the iPad and other IOS devices, bringing productivity benefits by adding robust bar code scanning to Apple, IOS, and the most common mobile devices and platforms to date. These scanners use advanced digital imaging technology to accurately and reliably capture all 2D and 1D bar codes in any orientation. We also recently announced our 7Ci, a low-cost 1D scanner that is Apple-certified and addresses the market's need for a low-cost Apple solution.

We continue to see very strong momentum in the market. Early adopter companies like [Haryana] and others are reporting very good success with their deployment, and solid ROIs, which is resulting in additional orders. We expect continued growth in our cordless scanning business going forward, with sales of our cordless scanners, cordless scanning expected to be up sequentially in Q1, as we continue to build momentum and more and more applications are developed and deployed.

As I noted earlier, we made significant progress last year in strengthening our overall business, as reflected in our improved financial performance for the year. We improved gross margins to 41.4%, compared to 40% in 2010, and we reduced our operating expenses from $9.1 million in 2010 to $8.5 million. Higher revenues in 201,1 in combination with improved margins and lower operating expenses, reduced our EBITDA loss to $154,000, or $0.04 per share; compared to an EBITDA operating loss of $2.5 million, or $0.66 per share in 2010. We also strengthened our balance sheet during 2011 by converting a $1 million convertible note into common stock, and we restored our working capital bank line.

In summary, we are entering 2012 with a very complete portfolio of products that we believe will enable us to continue to grow at the rate we experienced in 2011. On the cordless scanning side, we have completed our Apple development, and can offer both low-cost 1D scanning and sophisticated 2D scanning under a single STK, allowing us to service the requirements of the entire scanning market. Our cordless products also fully support Android, BlackBerry, and Windows-based solutions. We are confident that we will continue to see strong growth in this category for the next few quarters, as we have for the first mobile advantage in the Apple market and strong software tools for the developer community, making it easy to incorporate our standards into their solutions, which is key to long-term growth.

On our SoMo handheld side, we have resolved our supply issues and began the transition to a newer 655 version. The 655 will allow us to meet the market requirements of providing a device that is available for three to five years. This requirement is regularly mentioned by customers, and is especially important to the many of the long-term iPAQ customers who are now evaluating the SoMo as a replacement. The fact that we can assure these customers that the SoMo 655 will be available for three to five more years is a key requirement for them in moving to our handheld. It also assures all our existing and potential customers that we remain committed to the handheld market.

But while there is some uncertainty in all transitions, the timing of our new SoMo introduction is very good, and this next generation model is important to the long-term health of our hand-held business, especially as many customers are completing their evaluations now. And while we expect the transition to have an impact on revenue in Q1, it should not impact our overall first-half revenue, as we expect a substantially stronger Q2 on the back of the transition. Overall, we enter 2012 with a product portfolio that is the strongest we've ever had, and that we believe will enable us to maintain the growth levels we established in 2011, and reach profitable operating levels for the year.

I would now like to turn the call over to Dave for review of the financials. Dave?

Thank you, Kevin.

2011 was a year of positive achievement for Socket Mobile, including significantly improving financial results, and laying the groundwork for continued positive momentum in 2012. Our 2011 revenue of $17.5 million grew 30% over 2010 results. Our cordless scanning product revenue of $5.2 million was the largest growth driver, up 181% from the previous year. Cordless bar code scanning has grown from being 14% of our revenue in 2010 to being 29% of our revenue in 2011. Our ability to provide professional, mobile bar code scanning for Smartphones and tablets, combined with the growing adoption by developers for mobile applications with our easy-to-use software developers' kit, and the growing adoption in the industry of 2D bar code scanning, all benefited our revenues in 2011.

We first introduced our model 7X 2D bar code scanner in 2010, to initially work with many Smartphones and tablets, including Android-based Smartphones from Google, BlackBerry Smartphones and tablets from RIM, and Windows-based mobile phones from Microsoft. This product could be used in HID or direct-access mode with Apple devices. In 2011, we added Apple MFi certification to our 2D bar code scanner with the model 7Xi, enabling the use of our software developers' kit with Apple IOS 4 devices.

