Socket Mobile Inc (SCKT) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Socket Mobile first quarter 2012 management conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jim Byers of MKR Group. Thank you, Mr. Byers. You may begin.

Thank you, Operator. Good afternoon and welcome to Socket's conference call today to review financial results for its 2012 first quarter ended March 31, 2012.

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've also posted replay numbers in today's press release. For those wishing to replay this call by phone, the phone replays will be available for one week.

Before we begin, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 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 products and statements predicting trends, sales and market conditions, and opportunities in the markets 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 Socket's product 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 Socket's application partners and current distribution channels may choose not to distribute the products, or maybe not be successful in doing so; and the risk that acceptance of Socket's 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 such forward-looking statements.

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

Thanks, Jim. Good afternoon, everyone, and thank you for joining us today. In today's call, I'll begin with a brief review of our Q1 results and then discuss the business opportunities we see ahead, and our outlook for 2012.

Our revenue for the first quarter was $4 million, consisting of $2.2 million of SoMo-related sales, $1.5 million of cordless scanning-related sales and $300,000 from service and other related products. Q1 revenue was essentially flat compared to Q1 of last year, reflecting the impact of the transitions we are currently going through with both our product families.

Revenue from our SoMo product was impacted by customers waiting for our next-generation SoMo 655, which was announced in Q1 with Q2 availability. We expected this transition to impact Q1 sales as we noted on our last conference call.

On our cordless scanning side, sales were also impacted by two transitions, one related to the introduction of our new low-cost 7Ci barcode scanner, the second by the Apple-associated iPad transition. As you may recall, the 7Ci is our Apple certified low-cost 1D barcode scanner that addresses the need of the large Apple community that needs a 1D only solution. The release of the new iPad and introduction of the 7Ci combined to delay sales as customers were evaluating the new offerings.

I'd now like to provide more detail on each of the product families starting with the SoMo. We expect the transition to our new and enhanced SoMo 655 to be completed later this quarter when it ships. Currently, we have provided 18 customers with early development units to allow them to qualify their solution on the new platform.

Getting these early units into the hands of our customers serve several purposes. It provides us with valuable feedback from numerous environments, ensures the product is optimized prior to mass production, it enables our key customers to evaluate new hardware so they can assure themselves that their software runs perfectly and that the overall solution will meet their customers' requirements. And it ensures that there is demand for the new product when we're ready to ship.

I'm happy to report that feedback from this customer group has been excellent and customers are overwhelmingly very happy with the improvements we've made on performance of the new hardware and associated software. In addition, our commitment to have the new SoMo 655 device in the market five years has been noted by a number of customers as a key purchasing consideration, especially those who are transitioning from HP, and from those customers that have made significant investments in their Windows Mobile software.

During the transition, we continue to serve the demands from customers for our existing SoMo 650, which has remained solid. In Q1, we sold 3,500 standard SoMo 650s, which is a solid number, especially when compared to about the 3,600 units sold in Q4 and about the 1,600 units sold in Q1 of last year. I'm excluding OEM customers from these unit numbers to better reflect the underlying demand from the market for a standard PDA. Our SoMo is typical of an iPAQ traditionally sold by HP. Obviously, with HP's departure, we expect to have a substantially bigger share of the market going forward.

A quick update on Epocal, one of our larger OEM customers. We completed our contract with them in Q1, shipping the last remaining units and don't expect to ship anymore units until they've qualified the new SoMo 655. Overall, we're feeling very good about the SoMo transition and remain on schedule to ship the SoMo 655 to customers by early June.

Turning to our cordless scanning business, cordless scanning revenue in Q1 was $1.5 million, which was slightly lower than our Q4 number due to the transitions and was somewhat of a disappointment. However, we are excited about the introduction of our new 7Ci, a low-cost 1D Apple-certified scanner, to help us better address the Apple 1D market.

Our 7Ci is about half the cost of our 7Xi but only reads 1D barcodes. The significant price difference, which is about $300 per unit, coupled with the fact that many of our existing customers don't typically need 2D scanners, slightly impacted our Q1 revenues as customers decided to wait for the lower-cost version.

In addition, Apple preannounced the new iPad in late February, which we believe caused customers to delay any decision on purchases, until they had reviewed new tablet. As the new iPads didn't ship until March 16, it impacted much of March. March is by far the most important month of the first quarter and typically represents over 40% of the entire quarter's revenue. This resulted in lower-than-expected sales of our Apple scanners in Q1. However, we are confident this will be corrected this quarter, now that the new iPad is released and our 7Ci is available.

