Socket Mobile Inc (SCKT) 2019 Q4 法說會逐字稿

Hello, and welcome to the Q4 2019 management conference call. My name is Johnny, and I will be your operator for today's call. On today's call, we have Kevin Mills, Socket Mobile's CEO; and Lynn Zhao, Socket Mobile's CFO.

Before we begin, we'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, including -- include, but are not limited to, statements regarding mobile data collection and mobile data collection products, including details on timing, distribution and market acceptance of products and statements predicting the trends, sales and market factors and opportunities in the market in which Socket Mobile sells its products. Such statements involve risks and uncertainties, and actual results may differ materially from the results anticipated in such forward-looking statements because of a number of factors, including the market acceptance of sales and opportunities may not happen as anticipated; the risk of Socket Mobile's application partners and current distribution channels may choose to not distribute the products or may not be successful in doing so; the risk that acceptance of Socket Mobile's products and 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. (Operator Instructions) Please note that this conference is being recorded.

And now I will turn the call over to Kevin Mills, Socket Mobile's CEO. Kevin, you may begin.

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us today. Our 2019 revenue was $19.3 million, an increase of 17% over our 2018 revenue of $16.5 million. Our improved revenue, combined with slightly better gross margins, resulted in net operating profit before tax for 2019 of $500,000 compared to a net operating loss of $700,000 in 2018. Earnings per share based on net income was $0.05 per share for 2019 compared to a net loss of $0.09 per share in 2018.

2019 was the turnaround year we expected, and we were able to return to profitable operating levels in each quarter. As we look back at the entire year, it is easy to see where we were able to grow and where there is still opportunities for improvements, and I'd like to provide the following overview of the business.

Socket Mobile operates on a few different market segments and has product families targeted at each market segment. Our SocketScan family of products, which come in a variety of colors, were primarily used by iPad-based point-of-sale system providers and other indoor-centric applications. In 2019, the SocketScan family of products represented 65% of revenue and grew 22%, driven by our partners like Shopify, Square and ShopKeep, to name a few.

In 2019, the SocketScan family of products recovered all the ground we lost during the product transitions in 2018. We expect to see continued growth in 2020 in this category, driven by increasing strength of Shopify and others. We believe we already have a very substantial market share in this category.

Our DuraScan family of products are weather-proof and rubberized and primarily targeted at commercial, industrial, warehousing and outdoor applications and their associated customers. In 2019, the DuraScan family of products represented about 21% of our revenue but only grew 1%. When we originally designed the DuraScan family products, we believe that a weather-proof device that could withstand 500 tumbles to concrete would be more than sufficient to meet the market requirements for a robust solution for deployment in harsh environmental conditions. However, we discovered that level of durability was insufficient in the real world, and customers often drop the units 4 to 5x a day, which is 500 drops every 100 days.

Based on this feedback, we redesigned and retooled the DuraScan family of products, and we have made them substantially more robust. In addition, we added a much requested sales upgradable battery option. We launched the new and improved versions in January 2020 and are now shipping them. We believe we will be able to grow this portion of our business significantly in 2020.

Our DuraSled and attachable scanners made up the remaining 13% of our 2019 revenue and grew at a modest 5%. This DuraSled family of products is designed to be used as a single-handed solution combined with an iPhone or Samsung phone. Unlike much of our other business, which is driven by single unit purchases, the sled-based solutions tend to be deployed to deliver our inspection type workers, and typically the solution is deployed for 3 to 5 years. In 2019, most deployments were still based on the iPhone 6, 7 or 8. Socket was a late entry into the single-handed solution-based markets, which already had a number of established players. While we did grow the business, it was difficult to make substantial progress against the incumbents.

In 2019, we upgraded our solution to support the iPhone and the like. We believe we are currently the only company offering a complete range of iPhone solutions, which support from iPhone 6 through iPhone 11. In 2020, we will be a significantly stronger player. New deployments need to support both old and new phones, especially if the solution provides a bring-your-own-device option for workers. We believe we now have a complete product offering for these application providers and their customers, and we'll be able to grow our associated revenue.

So I would summarize 2019 as a good turnaround year, where we grew our revenue, return to profitability and repositioned our scanning product families for further growth. We also continue to invest in research and development, so we could bring new products to the market, such as the new S550, our membership card reader writer.

So as we look ahead to 2020, we expect to see continued growth, driven by our strong family of scanning products, with our SocketScan products being driven by our point-of-sale partners like Shopify, Square and others. We expect to do significantly better with our DuraScan family of products based on the design improvements we have completed. We expect our DuraSled products to grow based on the leadership position in the iPhone X and iPhone 11 fixed markets.

In addition, we expect to launch and gain traction for our S550, our contactless membership card reader writer, a device that can read mobile passes in both Apple and Google wallets as well as numerous NFC and RFID cards. While we don't expect to see any revenue until second half of 2020, we view the S550 as one of the most significant products we have ever developed. This will enable retail merchants to easily identify and offer loyalty points to customers based on the top of their phone. Products like the S550 take time as software has to be written. We are particularly excited that we are bringing this new product to our existing retail customer base. We see the S550 as a significant contributor to our long-term revenue goals.

