Socket Mobile Inc (SCKT) 2017 Q3 法說會逐字稿

Welcome to the Socket Mobile Third Quarter 2017 Management Conference Call. My name is Darryl, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Dave Dunlap. David, you may begin.

Thank you, operator. Good afternoon, everyone, and welcome to Socket Mobile's third quarter management conference call to review results for its third quarter and 9 months ended September 30, 2017.

Presenting today from Socket Mobile are Kevin Mills, President and CEO; James Lopez, Vice President of Marketing, Sales and Developers; and Dave Dunlap, Chief Financial Officer.

Socket Mobile distributed its earnings release over the wire service earlier today. The release has also been posted on Socket Mobile's website at socketmobile.com. In addition a replay of today's call can be accessed on Socket's website by selecting About Us, Investor Relations/Conference Call/Events. A transcript of this call will also be posted on Socket's website within a few days.

Before we begin, I'd 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 and Exchange Act of 1934, as amended. Such forward-looking statements include, but are not limited to, statements regarding mobile data-collection products, including details on timing, distribution and market acceptance of products; and statements predicting trends of sales and market conditions and opportunities in the markets in which Socket Mobile 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 the number of factors, including, but not limited to, the risk that manufacture of Socket's Mobiles 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 Socket Mobile's application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so; the risk that acceptance of Socket's products in vertical application markets may not happen as anticipated; as well as 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.

And now with that said, I'd like to turn over the call to Socket's President and CEO, Kevin Mills. Kevin?

Thanks, Dave.

Good afternoon, everyone, and thank you for joining us today. We are pleased to report another profitable and solid revenue quarter. Our Q3 revenue was $5.5 million, a 7% increase over the $5.1 million we reported in Q3 2016. Our Q3 cordless scanning revenue was $5 million, 11% higher than the $4.6 million we reported for these products in Q3 2016. Our operating income was $775,000, up slightly compared to the $718,000 operating income we reported in the same quarter a year ago.

Even though our Q3 results were positive and allowed us to maintain our history of improving operating results, I also have to say that Q3 as a quarter was a little bit strange. Typically, we see modest sales in July and August and a very robust sales in September. Typically, September represents about 40% of Q3 sales. However, this was not the case this year. We saw solid sales out in July and August, followed by a soft September. The first 2 weeks of September were off significantly, with sales out returning to normal levels in the latter portion of the month.

While we are not 100% sure of the cause, we suspect the extreme weather across the U.S. in early September was a strong factor. It is also worth noting that in September the labor bureau jobs report highlighted high job losses in the hospitality sector. So it felt like a 12-week-quarter rather than the usual 13 weeks.

Despite this, we did see our year-over-year cordless scanning run rate business grow by approximately 20% when you exclude deployments from both periods, reflecting the continued strength of our application-driven business model.

We also had 467 in Other revenue in Q3. This was from licenses from our SoMo products, sales of legacy products and engineering services. Because of the design win nature of our business and our long-standing relationships with customers, we are happy to accommodate these opportunities when we can. We will continue to have some revenue in this category going forward.

I will now turn the call over to James Lopez, our Vice President of Sales, Marketing and Developers, to provide a bit more color on the markets and how we see them evolving going forward. James?

Thank you, Kevin.

In Q3, VDC Research, who broadly covers the auto identification and data-capture industry, started coverage of the mobile barcode scanner market. VDC has defined the market by form factors: companion scanners, sled/sleeve scanners, and ring scanners; and by market segments: retail, commercial services, industrial manufacturing, transportation and logistics, and healthcare.

Moving forward, we will be aligning with VDC's definitions and will be referencing our market segments and solutions in these terms.

Socket was proud to be recognized by VDC as the companion scanner of choice worldwide favored by more than 1 in 3 users, and hope to see our SocketScan 800 Series and DuraScan solution gain similar traction in the sled and sleeve market. Socket does not participate in the ring scanner market.

