Socket Mobile Inc (SCKT) 2021 Q4 法說會逐字稿

Welcome to the Q4 2021 and Annual Financial Results Management Conference Call. My name is Adrianne, and I'll 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 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 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 involve 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 that 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 of 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 acceptance of Socket'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 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. On the phone with me, I have Kevin Mills, President and CEO; David Holmes, Chief Business Officer; and Lynn Zhao, Chief Financial Officer.

I'll now turn the call over to Kevin Mills. Kevin, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. I want to start with a quick review of 2021 and our Q4 results. And I'll hand the call over to Dave Holmes, who will outline the product adjustments and improvements in our go-to-market strategy. We believe these improvements will enable Socket Mobile to maintain its track record of growth for the next few years.

2021 was a very good year for Socket Mobile. We grew our revenue by 48% to $23.1 million. We maintained our gross margin in the 53% range and reported operating income of $2.7 million. Lynn Zhao will provide a more detailed breakdown of our financial results in a few minutes.

Our 2021 results show the progress we have made as a company over the past 12 months. We achieved these results in a very difficult environment by maintaining our focus on the data capture market and a great deal of hard work by our amazing team here at Socket Mobile.

The improvements also highlight the benefit of our application-driven business model and the leverage it brings over time as we continue to benefit through the success of our application partners.

Switching to our Q4 results. In Q4, we grew our revenue by 31% to $6.1 million. Our gross margins were slightly lower at 52.1% primarily due to increased costs associated with supply chain difficulties, resulting in an operating income of $700,000 for the quarter. These are very good results for Q4, which is a seasonally weak quarter for retail-related deployments.

So we enter 2022 a significantly stronger and better company than we entered 2021. In addition to the financial progress we made in 2021, we also learned a great deal from our application partners and feel we are much better positioned to serve their going forward data capture needs.

I'd now like to turn the call over to Dave Holmes, who will outline how we will better serve this market moving forward. Dave?

Thank you, Kevin, and good afternoon, everyone. When I joined Socket in the middle of last year, we embarked on a mission to strengthen our strategy to become a more comprehensive data capture company. We made great strides in the NFC market, which you may have heard about in our previous calls. And today, I'd like to highlight another key element of that strategy, the announcement we made earlier this week introducing the SocketCam C820.

This is the first member of the new SocketCam software product family that turns any mobile device into a high-performance barcode scanner. We think this is a critical piece in the data capture journey.

Today, Socket Mobile scanners are primarily used in the performance-sensitive portion of the data capture market, which we have a commanding market share in. However, our application partners have end users with different data capture needs and are often not data capture experts. They typically only add our Capture SDK to support Socket scanners when their customers run into performance issues.

Our research and experience tell us that data capture is a journey and our end customer requirements evolve over time. Through our customer feedback, we know that roughly 70% of our end users started out using a keyboard or camera-based scanning before they came to a Socket scanner.

While free scanning works very well in low volume, well-lit environments, it can struggle as volumes increase or conditions become more difficult. The addition of the C820 will allow our development partners to bring Socket's scanning expertise and capabilities to a much wider audience, allowing our app partners to serve all their end users, from the price sensitive to the performance sensitive with one integration.

Enabling the app for the entire journey allows the developers to service a much bigger audience, eliminates the burden of lengthy and technical onboarding processes and allows the end customers to select the best tool for their particular situation.

We will continue investing in the SocketCam family to offer data capture solutions that benefit our developer community and end users. We have an advanced version available -- we will have an advanced version available on a subscription basis later this year. And we think this is a critical evolution in how Socket serves the entire data capture journey.

With that, I'll turn it over to Lynn for more details on our financial results. Lynn?

Okay. Thank you, Dave, and good afternoon to everyone. We are very pleased with our 2021 results as we continue to grow our business and strengthen our financial position. We drove strong double-digit year-over-year revenue growth, gross margin improvement and a record of operating profitability while continuing to invest in product road map.

Year-over-year, Q4 revenue was up 31% to $6.1 million and annual revenue was up 48% to $23.2 million, driven by strong demand for our products as we benefited from the economic recovery and the flywheel effect of our application-driven business model.

Q4 gross margin was 1% lower than a year ago due to the rising component cost. For the year, however, our gross margin is 1.5% higher, which is a benefit of the increased revenue.