So to summarize, we believe 2020 will be a good year for Socket Mobile, with solid revenue growth, especially in Q2 and Q3. As we continue to be driven by our strong mobile point-of-sale partners, we expect to also see strong growth in both the DuraScan and DuraSled family of products as the year rolls out.

With that said, I will now turn the call over to our CFO, Lynn Zhao. Lynn?

Thank you, Kevin. Revenue for the fourth quarter of 2019 was $4.6 million, with the gross margins of 53.1%, operating expenses of $2.2 million and the net income before income tax of $0.2 million. Revenue in the fourth quarter of 2018 was $4.1 million, with the gross margins of 50.3%, operating expenses of $2.2 million and a net loss before tax of $0.2 million. Net income after tax for the fourth quarter of 2019 was $0.1 million or $0.01 per share compared to a net loss for the fourth quarter of 2018 of $0.2 million or $0.03 per share.

We continue to benefit from net operating loss carryforwards and have paid 0 state and federal taxes in 2019. Net income before tax for 2019 was $0.5 million compared to a net loss before taxes of $0.7 million in 2018. The noncash stock option expenses increased our taxable income for 2019, and we recorded $0.2 million income tax, which was sheltered by net operating loss carry forward, and they required a no cash payment. Our remaining net operating loss carryforward at December 31, 2019 are expected to shelter future income of approximately $20.6 million for federal tax and $11 million for state tax.

Our cash flow has improved as a result of the profitable growth. Our balance sheet at December 31, 2019 include cash of $1.0 million compared to $1.1 million at December 31, 2018. In 2019, we paid down the term loan from $0.8 million as of December 31, 2018, to $0.3 million at December 31, 2019. The current ratio, current assets divided by current liabilities, was 1.4 at December 31, 2019, compared to a current ratio of 1.3 at December 31, 2018. Shareholders' equity at December 31, 2019 was $13.2 million compared to $12.4 million at December 31, 2018.

In early January, we renewed the revolving credit facilities with our bank and extended their maturity date to January 31, 2022. Our credit facilities and the profitability will provide the working capital we need to support future growth.

Now I will turn the call over to the operator for your questions. Johnny?

(Operator Instructions) And our first question is from [Al Troy].

Very happy to see positive 2019, nice turnaround, increased revenues and profitability, and I'm also very impressed with your guidance going forward for 2020. It sounds like it's going to be a good year. Do you have any plans to expose Socket to the investment community as far -- I know you hired a PR firm at the end of the year. So do you have any plans on that scale?

Yes, I think we'll continue to reach out to the investment community, obviously, telling the story on the back of a profitable 2019 is significantly easier than telling the story when we were turning around and promising as opposed to having delivered. So yes, we will continue to outreach. Obviously, as part of the exercise, we want to get more associated with some of our customers like Shopify, who is doing very well in the markets, and we provide a lot of scanners to them, right. But yes, the plan is to continue to tell our story and see if we can see the benefits reflected in our share value.

That's great. I also saw on a Facebook post that you mentioned you're looking to hire more salespeople and technical people. Is that the digital people you're hiring now?

Yes. I mean again, I think that we continue to hire. We've been, I would say, optimizing our business model over the last few years so that we feel we're in a much stronger position, and we continue to hire as we see the opportunity to add revenue. So yes, we will continue to hire, particularly in digital marketing as well as in the software areas.

Our next call's from [Steve Swanson].

Kevin, a couple of questions ahead. The first one was how many of the S550 -- how much of the S550 scanners have we actually shipped to developers? Is it 10? Is it 20? Is it 1,000?

No, no. It's -- I would say, a number less than 50. So I think we're still at the stage where all of the hardware has to be working before you really engage with the developers. We do probably have what we'd call 20 highly-technical developers that have been working with us to make sure the product will meet all the requirements and some of these would -- and put them into programs that would drive sales.

We're still very much in the end of the development phase. In today's world, nobody wants to write software unless the hardware is complete. In addition, we're still, I would say, understanding all of the parameters associated with the Apple VAS and Google Wallet-based payment systems, which is all very new. And we have a lot of what I would describe as good technical partners. But I think that the number would be in the 50 range. And once we have that, any of those customers could drive demand for several hundreds, et cetera. So that gives you some scale of where we're at.

Yes. I realize you've made an announcement that the device was all ready and available to developers. And I was just kind of curious, was this something that's been -- people have been clamoring for, but apparently not. It's early days on this. So this doesn't sound like 2020 kind of driver of anything. It's more maybe fourth quarter 2020 is when you might start selling some of these, so thanks for the feedback on around 50 or less than 50 folks have actually got those in their hands. So I appreciate that.

Next question I had was around inventory. It looks like we built inventory from the end of third quarter to the end of fourth quarter by about 26%. We went from about $2.5 million up to $3.2 million. Was that planned? Or is that -- I was a little surprised that we went up that high in inventory.

Well, it's a combination. We did bring in some additional products from -- and we are shipping a bit more by sea, so we do have more inventory. I think the other thing that's happening is that we do now have inventory ourselves at places like Amazon, where we can do fulfillment from our online shops. So the combination, I think, has added to the inventory. So we're comfortable with that.