Our 800 Series scanners continued to perform well in Q3 as did our DuraScan 700 Series scanners. Our DuraScan scanners, which were primarily designed to address the durability needs of market segments outside of mobile point-of-sale are successfully growing our sales in commercial services, industrial and logistics segments, and has shown continuous quarter-over-quarter growth since March.

Lastly, Q3 also demonstrated a lot of early but strong interest in the DuraScan D600 from developers representing every segment. The D600 is our first handheld capable of reading data from RFID tags or from smartphones, leveraging near-field communications capabilities. And we've have seen many new and exciting data-capture opportunities around RFID/NFC emerging throughout 2018.

Now I'd like to hand things over to Dave.

Thank you, James.

So total revenue for the third quarter was $5,475,000, a year-over-year increase of 7%. Socket Mobile's cordless barcode scanners generated $5,022,000 in revenue from the quarterly worldwide sale of 21,500 barcode scanners, a year-over-year revenue increase of 8%. The additional revenue of $453,000 was primarily from non-recurring revenue sources, including the sale of legacy products, services revenue, license fees and engineering services. The total in this category in the third quarter last year was $467,000.

Revenue for the 9 months of 2017 was $16.3 million, a year-over-year increase of 28%. Our gross margins continued to benefit from product component cost reductions.

Total margins for the third quarter increased to 55.5%. Total margins from cordless barcode scanning sales were 53.6%.

Operating expenses were $2,271,000, up from $1,912,000 in the third quarter a year ago and up from $2,202,000 in the previous quarter.

We continued to invest in the cost of new product development while maintaining our commitment to operate profitably.

Operating income for the third quarter was $775,000 or $0.11 per fully diluted share. To that balance, we deducted interest expense of $21,000, minimum income taxes currently payable of $28,000, and deferred income taxes of $312,000 to derive net income for the third quarter of $408,000 or $0.06 per fully diluted share.

Deferred income taxes are sheltered by our net operating loss carryforwards and do not require the use of cash.

Our balance sheet continues to benefit from our profitable operating results and from the sheltering of our deferred income taxes.

Cash and equivalents at September 30, 2017, increased to $2.9 million, up from $2.1 million at the end of the second quarter and up from $1.3 million at the end of last year. We also have an available unused receivables base bank line of credit of up to $2.5 million.

Working capital at September 30, 2017, increased to $6.7 million, with the current ratio of 3.7. Our working capital growth included a combination of operating profitability and the conversion of $1.2 million in convertible notes plus crude interest that matured on September 4, 2017, and converted into common stock.

Our stockholders' equity at September 30, 2017, has grown to $19.8 million, up from $16.2 million, at the beginning of the year.

Today, we have approximately 7 million common shares outstanding. In addition, we have reserve 2.3 million shares for future issue as stock options outstanding are exercised. Future stock option exercises will generate nearly $5 million in cash and additional equity.

Socket has made considerable financial progress over the past 3 years, and the financial trends continue to be positive. Cordless barcode scanning revenue has more than doubled over the past 3 years and represented 92% of our revenue in the most recent quarter.

We've improved our operating margins over the past 3 years from the 40% level to more than 50% through a combination of product cost reductions and manufacturing efficiencies. We've increased our operating expenses and our headcount this year, which increased by about 10%, to support growth and an active and expanded product development program. Our commitment is to continue to grow and to operate profitably.

Now I'd like to turn the call back to Kevin.

Thank you, Dave.

So in summary, our cordless scanning revenue growth continues to be strong, and we feel very positive about the future. Our application-driven business model continues to be validated by the strong results in the U.S., and we have seen very solid increases from online resellers like Amazon and CDW during the year. We are also seeing stronger run rate business in Europe and Japan.

Our products are just becoming available in China, which took longer than expected, and we expect their availability to allow our developer partners servicing the local market to design our scanners into their applications. This will take time, but product availability is the first major milestone in the design win process, and that has now been achieved.

