Socket Mobile Inc (SCKT) 2021 Q3 法說會逐字稿

Welcome to the Socket Mobile's Q3 2021 Management Conference Call. Today, we have Kevin Mills, President and CEO; and Lynn Zhao, CFO. My name is Adrienne, and I will be your operator for today's call.

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 Securities Exchange Act of 1934, as amended. Such forward-looking statements 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 conditions and opportunities in the markets in which Socket Mobile sells its products.

Such statements include risks and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements because of a number of factors, including, but not limited to, the risk of manufacture of Socket's 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 to market acceptance and sales opportunities may not happen as anticipated, and the risks that Socket'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 forward-looking statements. (Operator Instructions) Please note this conference is being recorded. I'll now turn the call over to Kevin Mills, President and CEO. Kevin Mills, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Our third quarter revenue was $6.3 million, an increase of 54% compared to $4.1 million for the same period in 2020. The growth was driven by the deployment of business applications in the retail industry. Operating income for the third quarter of 2021 was $954,000 compared to an operating loss of $4 million in the prior year. Lynn will provide a more detailed breakdown of our results in a few minutes.

In Q3, our revenue was driven by our retail-centric customers led by Shopify. Our retail-centric business continues to benefit from both the reopening of the economy and ongoing retail changes that require customers to be serviced in a more mobile-friendly way. We also benefited from the deployment of an assisted selling app in Q3.

The solid retail demand we saw in Q3 continues as we enter Q4, but we expect it to taper as we enter the second half of Q4 as is traditional for retail-centric businesses. Sales to the Commercial Services Applications segment were more robust in Q3, and we expect to see further increases in Q4. We believe the gains in this segment will offset the traditional Q4 retail seasonal slowdowns and allow us to deliver another solid revenue performance in Q4.

On the supply situation, it is a very challenging environment, and we continue to navigate industry-wide electronic component shortages and delays. However, we took various strategic actions to increase our inventory in 2020 and throughout the past 9 months, so we would be able to continue to supply to our application partners and their many consumers. We remain focused on navigating the many delivery and supply issues, so it continue to support our customers in 2022. We anticipate the component shortages, the lengthening lead times and inflationary costs will persist well into 2022.

We continue to invest in our NFC-centric products, which we expect to be a significant revenue driver in 2022 and beyond. Apple continues to increase the emerging market for NFC readers as they expand the mobile wallet capabilities and functionalities. In iOS 15, Apple made it possible to carry digital identification such as a mobile driver's license as a mobile pass in your digital wallets, making it possible to integrate this functionality into many applications.

As outlined in our recent press release, we also see new opportunities in the emerging secure Supply Chain segment, which is possible by combining NFC and blockchain technologies. We believe that our S550 and D600 NFC products are ideal for these emerging markets.

So in summary, Q3 was another very good quarter, and we expect to maintain our momentum into Q4, even though it's a seasonally weak quarter for us, and we look forward to further growth in 2022.

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

Thanks, Kevin. Good afternoon, everyone. I'm pleased to be with you today to share our Q3 results, another quarter in which we delivered a strong financial and operating performance. The 9-month revenue was $17.1 million, representing a 55% increase from the same period last year. The revenue growth rate between 9 months of 2019 and 2021 was 17%.

In Q3, we experienced a component cost in the freight increases which reduced our gross margin slightly by 1%, compared with both the prior year and last quarter. Although we currently are navigating the challenges well through supplier diversification and inventory management, the ongoing industry-wide electronic component shortages could result in future supply disruptions and higher production costs.

Our Q3 operating expenses increased to 35% compared with the prior year quarter, if excluding the noncash goodwill impairment charge of $4.4 million in Q3 2020, an increase of 1% compared with the last quarter. The increase compared to the prior year reflects costs associated with the higher headcount, investment in technology, consulting and external professional services and increased compensation related to improved company performance.