The introduction of our 7Ci is very important to the long-term health of our Apple-centric scanning business, as we are now offering both an aggressively-priced 1D scanner and a sophisticated 2D scanner, both of which are Apple certified and supported by a single common SDK. It is unrealistic to expect customers to pay for a 2D scanner when they have a 1D-only requirement because the cost difference is very significant at $300 MSRP.

Obviously, in the development phase, customers are less price sensitive, as you're only buying a few scanners for your development team. However, when you move into the deployment phase, it makes a significant difference. We believe having both these offerings is the right recipe for success, as customers can choose the right solution for their situation. The 7Ci is now shipping, so the scanning transition is behind us and we expect to see good growth in our scanning business in Q2.

In summary, as we anticipated, Q1 was very much a transition quarter. However, we now have the cordless scanning transition complete and believe we have established a strong position in the market. We expect to resume growth in Q2 and see solid growth continue in the coming quarters. We expect our cordless scanning sales continue to be driven by the growth of mobile phones and tablets, as business application devices with the scanning requirements.

The SoMo transition will be completed this quarter, which will enable us to resume growth in the SoMo business as well. The SoMo 655 is being very well received by both new and existing customers. Having visited a number of customers within the last few weeks, I'm very excited by the level of interest we are seeing and expect to see this interest convert to sales as we start to ship.

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

Thank you, Kevin. Our first quarter 2012 revenue was $4 million, flat with the first quarter a year ago and sequentially down from revenue of $4.4 million in the fourth quarter of 2011. As Kevin noted, our new model 7Ci linear low-cost Apple-certified barcode scanner began shipping in April. Predictably, that slowed down first quarter customer purchases of our higher-performance model 7Xi Apple barcode scanners and our entry-level barcode scanner, our model 7E as customers evaluated whether the new Apple-certified linear scanner could meet the requirements at a lower price point. With the new low-cost Apple-certified barcode scanner now in the channel, the growth momentum with our cordless scanning products is expected to resume.

Addressing our SoMo handheld computer, we place sufficient SoMo Model 650 product into the channel to meet estimated customer demand during the first and second quarters, and the sales of nearly 4,000 SoMo 650 units during the first quarter were similar to the sales volume for this product in the previous quarter. But the announcement of the new SoMo 655 predictably caused some customers to wait for its arrival. So SoMo Model 650 product sales in the first quarter were flat instead of growing.

Customers who have sampled the new SoMo 655, as Kevin noted, have been quite pleased with the product and we expect strong and growing demand once we commence SoMo 655 shipments in early June. The SoMo handheld computer is an ideal replacement for the HP 200 series and other discontinued HP Windows Mobile-based PDAs, as the Model 650 or 655 will run the same application software without modification and the products have a similar look and feel, minimizing any training requirements for employees.

As Kevin reported, we are in the final stages of gearing up production for the SoMo 655, which has been going well. We will continue to offer our SoMo 650 handheld computers until the supply is exhausted. For the channel fully stocked, order backlog entering the second quarter has returned to more normal reorder levels of approximately $1 million for all of our products.

Our first quarter operations resulted in a net loss of $872,000 or $0.18 per share compared to a first quarter loss a year ago of $928,000 or $0.24 per share and the fourth quarter 2011 loss of $375,000 or $0.08 per share. Our margins improved with higher sales, which better absorbs manufacturing overhead. Thus, our margins at $4 million in revenue were 38.5% in 2012, and 37.5% in 2011, whereas at $4.4 million in Q4 2011, our margins were 43.1%. As our revenues grow, we expect our gross margins to continue to improve. Our operating expenses in the first quarter of 2012 were $2.4 million, up from $2.3 million in Q4, primarily reflecting the bulk of the annual costs of our year-end audit, which are incurred primarily in the first quarter.

In the second quarter, we would expect increases in revenue, as the product transition is complete, improving gross margins with higher volume sales and relatively flat operating costs. Our operating costs in the second quarter will include development costs associated with new products, including products for release later this year, and higher sales and marketing costs as we ramp up selling and marketing activities relating to our new products.