We believe 2018 will be a big year for Socket Mobile. We expect to launch newer versions of our product with attractive price points and new features, which we feel will both solidify our market leadership position and enhance our growth and profitability.

With that said, I'd now like to turn the call over to the operator for questions.

(Operator Instructions) And we do have a question from [Will Hamilton.]

Regarding September, so Kevin, you made a comment -- so the second half of the month bounced back to normal trends. Is that what you were saying?

Yes.

And that's -- has that -- I know you don't normally provide guidance, but has that sort of continued literally into October?

Yes. So I mean, we track on a weekly basis our sales out. So -- and it was just one online reseller. It would be -- something could have happened. But when you look at all of our top resellers, that first 2 weeks of September were strangely quiet across all online outlets. So essentially, it's -- we did typically half of what we would normally do in those 2 weeks. And then it's has come back and have been completely normal sense. So we don't exactly know, but I think the fall off in sales coincides with Hurricanes Harvey and Irma and all the, I would say, activities all going on in the U.S. in first 2 weeks. So in that respect, I think the quarter turned out to be a little bit softer than we expected, and certainly we were surprised by that. But things have all returned to normal since.

Okay. So like the sort of -- not to put words in your mouth, but the 15%, 20% type of growth that you experienced will move forward?

Correct.

Yes, okay. And then what was the actual unit -- scanner unit sales?

It was 21,500, I think.

Okay. And you made a comment that there was 20% growth without deployment. I assume the deployments are those to enterprise?

Yes. So it was approximately 20%. I think it came out at just under 20%. But yes, if we take out the deployments in both periods, it was about 20% underlying growth.

So there were heavier amount of deployment than last year?

Correct. That is true.

And was that also the case in the fourth quarter?

Yes. I believe that is -- I believe -- yes, last year, we had the benefit of the start of American Greetings in this period, I believe. So we had some good deployments during that period. So yes, I believe that is the case.

Okay, that's helpful. And just one last question as it relates to your comments on 2018. You mentioned some new versions coming out at some competitive pricing. So can you give any more color around that? I know you wanted to open...

If I gave you all the color now, it wouldn't be a surprise when we (inaudible). But I think that we have been working hard to make sure that we're in a better position for next year and in the beginning of the year, predictably as relates to shows like NRF. This is where you generally launch your new products, and people evaluate all the new products in the January, early February time frame, which is one of the reasons why business tends to be quiet during this period. And then people to start purchasing mid-February. We will have, I think, updated versions with good price points to meet or exceed customer expectations in that time frame.

Okay. And can you just provide, lastly, update on the DuraCase and how that's performing?

Yes, the DuraCase is a complement to our 800 Series scanners, and it allows the 800 Series to be married up with a smartphone or an iPod Touch as a single-handed solution. And it's been great. The 800 Series has shown a lot of growth quarter-over-quarter, and it -- right now, it's performing well. I mean, nothing other than saying quarter-over-quarter it continues to be one of our strongest performers.

And our next question comes from Matthew Galinko.

So maybe just one more question on the Q3 order flow. Do you think that perhaps demand is going to snap back in any way and was just deferred as a result of natural disasters or whatever kind of triggered the slow spending? So do you think it -- we could play catch up over a couple of quarters and then back to normal? Or is it just sort of an anomaly that never really comes back?

Well, first of all, I don't think the business was lost. I think it was delayed, so yes, it comes back over quarter -- over the following quarters. But I think, actually, it snaps back probably quicker than that. As we've pointed out many times, we have a run rate business, and we have large resellers like Amazon and CDW. And we can't obviously see the individual purchases, but you can see the trends. And those 2 weeks were abnormally low, but we don't believe the business was lost. It was just delayed. So to answer your question, yes, we would expect to take that business up going forward.

And our ship of orders, Matt, in October to date are now above $2 million. Almost takes the 40% approaching that, that you saw back in what we normally see in September and started to move some of that into the October time period. So we're expecting that the delay is fairly short term for at least a good portion of that, and we'll know more as we go through the quarter.