Since our announcement of Apple MFi certification, we've been announcing the adoption of the Apple version of our 2D bar code scanner by developers of Apple-based applications who have integrated our bar code scanners into their applications and are promoting the use of our products. We've sold, to date, more than 100 software developer kits, and we expect many more applications integrating bar code scanning into Apple and other Smartphone and tablet devices to be released in 2012. And finally, the announcement yesterday of the pending release of an Apple MFi-certified low-cost bar code scanner, our model 7Ci, will extend to Apple users the benefits of a lower-cost linear scanner for those that do not require 2D scanning, further expanding our target market in 2012.

Revenue in 2011 from our SoMo 650 family of handheld computer products was $9.9 million, up 21% from 2010, despite screen shortages slowing down deliveries for the first nine months. Handheld computer products and related peripherals and accessories represented 57% of our 2011 revenue. By the end of 2011, our order backlog was back to normal levels, at about $1 million; channel inventories were restored to normal, and in some cases above-normal levels where product was awaiting distribution; and our major resellers, including Dell, CDW, and Amazon.com, were all showing our products as available.

As Kevin has noted, our SoMo family of handheld computers are a logical replacement for the Hewlett Packard 200 series handheld computers that were discontinued by HP last year. We've continued to see growing demand from the HP customer base for a general-purpose handheld computer designed for mobile professionals in business and healthcare and other environments. We are currently providing samples of our recently-announced new handheld computer, the SoMo 655, designed as an upgraded version of the SoMo 650, with additional wireless LAN, more memory, and other improvements. Most importantly, the announcement gives former HP and other handheld computer customers more choices, and reaffirms our commitment to the mobile handheld computer marketplace. As with the SoMo 650, we've committed to make the SoMo 655 available for at least three to five years.

Our revenue in 2011 from our two primary product lines, handheld computers and cordless bar code scanning, with both lines growing, was 87% of our total annual revenue; with a balance from sale of products to OEM customers, some legacy product sales, and service revenue. We expect our two major product lines, handheld computers and cordless bar code scanners, to continue to be the dominant portion of our 2012 revenue and the main drivers of additional revenue growth.

With growing sales volumes, our margins also improved, up from 40% in 2010 to 41.4% in 2011. We also benefited in 2011 from organizational changes in our sales organization in North America, to centralize our formerly regionalized sales team. From closely managing our discretionary expenses, and from a continuation of many of the cost-reduction steps we initiated several years ago, our operating expenses further decreased in 2011 from $9.1 million in 2010 to $8.5 million in 2011. These three factors -- increasing revenue, improving margins, and lower operating costs, all contributed to bottom-line improvements. Measured on an EBITDA basis, or earnings before interest, taxes, depreciation, and amortization, our EBITDA net loss in 2011 was reduced to $154,000, or $0.04 per share; compared to an EBITDA net loss in 2010 of $2.5 million, or $0.66 per share.

On a GAAP basis, our 2011 results included $1 million of debt discount amortization related to conversion in 2011 of convertible notes that were issued in November 2010. So our GAAP net loss in 2011 was $2.4 million, or $0.56 per share; compared to a GAAP net loss in 2010 of $4 million, or $1.05 per share. Our last debt discount amortization charge was recorded in the third quarter of 2011 with the full conversion of convertible notes into common stock.

Our balance sheet also improved during 2011, with a conversion of $1 million in convertible notes into common stock, with the issuance of another $0.5 million of common stock in the first quarter to our primary contract supplier to help lower trade balances payable; and with the addition of a working capital bank line of credit of $2.5 million in the fourth quarter. Many of the components of working capital also improved, with significantly higher receivables and lower inventories reflecting increasing shipments; lower payables reflecting faster payments to our vendors; and a revolving bank line draw of $1.1 million replacing $1 million in notes payable at the end of 2010.

On a cautionary note, the first quarter of 2012, like the fourth quarter of 2011, is somewhat of a transition quarter, as selling programs for our handheld computers get fully turned back on; as customer deployment planning re-engages; as Apple and other developers continue to complete and launch additional bar code scanning applications; and as customers evaluate these new product alternatives, with our recently announced SoMo 655 handheld computer and our model 7Ci Apple-certified low-cost bar code scanner. Transitions can have the effect of slowing revenue growth in the short-term while strengthening the opportunity for revenue growth beyond the transition period. For example, in the fourth quarter, we shipped a net $5.3 million of product into the channel, but with typical holiday slowdowns, and because we recognize revenue based on sales out in the channel, only $4.4 million in revenue was recorded for the fourth quarter. To expedite our moving through this transition period, this quarter we are closely monitoring the completion of three production launch tasks for our newly announced products, which are going well; and we are expediting customer evaluations of our new products through the availability of samples and technical information.