Our second quarter revenue will be helped by sales of the new 7Ci barcode scanner. Sales of the SoMo 650 are likely to continue throughout the quarter, with upside revenue opportunities from handheld computer sales, if we deliver the SoMo 655 in early June as scheduled, providing time for the channel to process and ship the initial deliveries.

We held our cash balances at the end of March level with end of year balances at just under $1 million. We will continue to closely manage our working capital, hold down our expenses to those deemed essential, and stay focused on our new product launches to move the products into and through the channels quickly while building customer demand.

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 and business and healthcare, growing Socket's revenues to profitable operating levels and building shareholder value.

Biannual meeting of stockholders is scheduled for tomorrow, April 25, at the Company's facility in Newark, California, on the ballot or the election of current Directors and the ratification of Moss Adams to continue to serve as our independent auditors for 2012.

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

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Brian Swift, Security Research Associates.

Hi, guys.

Hi, Brian.

Sorry, but I got a call during the conference, so I didn't catch all of it, but maybe you can fill in something for me. You mentioned as part of your SoMo sales, you had some OEM revenues that were kind of end of life on that product and could you give us an idea of what the significance of that was for the quarter and how long it'll be before they ramp up again?

Sure. So, I was referring to Epocal. I think the significance for the quarter was probably less than $100,000. And Epocal, we signed a deal with them for 5,000 units almost two years ago. And essentially, we've been fulfilling that contract over the last two years. To give you some, I would say, comparison, if I look at Q1 2011, Epocal represented $800,000 of our SoMo revenue, or $800,000 of our $4 million. As the year went on, they phased down because the contract was coming to an end. We will provide them with the 655; we're waiting for the special component for them that we will have probably another month or so. And we believe then they will qualify. So, I think, the earliest they could ramp back up is probably late Q3, early Q4.

Okay. And could you give us any kind of a color on some of the customers that are -- that you have kind of in a pipeline for the 655 as -- what do you anticipate the roll out of that product to do and then when do you think the 650 will be done?

Okay. So I think that we stay true to our hospitality and healthcare-related customers. We currently have about 18 customers who have evaluated. We seem to have a lot of interest in the hospitality market, particularly tableside ordering, etcetera. The -- I would say the upside looks very, very strong, but it's too early. I mean, it's easy for people during an evaluation phase to be very bullish. But there seems to be sizeable opportunities in the several thousands at some of these customers that we are now evaluating.

We're also able to now deal with the HP customers who want to transition. Obviously, previously with the 650, probably the first question we got asked was, if I transition to the SoMo 650, can you guarantee it's going to be available for three to five years. We didn't have a good answer for that. Now, we have a very good answer for that and we're able to -- we've designed the 655 with components, we are pretty confident will be available for five years and therefore are able to commit to customers that if they go with us, we will be able to support them for multiple years, which in a lot of these applications is critical.

So on this recent trip, I visited two or three different hospitals, things like the phlebotomy department where they're using our device to scan patients prior to drawing blood and then print a label for the blood that goes on the vial. Those type of applications, they are still in trial, they are still changing. But we seem to be a logical candidate in many of these process improvement applications.

I would hope that the ramp up of 655 is pretty strong, particularly in the second half. But I don't have firm numbers yet. I have projections from customers, but until we start shipping, I think it's too early to be giving out numbers.

As regards 650, I think as Dave mentioned, we have stock available, we will continue to sell that. I think we'll be all done by July, August at the latest. It's not possible to have the 655 available in all territories at the same time. So we will move out of say territories like Japan last where we have to go through extra certifications. So 650s might still be shipping there in August, whereas they might ship in Europe after June.

So we do have a plan to make sure that the inventory is all used up and today demand would strongly suggest that we won't have a surplus on the 650. So sorry, that's a long answer, [probably]. Okay, I think that should give you a lot of color on the situation.

Okay. Thank you.

(Operator Instructions) [Bernard Fidel], a Private Investor.

Hi, Kevin and David.

Hi, Dr. Fidel.

Hi, Dr. Fidel. How are you?

Okay. Well, it looks like we're getting out of the transition things, so this should be -- what do you look for this quarter. You look for growth in sales?

So I think on the scanning side, we're through the transition. So we're able to basically service the requirements pretty well. We're pleased to have both the 7Ci which is aggressively priced and very good in terms of 1D scanning and the more sophisticated 2D. When we started last quarter, we didn't -- obviously even at our conference call, we didn't know that Apple was going to announce the new iPad. So that was a bit of a surprise, but they generally surprise the world anyway.