Got it. Regarding the VDC report, does that tend to -- I guess, it's been a little while since their last report. Does that have any influence on inbound interest for deployments in the business? Or does it have any influence in the market for you?

Matt, this is actually the very first time the VDC has addressed the mobile barcode scanning market as a market in and of itself. So this is the very first report. So I think what they've have done is shined a light on an emerging market and presented it as something that is adding to the user base that used to be represented only by the AIDC market. So for us, it's a real validation of what we've been chasing for the last 2 years and how the applications on mobile devices are opening up applications of barcode scanning and near-field scanning moving forward. So it's just been a great validation of the market that we're participating in, and it gives us a frame of reference now to, as I mentioned, start defining our market's width and to start positioning our products within. And I think that there are people who are going to be seeing the report and seeing the validation there, and that hopefully will bring developers as well.

Got you. I know you touched on a little bit on developer registration around the near-field products, but just anything new in terms of the end markets they're touching?

They're touching every market. Surprisingly, they're -- literally every market. And one of the interesting things is a lot of the old developers that were barcode scanning developers are coming back and looking at the near-field products, including some of our mobile point-of-sale partners. So across the board, there's a lot of interest in what can happen there. And I think as applications for near field emerge, with companies like Apple promoting the near-field capabilities of their devices and how that near-field capability is available to application developers, you're going to see new use cases emerge. And so with our D600 product, we already have a handheld solution that our developers can turn to.

Got it. All right, just one more from me. I guess, one of your point-of-sale application partners, public ones, commented on sort of targeting a move up-market. I'm curious if you can -- have any -- clearly no -- not much feasibility into what they're doing, but do you have a sense that you're being pulled up-market on the point-of-sale side at all through the application channel?

We do. We draft off of their efforts to move into different markets. So as we saw our partners originally tackle retail, boutiques and specialty shops, as we saw them going into other applications like quick service restaurants and service industries, where inventory was big, we saw ourselves get pulled into new inventory opportunities. And so in the same way, as they address new markets, we see ourselves also being able to address those markets. And we certainly have the products to address the market. So the enabler is the application being able to service to market and then our product complements that. So we definitely draft off of those opportunities.

And our next question comes from [Al Troy.]

You mentioned that China -- Socket's scanners are the proof of sales in China. Do you expect substantial revenue from China?

Yes, we do, but not instantly. I mean, as we've point out many times, no one's going to right software for products that don't physically exist in their space. So there's a process to it. First, we have to make the product available, which we now have done. It took, as I said, a little bit longer. There's a lot of regulations in China to get through. But the products are now available, which -- that encourages people to bake them into their solutions because, ultimately, they want to sell the software and the hardware they need to support, it needs to be available. So yes, we think China is a big market. And in looking at the VDC numbers, China, I think, represents the second-largest market, right -- third-largest market after combined Europe. But we weren't there, and now, we'll start to be there. It will take a quarter or 2, but yes, we expect to do quite well in China going forward.

That sounds good. China could generate a lot of revenues. Do you have any investor conferences planned in the near future to tell your story to investors, mutual funds, et cetera?

At the moment, we don't have lot planned. As you know, we did do the Sidoti conference in New York, so we're following up with people based on that. And we continue to reach out to people. The Sidoti conference did generate a reasonable amount of interest, but we would like to kind of work through that interest and see how applicable it is before we commit to the next. We are aware there's other conferences that we can sign up for in the fourth quarter, but we haven't actually signed on the dotted line for any of them at this stage.

Okay. Is there any chance of issuing any interim information to shareholders? There was no releases between the second and third quarter, so let -- new products coming out, anything that's doing like China was approved, and stuff like that. Is there any way of letting us know in the meantime without having to wait for the end of the quarter conference calls?