In summary, 2011 was a positive momentum year with revenue growth that was driven by new market opportunities and new products, by improving operating results, and by a strengthening balance sheet. Our markets are recovering from the worldwide economic downturn experienced over the past several years, and we have maintained our key development activities for products for the mobile workforce. We continue to enjoy close cooperation and support from our suppliers, our customers, and our employees.

Our objective in 2012 remains focused on serving the emerging mobility markets in business and healthcare, growing stock at profitable operating levels, and building shareholder value. Our annual meeting of stockholders is scheduled for April 25, 2012, at the Company's facility in Newark, California. The record date for voting is next Monday, February 27, 2012. 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 Ross Adams to serve as independent auditors for 2012. I am pleased to report that all of our current directors have agreed to serve for another year.

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

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we poll for questions. Our first question comes from the line of Brian Swift from Security Research Associates.

Oh, hi. I'm sorry, I was trying to listen to two conference calls at the same time. So could you give me a little help on the -- I heard the ASP on the handheld at $648 -- was that for the new model 655? And how does that compare to the 650?

Okay, well, first of all, let me just say that we only quote MSRP, which is manufacturer's suggested retail price. Then products are sold at a discount to that through the distribution channel. Generally speaking, the devices are available somewhere between 5% and 10% lower than that price through various outlets. So that would put you into the high $500s. I would say, generally speaking, it will be 10% -- no more than 10% higher than the current 650 model.

Okay. That's because it has the wireless LAN?

It has a number of additional benefits, including the [group] wireless LAN, so it's [PGN], and 4 gigabytes of memory. And it will have a more robust connecting and charging arrangement, which I think people will like. It will support things like charging in the [jewelry] cases or add a case to the SoMo to make it even more durable.

Historically, we've been unable to charge the devices in those cases, which was a negative for people in that they have to remove the device out of some portion of the case. So with a lot of feedback and improvements in the device, it will also ship with Windows Mobile 6.5 instead of 6.1. Those are the highlights of the features.

I think for many customers, the fact that it's software-compatible will allow them to continue to run the many programs that already are developed either from the 650 or for the iPAQs.

Okay, and that's available in Q2, you said?

Yes. So we will start shipping that in Q2. I think, as Dave mentioned, we're already sampling and we have a Beta program in place. We're working with key resellers and developers to make sure that everything is working well and making sure all their feedback is incorporated before we go into full production.

Okay. So that's part of the transition issue you're referring to that potentially can happen where customers decide they want to have the 655, but it's not going to be shipped until next quarter, so it could have an impact on this quarter?

Yes. So I think that's -- I mean, transitions are never easy, but they're always required. Most of our customers basically take, I would say, 90 to 120 days to qualify hardware with their applications. We essentially are announcing it now and providing samples to key customers so that we can have, I think, a stronger Q2 and through the rest of the year. Obviously, some existing customers will slow down their deployments to wait for the 655, if it solves or improves their deployment issues and that goal was, I think, part of the challenge with the transition.

All right. Speaking of that, could you give us -- Dave talked about the spillover from -- that you shipped 5 -- what is that? 5.3 --

Shipped 5.3, yes.

And recorded 4.4. So you have a little bit of a head start into the quarter.

Correct.

How are things looking so far? You're almost -- you're more than halfway through.

Okay. I think that's -- well, first of all, in general, one of the reasons the things didn't clear the channel is that we eventually cleared our backlog. It was, I would say, late November and you run into Thanksgiving and the Christmas holiday period in general. Also, our traditional situation is January is a pretty soft month for everyone in the AIDC.

I would say this year we're running in line, maybe marginally ahead of where our January was last year and nothing significant. But we see good momentum in the market right now, so things are, I would say, on track. I wouldn't describe them as being overly robust or concerning. But January is traditionally a very weak month every year and this year was no different. We are seeing a more robust every.

Okay. All right. I will let somebody else ask a question and I'll come back if I think of something else.

All right, thank you very much.

Thank you. (Operator Instructions) We have no further questions at this time. I would like to turn the call back over to Kevin Mills for closing comments.

Thank you very much. I would just like to thank everyone for participating in today's call and we look forward to announcing results in April. Thank you all very much and have a good day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.