Although we are confident that our focus on navigating the supply constraints will enable us to continue to meet our customers' needs, the ongoing industry-wide electronic component shortages could result in future higher component production cost.

Operating expenses in Q4 were $2.5 million increased 28% over the prior year quarter. Spend on engineering and the product development led the way as our priority investment area increased 46%. Increases in general and administrative and sales, marketing and customer support are 28% and 19%, respectively.

Our full year operating expenses increased 18% compared with the prior year if excluding the noncash goodwill impairment charge of $4.4 million in 2020. The increase in 2021 reflects the costs associated with higher headcount, investment in technology, consulting and external professional services and increased compensation related to improved company performance. We believe our continued commitment to invest in talent and the technology is essential to provide a new product offering and to better service our development partners.

In Q4, we had a net income of $1.1 million, including a deferred tax benefit of $299,000 compared to $1.9 million in the comparable prior year quarter, which included a gain of $1 million under forgiveness of PPP loan. Net income for the year was $4.5 million, including a deferred tax benefit of $1.9 million compared to a loss of $3.3 million in 2020, which included $3.3 million of goodwill impairment charge, netting off the gain on PPP loan forgiveness.

The deferred tax benefits recorded in 2021 are due to the recognition of tax deductions resulting from disqualified disposition of incentive stock options, disposition of nonqualified stock options and the divest of employee restricted stock awards.

Adjusted EBITDA in 2021 increased to $4.2 million compared to $1.2 million in 2020. Adjusted EBITDA margin in 2021 was 18% compared to 8% in 2020. Q4 adjusted EBITDA was $1.1 million versus $0.8 million a year ago.

Turning to our balance sheet. We continue to focus on driving strong cash flow. In 2021, we generated a record $2.1 million in cash from operations compared to $0.8 million generated in 2020. We ended the year with a cash balance of $6.1 million compared to $2.1 million a year ago. As of December 31, 2021, our inventory level net of reserve was at $5.2 million compared to $3.2 million a year ago. The increased inventory enables us to service our customers' full demand while navigating the supply constraints.

Our balance sheet has further strengthened with the current ratio of 2.7 to 1 as of December 31 compared to 1.9 to 1 a year ago.

Now I will talk about the share buyback program approved by our Board of Directors. After evaluating the company's financial statements for the year as well as the recent developments of the company, the Board determined that the company has a sufficient surplus as computed in accordance with Section 154 of the General Corporation Law of the State of Delaware for the stock repurchase program.

The use of the funds will not impair the company's capital, but rather, the company will continue to have sufficient resources to operate for the foreseeable future. And currently -- and following the repurchase program, the company's existing debt will not exceed the present value of the company's assets even if the stock repurchase program is completed in full.

The Board hereby determined that the stock repurchase program is in the best interest of the company and its shareholders, and the Board approved the program. All repurchases will be conducted in accordance with SEC Rule 10b-18. We'll enter 10b5-1 plan during the open window and our broker will execute their trades.

This wraps up our prepared remarks. Now I will hand the call over to the operator for questions.

(Operator Instructions) Our first question comes from Frank Quattrone from Wells Fargo.

Congratulations on your rate of growth considering the COVID situation and, again, the other variants that have come about. I think you've done a great job of the stock repurchase program.

I have a question as far as in 2016, you entered the NASDAQ. Now I posed a question to you, I guess, about 6 months ago. And as far as you're going to consult with the Board possibility of getting more eyes and more funds or institutional type of investors to, again, build from the New York Stock Exchange, where, again, I think that the -- these up-and-down gyrations have been horrible.

I mean the average investor -- I'm a former retail broker. So what I'm saying is people that I did speak with and have bought the company, it's been like a nightmare when they -- you see what your account is next day, it flops right back down.

I think you can get a lot more stability if you can, again, get listed on the New York Stock Exchange and stop all this flipping. I think the flipping with the interest rate rise and so forth, it should soon be over. So my question is, have you guys considered a listing on the New York Stock Exchange?

Well, there's a lot in those questions, Frank. So let me just kind of address a few of them. I think that there's a lot of instability in the market. And certainly, with a lower price and the availability of programs like Robinhood, there tends to be a lot of emotion driving the stock as opposed to fundamentals.