Moving to our capital position. We ended the quarter with a cash balance of $5.4 million compared with $2.1 million at the end of 2020. Even with an increase in strategic investments in our inventory position as well as an increase in receivables due to strong sales growth, our cash flow from operations increased in the third quarter, thanks to the increase in net profit. Our balance sheet has further strengthened with the current ratio of 3.54 as of September 30.

Through the first 9 months of the year, we've been very happy with our performance. The strong demand for our products is a testament to the underlying strength of our business and of our application-driven business model, which we believe will drive long-term profitable growth.

With that, I will turn things back to the operator for your questions. Operator?

(Operator Instructions) And our first question comes from Frank Quattrone from Prudential.

So I'm really hard of hearing, but I have it on speaker phone. Can you guys hear me okay?

Yes. You're good, Frank. Yes.

Okay. I have been investing in your company for well over 2.5 years. And it is very, very nerve wrenching when one can see, 1 minute, you get a quote, all of a sudden, stock is $30; next minute or hour later, it's $3, $4 again.

What is the problem? Today, over (inaudible) shares traded up to 9 something, down to 7 something. And now I think that The Street basically does not understand -- or your PR firm is not doing its job to get the word out. I think you have fantastic products. I think your growth factor for the size of your company is really great. I've worked for Pru for 5 years, (inaudible) another one. I had my own brokerage firm and so forth and so on. I have not seen anything as good as this as far as your PR from the company, but it seems like it's falls on deaf ears. And is there any reason why these wild gyrations? This is horrible. I'm sorry...

Yes. Okay. So I can give you some color on why this is possibly happening, but this is just a theory in so far as we -- when we do our shareholder mailing, we do notice that we have a very large audience in what would be the Robinhood or day trading application-driven trading situation. And it has become exceedingly easy for people to buy and sell stocks and to let it run on emotion.

I think from our point of view, we focus on the fundamentals of the business, and we don't really control the stock price. And I don't think we should spend a lot of energy trying to do that. We continue to tell our story to institutional investors and others. And I think the story continues to get better. But I think the biggest issue in to date is that there's high volatility because of the availability of day trading apps like Robinhood and others, which make it exceedingly easy for people to trade small amounts of stock on emotion.

Well, okay. I agree with some of the reasoning behind Robinhood, but I was in the security long before Robinhood started playing their games with a multitude of stocks. I agree with a partial end of it, but I don't agree with the other side because, number one, there is not a large [shortage].

Look, I'm in the market 60 years. I have my own BD, broker dealership. I have 21 brokers under me. I have traders. I mean I understand the day trading aspect of it. But what their analogy of trading is and investing with their shareholders, it's going to backfire on them.

But it's hurting a lot of companies. And I'm sure the SEC is going to take notice. But I do not think that the gyrations like 1 day, all of a sudden, stock is $35. The next day, it's (inaudible) for 6 months at $3, $4. Maybe that kind of trading can be halted because the SEC is taking some steps. But I really don't think that the Robinhood people are that effective in a company like this. But I think...

Well, again, I think there's many theories here, and we certainly don't have the answer, I think, from our point of view, the main thing we're focused on is to build the long-term value of the company, which I think we continue to do. And I think that for the long-term shareholder, we still represent a good opportunity.

Well, I have nothing but long-term shareholders. When I was sitting on the bench, I had 600 shareholders. And when I left the bench, a few of them followed me. I have picked some very good companies with growth probably not as good as yours. And my long-term investors are just discouraged because they would love to add more to their positions, but they're afraid because every time they -- every time they buy on good news, like I say, it's more than (inaudible) years.

Look, I don't want to bother you with my input, but I just want to make mention that maybe if it is the Robinhood people, that they should be investigated once again because I know they've damaged quite a few stocks. GameStop, for one, $500, down to $10. It's ridiculous.

All right.

(inaudible) my question. There's other people that want to talk in.

And our next question comes from Chris Sakai from Singular Research.