So I think that the two big transitions are behind us, so we would expect to see good growth in the cordless scanning this quarter. On the SoMo side, the most important thing we have to do is to ship the 655 on time. We're able to service existing customers with the 650, but realistically we can't service any of our new demand for new deployments until the 655 ships. So those customers are obviously waiting, and we already have a number of them lined up. So, I would expect the SoMo to be generally flat to marginally up, but generally flat. But, we'll be through the transition and we will be able to service the demand we're seeing from customers who want to transition from HP and customers who want to deploy new solutions.

And we expect the existing business to support the SoMo 650 to support the existing customers. But you're not going to get a lot of new customers going to a product that's already been in the market for five years. And its new version is just around the corner.

Okay. Now, we're almost through April, how does the sales for April, particularly on the scanners, do you see a pickup on it?

Yes, I mean, April's been okay. I would just say that we did because of Easter and Passover, the first two weeks of April have been pretty dead. As a lot of people take time off, particularly in Europe and other places in the world. So we've seen things pick back up since mid-April? But I would say we remain on track. We have seen deployments of the 7Ci starting already, which is very encouraging. But, it's very early days in the quarter and particularly on the back of a two-week holiday for most of the world to be saying as we're ahead or behind. I would say, on the scanning side, we're not worried at all at this stage and things are very much in line with our expectations.

[Dr. Fidel], just comparing the flow in April versus the flow in January, we're a week before the end of April, and we're about even with where we were in January. So, we're already seeing some pickup even without any of the new products contributing much to revenue growth on the scanning side, and certainly the 655, the contribution if any would be in the June time period. So, we're running consistently as we would expect perhaps a little bit ahead of the first quarter. But as Kevin points out, it's very early in the measurement period. The momentum for this quarter will clearly be in the second half of the quarter.

Okay. Now, do you have any estimates of what you see for the second quarter, sales?

Yes. I mean, obviously, we have an estimate, but we're expecting to see it up and to be a little bit stronger, right, and to resume growth. Because our numbers are still relatively small, it's very difficult to peg a number. But, because one or two deals it's -- a deal can be $0.25 million. So I think that from my point of view, there are two things that are very important in Q2, which is, we have to ship the 655 on time.

And, we basically need to get as close as we can to cash breakeven or above. Those are our two, I would say, main concerns for us. And that would give us a reasonable growth over Q1. But, launching the product and getting the SoMo business growing again, we have already pent-up demand, delivering against that I think is key and there's work to do. And we have people working very hard to make sure this happens.

And you recall, Dr. Fidel, our revenue recognition is based on what we sell out of the channel. So, shipping these new products into the channel is step one. But it doesn't get to the point of revenue recognition until the channel can turn it around and ship it on to their customers. So, there's always some time delay, we don't control the timing of what the distributors are doing. Again, the important thing for us as Kevin's noting is getting these products into the channel as early as we can. There's not an issue with the barcode scanner, because we're still early in the quarter. But when we get to the point of being end of May, early June, then a week or two makes a big difference.

Yes. And, I'm just back from a trip to customers and I mean, I have to say I was extremely encouraged by the feedback we've gotten on the 655 and the improvements we made from an engineering point of view seemed to be absolutely in line with people's expectations and requirements. So, I think that the 655 will be a substantially better PDA at basically equivalent price. And without the HP in the market, we'll be both a low-price leader as well as a very, very full-featured SoMo device. So, a lot of hard work has gone into this; we're not there yet, but, we're desperately close now.

Well, on the 655, let's assume that you have it available at the end of May, beginning of June, do you have orders for it already?

Yes. But we certainly do. So having orders for us, I think, is part of the process. The 18 customers that we selected to get early units, they had multiple purposes. Obviously, they're 18 different types of environment, so we guess, lots of feedback from different environments to make sure that the units are really robust and dependable before we turn on mass production. [But also] these customers are in need of units to deploy. So, yes, we expect to receive orders from them and have received orders already from some of them. So I don't have a big concern that we'll have orders on the books waiting for the 655 when it comes along.

Okay. I have two more questions. For this quarter, could you see cash flow positive? What do you need to -- how many -- what do sales have to be for that?