Yes, we can certainly look at that. I think we'll have some new products to announce, particularly a time that's busy for us would be towards the end of the year, January, as we have new products to launch, et cetera. So I think you will see some more activity in that area in the next -- between now and the next quarter conference call than you had in the past.

And our next question comes from [Michael Haggerty.]

I have a couple of questions around the stock hold in the float. Obviously, there's a general concern, I guess, amongst everybody that the stock appears to be somewhat undervalued. And I tend to assume that's, to some extent, reflecting maybe possibilities of a slower growth in the horizon, which somewhat was seen in this quarter or both for special reasons. I'm wondering if you've considered starting to divert some of the free cash flow that's coming through into share buyback. That was my first question. My second question is I'd like -- when you mentioned that we've got 2.3 million options currently outstanding, I'd like to know how many options are issued each year. And then, a third point is I'd just like to make a statement, really. It's not intended to be a criticism. But when I look at the insider trading and see the number of transactions that take place from management, I saw that in the last 18 months, 2 members of management have traded options 24 times. And the total revenue -- or the total profit of those trades is less than $100,000. It's not a question about how much money they're exercising or bringing in, but I think a casual observer who looks at the insider trading and sees senior-level management exercising options 24 times in 18 months, that's 2 people, I think that can send a signal of lack of confidence and concern to potential investors. So those 3 points, please, if you may.

All right. Well, I'll start with the last one, which is the trading of the stock. Most of us have 10b5s, which is a vehicle that we use, where we make a plan -- I can speak for myself. I make a plan once every year, maybe once every 2 years, and it gets triggered based on activity in the market, which is outside my control. And I believe -- I don't know exactly, but I would say over 20 of those 24 trades were triggered by 10b5 plans, so they're based on a blind trust. And your point about have we considered dividend or other things. In Q3, I think we finally cleaned up our balance sheet. We converted all our debt. We have no long-term debt. Yes, we will have to look at a plan for the cash, but we don't have such a plan right now. To me, any plan to buy back shares or do other things was premature based on the fact that we had still outstanding convertible debt. So once we converted that, I think now is the time to look at it, and we will look at it. And lastly, on your question about stock options, we do have a shareholder-approved stock option plan that generates -- 4% of outstanding shares are put into the option pool on an annual basis, and those are distributed to the employees and management, board directors, et cetera. And we generally hold a reserve of around 100,000 or 150,000 shares. So if we have 7 million shares outstanding at the end of this year, the 4% would represent 280,000.

And there's 2.3 million actually issued at the moment?

Yes.

Yes, but that's...

But they're not all vested. Typically, our options vest over a 4-year period. So there's 1.7 million that are vested, there's another 0.5 million that will vest over the next 3 or 4 years.

And the vesting is done based on the fair market value of the stock during that time. So the employees are able to buy shares -- so today, let's say, we're at $4 and you get an option. You get an option to buy shares at $4. Obviously, the appreciation generates wealth for everybody, including the optionee, right? But it's not like they get the shares for free.

No. Nothing like that. (inaudible)

Okay.

And Michael, that is a shareholder-approved program. And it's certainly, from our experience, is it very closely aligns the interest of the employees with the shareholder interest because everybody's focused on doing the things needed to generate increased value for the company. I also might mention that from a perspective on cash, we find cash from an operating standpoint to be very helpful in our relationships with all our stakeholders. Larger organizations that are considering buying our products, one of the things that they will screen for is the ability -- the sustainability of the company to be able to continue to service the products that they buy. And with our positive operating results and cash balances, we passed those screenings today. A few years ago, we weren't passing them without a lot of explanation. And it's true across. Our suppliers -- it's really there to assure our suppliers. If we get a large order and want to greatly pick up the pace of ordering, our suppliers don't question our ability to pay when due. So there are levels of cash that become very helpful in the operations of a smaller company, and at this point, we've appreciated that.

(Operator Instructions) And we have no further questions at this time.

Okay. So I would like to close by just thanking everyone for participating in today's call, and wish you all a good afternoon. Thank you.

And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.