I think as we look to 2022, we will make a more concerted effort to get to conferences to explain our story, which we now feel is sufficiently strong. We are doing a Singular Research Conference as well as APC's Capital Research Conference in the near future. So we will reach out more. And I think you are right, the more institutional investors we can get, the more stability it will bring to the markets -- to the stock price, I should say.

And I think this is one of the reasons why we're doing the buyback program is because the market price of it doesn't reflect the value of the company. And we feel that as we have surplus cash, it would be good to show our commitment to the long-term future by doing the repurchase program.

So we have no plans in the short term to get on a second exchange. We've been on NASDAQ for many years. And as you point out, we basically -- we entered the NASDAQ market. In fact, we were on the NASDAQ market for many years, and we were on a compliance and got back in compliance in 2016.

So we hope to see some more stability in the stock price this year, especially as we get more institutional investors. I don't think we can do a lot about the Reddit or the Robinhood in the short term. So I hope that answers your question.

Yes -- in part, yes. The only other thing is, to say the Robinhood people, I think they have been slapped on the hand and just evidenced by their own stock that's been trading. Again, everything they've done, I think, is wrong.

But I think you more than qualify for the exchange. When I was with Prudential and then another major firm, we always had a problem with the smaller companies that we always have to write unsolicited and so forth. But I'm saying the -- it's just the -- in-between the quarters, I mean, if you're going to have more transparency, that's wonderful.

A buyback could help to some extent. But it can't -- like the stock jumped just pre -- well, aftermarket, I should say, jumped to like $5.68. I think it's back to $5 again. But it's that kind of thing that I think the company should look for more stability. Your growth is fantastic. You're on a 45-degree curve. That's more than average in this climate. It's amazing and I congratulate you guys. And I thank you again for answering the question.

We appreciate the questions, Frank. Thank you very much.

(Operator Instructions) And we have Frank Quattrone from Wells Fargo.

I do have one more -- I have about 15, maybe 20 of my former clients that come to me and look for various recommendations. Now the other problem is the understanding of the -- I'm not a computer guy myself. I mean -- but these people are much more advanced than I am. But I think if you can kind of lay it out in layman terms and explain from that point where we can get a little more transparency as far as these products are coming online and exactly what they mean down the road for, I think, you had quick explanation to the previous product and the new ones. I've gotten 2 calls and nobody really understands. Maybe the computer geniuses and kids today, they could probably understand it much better than an old war horse like me.

So let me try and explain a little bit. So we are dependent on our developers to enable our software so that people can use our scanners. Our research has shown that many of the people who buy our scanners have gone from keyboard or camera-based keyboards -- camera-based scanners to our scanners.

And what we're trying to do is to ensure that we service those customers earlier to smooth out the onboarding process so that as they need more functionality out of their scanner, they can use the current application they have.

Today, it often takes us an extra year to even 2 years when customers need to use the more performance-centric scanners, but their application doesn't support it. So there's a development cycle, and we're trying to minimize that development cycle to make it easier for people who need performance-based scanning.

It's a little bit complicated, I would agree. Our business model is a little bit complicated because we sell through our application partners and -- where we enable -- they enable their customers to buy our products.

So this is why we refer to it as a business -- an application-driven business model because the application comes first. We're trying to improve what -- or effectively have improved the loss on our web page, how we inform people about our story. And I think as we go out to investors, that's an area we'll continue to work on to simplify the story even though it is -- the plan is a little bit complicated.

Okay. Great. The thing I do want to reemphasize again, you guys have not stumbled in the last 2 years that I've really been invested in the company. I've not seen any step backwards. A lot of companies have been really fallen back and then trying to recover has been a tough road. You guys are not there. And that's what I commend you again on that. And sorry to jump on anybody else's question. But thank you again.

(Operator Instructions) And our next question comes from William Carroll from Empower.

Yes. Just a question about the share repurchase program. Will that just be at the company's discretion from time to time? Or do you have a planned purchase activity?

We're going to enter a 10b-5 plan next week. We'll be including a 45-day waiting period as all of this is following the SEC rules. Then after that, the plan will be in our brokers hand to execute.

(Operator Instructions) Currently, we have no further questions.

Okay. So let me just finish by saying we feel we've made significant progress in 2021 and feel we've established a solid foundation that will enable us to grow our revenue and importance in the data capture market in the next few years. And I'd like to thank everyone for your time and interest in Socket Mobile and 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.