Probably --

Yes, one way to look at that, Dr. Fidel, is, you look at the operating expense levels of about $2.4 million this quarter. Let's say it's $2.4 million next quarter, and I talked about it being flat, included within that total are at least $300,000 of non-cash cost, your stock option expensing and your depreciation. So, you're trying to fund the $2.1 million in operating cost from contributions from your sales. And with about a 40% margin, you're (multiple speakers) talking about getting up into the high 4s, $5 million level as being both profitable and, well, being cash flow positive. And then, you've got to cover that other $300,000 to be actually profitable, which should be another $600,000, $700,000. So, around $5.5 million gets you to profitability.

Okay. Now, do you expect to be profitable in the second half?

In the second half, absolutely, the second half of the year, yes, right. I think that we said on the previous call that transitions are difficult, because there's a great deal of uncertainty and you don't know which way customers are going to go; some will go for the 650, because it's less expensive and they've tested and qualified it; and some will wait. I think, we'll be through the transition by the end of this quarter, and we'll have a very clean, I would say, product line, sales channel, et cetera, lined up and certainly based on early indications, I don't think that we will have demand issues for the 655 and that will give us the additional revenue to get into the profitable territory.

And you recall, Dr. Fidel, our growth rate on revenues last year was 30% overall and it covered both of our major product categories, both barcode scanning and our handheld computers. You've actually got a stronger opportunity in the second half of this year. Once we get the new products out, given that we now are addressing with the low-cost barcode scanner the 60% or 70% of the market that only does 1D scanning and that will open it up with the lower cost to more people using the Apple products as well as other products. That scanner works with multiple smartphones and tablets.

And the SoMo 655 really opens up opportunities for a number of HP customers that by now are seriously looking to phase in an alternative without having to abandon their applications. So, the opportunities we see in the second half of this year, we like.

Okay. So you could see a third quarter being potentially a profitable quarter, is that a fair statement?

I think that's a fair statement, yes.

Okay. And for the quarter we're now, could that be a cash flow positive? In other words, [would we get] growth from the first quarter, let's put it that way?

Yes. I think, we're comfortable, we'll have growth from the first quarter, but -- and we will strive to get as close to cash positive as we can and beyond this. So, we're doing everything to basically get cash positive. I just think, we have to be realistic; a lot comes down to when we ship the 655; and as Dave mentioned, the difference of a week could make the difference of several hundred thousand dollars, whether it clears the channel or not clears the channel. And, we just don't know that at this stage of the game.

Well, for those who want the 650, there's plenty of product in the channel and we can hit the cash breakeven targets even if there were some delays on the 655, but the question is how many of those will ship out of the channel by the end of June and it does get harder and harder as you go on down through this quarter and into next quarter, because those products are spread throughout the distribution channel.

Customers have relationships with some, but not with all. We can certainly guide and direct people to where the product is, but once the Company is out of the 650, then the product availability will be in the distribution channels and as quickly as it sells out that will complete the life of that product. So, we're hopeful that customers will take advantage of the availability today and bring in the 650s that they need, and we'll get the 655s out just as quickly as we can.

Just one question. I think you mentioned, but I didn't quite understand that. The Canadian Company that you have --

Epocal.

Epocal, right.

Yes.

When will you get a contract with them? In other words, you're going to be meeting with them or something to [put out a test]?

Yes, so we will -- first of all, we have to get them a final, final version of our 655 with some additional componentry which we will have ready. They have to qualify us and then we can have a contract discussion. If they don't qualify the device, there is nothing to discuss. So that's the process. We would expect to start it this quarter and probably finish it, hopefully before Q3, but it's up to them in terms of the timing, they are the customer. I think that what we have to offer will be better and less expensive for them than what we offered them previously which they liked. So I can't give you any guarantees, but yes, we will be meeting with them and we will provide samples so they can qualify the 655 and we've built in a number of features in the device that were specifically for them. So we feel there's a good possibility that they'll be a customer going forward again.

And Epocal has inventory of our 650, so we're not disrupting their ability to ship their products as we move through this transition. It's all been coordinated with them and we expect it will be a smooth transition.

All right.

Okay.

All right. (inaudible) the next person.

All right. Thank you very much, Dr. Fidel.

Thank you. We have no further questions in queue at this time.

Okay. So we would just like to thank everyone for participating in today's call and wish you all a good afternoon. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.