Kevin, sorry if it might be hard to hear, I'm in the car. But I just had a question, I guess, on your headcount. You mentioned there was an increase in your headcount. Where does that currently stand? And what's going to -- that going to look like in 2022?

Okay. So I think we have increased our engineering headcount primarily and our marketing headcount. We -- they were a little understaffed in key areas, and we're addressing that. I don't think it substantially changes the model. And we need to add a few more people, but it's not directly tied to revenue growth in the short term. It's more long term. We have to cover more platforms and stuff like this. So from a model point of view, I think the model you have is still pretty good.

Okay. All right. Great. And then how is your inventory management going? You see a lot -- are you seeing a lot of extra costs in your supply chain because of the disruption? And are you passing that along to your customer?

We are seeing increased costs in our supply chain, primarily on the cost associated with freight. We have made the decision not to pass it on in the short term. And we believe if it's reasonable, we won't pass it on because it would be very disruptive to our business model.

So as I said, we took actions starting in November -- October, November of 2020. So we increased our inventory. So we're not in a panic situation. And we're able to deal with some delays in the market and not have to change everything from sea freight to airfreight, which is terribly expensive.

So it's a very difficult environment right now. We continue to work on those on a daily basis. But at the moment, the cost increases probably cost us 1% of gross margin. And it's not worth disrupting what we have going for that small marginal trend.

Okay. And then I know you guys don't give any guidance, but you say quarter 4 is your worst quarter. So how -- can you give us any color there as far as revenue growth goes?

Well, yes, I think revenue growth compared to 2020 will still be solid. The retail business, basically, you don't have any strong revenue in December and January. So those 2 months really are quite weak, but that's by design. People don't deploy new systems in December or January. We would expect it maybe to be slightly less in Q3, but not substantially. But I can't remember what we did last year, maybe $4.2 million. So I think that the growth over that would still be quite strong.

Last year, Q4 was at $4.7 million, Kevin.

Okay, $4.7 million. So it will still be strong growth over that.

And our next question comes from [Robert Mosby] from Singular Research.

Congratulations on the quarter. A comment to share with the first caller and his frustrations which I 100% empathize with, and also a question regarding the look ahead and some of the recent demand in the way of a digital ID.

So I entirely understand, having been in the industry for over 30 years, the 1 key effect is the point of distribution has gone from, let's say, analog. Brokers calling up their clients, and that takes time, and then they decide to immediate binary digital where an army of Reddit traders on wallstreetbets see the idea all at the same time and can act in real time on it. And so for a company with 7 million shares, that can have quite an impact. It doesn't take a lot of capital.

So I do want to mention that we recently picked up coverage on Socket Media. And for the gentleman who called in, if he'd like to visit us, we have a redacted version. And this is what helps us is to try to understand the fundamental valuation in between these wild gyrations as kind of your anchor, your target. But for the gentleman and possibly any of his associates, if they want to visit us on Seeking Alpha, for Singular Research Seeking Alpha, we can offer them a complementary report. And we will have an update very soon on Socket Media based on the recent quarter. So I wanted to offer that out here, if it's helpful.

The question I have is regarding you mentioned driver licenses in the digital wallet. Is there a plan or an integration with vax IDs involved here, too, possibly?

Yes. I mean, so this is a very fast-changing space. So Apple and Google, for quite some time, but Apple more recently, have allowed people to carry digital wallets. They also have introduced the idea of a secure enclave for things like medical information on your phone. And that's the first step in the process. Once you have your ID or vaccination status or any other secure information, verified secure information on your phone, then they can allow applications to use that information under certain conditions, including verifying yourself with your fingerprint or your face print, et cetera.

So this is a process that is taking some time. And the digital wallet is the ideal place for this type of information to end up. And the world is pretty trained on using Apple Pay to tap to do a payment. You can -- you can use that same mechanism to tap for access or for identification or for health status, et cetera.