Even though it's not on our balance sheet, our inventory in standard distribution probably has fallen because we typically had $2 million in distribution that was not on our books, but -- and that number is a bit lower. But yes, we would keep inventory a little bit higher because the cost of shipping by sea is much less. Certainly, in today's, I would say, world, having a little bit more supply here is probably a good thing rather than a bad thing, especially due to supply constraints that seem to be more and more an issue on an ongoing basis.

Okay. All right. And I guess the last question I have for now is it looks like we'll pay off our term loan sometime in the middle of this year. And I'm wondering what we plan to do with the money thereafter that we're saving by having paid off this loan that we had. We'll have extra cash hanging around. I'm wondering what we plan to do with it, if anything.

Well, we'll certainly have a plan. I think that we used our reserves of cash back in 2018 when we bought back 18% of the company from the public markets. Basically, we'd like to have some buffer, which I think we can generate this year and not be as lean on cash as we've been over the last few years. And certainly, we will have a plan in 2021 as we start to generate a good amount of cash.

Okay. I assume we are not planning to make any stock buybacks in 2020?

That is a fair assumption. That is -- we have no current plans to buy back any stock. I think that...

I appreciate that, and I hope that we do not do that. I don't think that's a wise move, and so I'm glad to see or hear that we don't envision doing any of that in 2020. Okay. I appreciate that. I'll get back in the queue then.

Yes. Just let me maybe add one thing to the question the S550. One of the things that is important to understand is that many of the things we're doing with the S550 were not possible prior to iOS 13. Because prior to iOS 13, the Apple Pay mechanism within an iPhone was exclusive to Apple. Apple have opened that up with iOS 13, so you could use it for various types of passes. So even though I think we have a lot done on the S550, we're still very early in this market, but we feel it will be a substantial market going forward, and that's why I don't think you'll see any revenue until the second half.

Our next question is from [Alan Lines].

Kevin, Lynn, I have a question. Can you -- as far as revenue is concerned, how much this quarter was foreign versus American? I know it's very heavy last quarter because of Japan, but how did that shape up this quarter?

I think it was more back to normal. We had, on the last call, said that we might get some additional revenue from Japan because they extended the date, and that really didn't happen. I would say, on an annual basis, we were 74% domestic and 26% international. We were probably along those lines in Q4. In Q3, we did have an additional, I would say, 4% to 6% internationally because of Japan and also because of Europe. But on an annual basis, it's 74%, 26%, and we did -- international was weak in Q4 relative to Q3.

Okay. As far as -- I remember last quarter, you mentioned that you were seeing some -- what caused -- maybe not to read what you were looking for, that there was weakness in small business purchases. Has that weakness subsided in the fourth quarter, and how do you see it going forward?

Well, I think that we generally expect December and January to be the weakest month of the year relative to the mobile point-of-sale portion of the business, and that's generally because people don't deploy cash registers in that period of time. We do have some more color based on surveys and other stuff we've done. So now we understand that about 50% of our scanners are sold in conjunction with the point-of-sale system at the same time and 50% some time afterwards, up to a year afterwards.

We certainly lose out in December and January. And certainly, small businesses tend to be busy during this time. And I think that's a trend that will continue. It's not true of the other elements of the business. And I think as point-of-sale continues to fall as an overall percent, we'll have less of that seasonality. We have seen what I would describe as a typically weak January, and we do expect and are seeing much their strength in February, so I think things are rolling out as we expect.

Could you talk a little bit about the marketing implementation, buying and then selling and how is that coming along?

It's okay. I mean I think that we still struggle to get recognition. I think we've made a bigger effort to get recognized in the membership card reader because it's new and exciting, and they've outreached and we've had more interest from retail magazines and retail organizations based on this. And I think the plan is basically to continue to, I would say, market in the digital space and get associated with some of these new initiatives.

And I think that, in turn, will lead to people having an interest in the company and the stock. I think the story was certainly not as strong in '19 coming off the back of a weak '18, and it's an easier story to tell now, and we'll work hard to do that.

Okay. Are you still pursuing a marketing person to replace James Lopez? I know he was...

Yes. Yes. So we've struggled in this area. I'm happy to report that we have a new person starting as Director of Digital Marketing at the end of this month. It took us time to find the right person, but we're very happy with the person who will be on board, and that will be a big focus for 2020.

All right. Okay. So last question. I guess you talked about, obviously, and I think that's going to happen, improve the revenue and profit. Do you -- is it unreasonable to expect that you could -- it could mean at least a 20% revenue growth in 2020? Or you're not going to talk about it yet?

I think that we would be -- I think we can maintain our current momentum. I think that as a target, those are the type of ranges we would like to be in. So -- but I think I'd be happier to talk about this middle of the year when certain things have happened. So -- but I don't think those are unrealistic expectations.

Okay. Looking for a much improved 2020.

Thank you.

At this time, we don't have any further questions. (Operator Instructions) And it does not look like we have any further questions at this time.

So I'd just like to thank everyone for participating in today's call and to wish you all a good afternoon. Thank you.