So it takes a while, but I think we're part of this journey. And as part of deploying it, you need readers. So there's a few elements you need, and more and more of them are coming into place. But ultimately, the core elements have to be in place before someone can write an application to use all the capabilities. And I think we're coming up on that point, and we would expect to be seeing these types of applications, I would say, beginning middle of 2022. So we've always been early in these markets. That takes some time, but the time they take is actually getting shorter.

And your next question comes from William Carroll from EMPOWER Sales.

Kevin, congratulations on a good quarter. I'm -- primarily I'm an investor, shareholder long term. What revenue catalyst does the company have beyond 2022 in terms of maybe new products? Anything you can share with us in that regard?

Yes. So as I was just mentioning to the previous caller, Robert, we need to do the hardware that enables future applications. So we currently are doing a lot of work on NFC-related products. And we have a growing developer community for these products. So as those applications become available, they will drive the requirement for those readers and for reader writers.

I know that it's not an instant [add] sales overnight, but we continue to have more and more products. We've updated our products as well. We recently introduced a version of our S740 that reads all barcodes, but also reads passports and other, what's called MRZ, machine-readable zones, on international licenses, et cetera. And by doing that, you open up the market for people to check using a scanner or somebody's ID if they're in an airport or using an international driving license or something like this. So we do actually believe that we have a lot of new hardware.

The other thing that we benefit from is that many of the applications continue to add more functionality. And therefore, there's a greater audience for people who need the data capture elements. So because we don't have the complete solution, more the ingredient, it's not always easy to explain that in the short term. But there's plenty of new hardware coming that will drive sales in 2022 and beyond.

All right. Very good. And then the first gentleman that commented with some frustration about the stock price, I think the stock will take care of itself as you guys continue to deliver. All right.

Thank you very much.

(Operator Instructions) And we have Frank Quattrone from Prudential in the queue.

Okay. I'm sorry to jump in again. I do have a question on your supply chain. Is -- or how much of your supply of your so-called ingredients of your components are late to China and/or Taiwan because the CEO of Nucor was on CNBC today and he is saying that 90% of the USA to get [both China, Taiwan] and to help the companies. How much of your components come from abroad, meaning like China? And can Vietnam and/or Japan take over part of that project?

Okay. So it's a complicated question. I'll try and give you a reasonably simple answer. In terms of direct dealings with China and/or Taiwan, we currently have no direct dealings in terms of supply with either of those countries, in terms of direct supply.

However, many of the components used by our subcontractors who are currently in Mexico and Malaysia get components from China because theirs is the only place that's available. Whether it's good or bad, we didn't have enough volume to deal direct with many of the suppliers in China, and we've avoided China for the last number of years because of that.

So -- but there are many components at the lower level, resistors, capacitors and other basic components, that are only available through China. So I would say we don't have a huge exposure, but we do have an exposure. And I think the hardest part with the supply chain situations at the moment is that the shipping particularly doesn't work well. And when you're shipping things like batteries, we were generally getting batteries 20 days after they shipped from China. Now those same batteries can be stuck in a boat for 4 to 5 months.

And we've had that situation now because -- and this is the question that was asked previously. We can make the decision to source those components or -- from other places and then pay additional freight costs to make sure there's no supply interruption. But today, it's an everyday battle to make sure you have components. And we're very confident that we have components through the beginning of 2022, but we're working hard every day to make sure that, that's an ongoing situation. So there's no simple answer to your question, Frank.

Well, I did see a segment on 60 Minutes, and I did see the shipping problem where these tankers are sitting out there for months and they just can't be unloaded or uploaded or downloaded, whatever they have to be. It's horrible. And I emphasize with you.

And the next question comes from [Junie Karl].

(Operator Instructions) Speakers, can you hear me?

Yes, we can hear you.

Okay. (Operator Instructions) And we have nobody else on the queue right now.

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

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating, and you may now disconnect.