Socket Mobile, Inc. (OTCQB:SCKT) Q4 2008 Earnings Call Transcript February 18, 2009 5:00 PM ET
Jim Byers – MKR Group and Investor Relations
Kevin J. Mills – President and Chief Executive Officer
David W. Dunlap – Vice President and Chief Financial Officer
Paul Bornstein – Black Diamond Advisers
Walter Ramsey – Walrus Partners
Greetings and welcome to the Socket Mobile Incorporated fourth quarter 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, Jim Byers with MKR Group. Thank you. You may begin.
Thank you operator. Good afternoon and welcome to Socket's conference call to review financial results for its fourth quarter and year ended December 31, 2008. Online today are Kevin Mills, President and CEO of Socket and Dave Dunlap, CFO of Socket.
Socket distributed its earnings release over the wire service at the close of today's market. The release is 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 completion of this call 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'd like too remind everyone that this conference call may contain forward-looking statements within the meanings 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 our new handheld mobile computer products including details on the timing, distribution and market acceptance of the product and statements predicting trends, sales and market opportunities in the markets in which we sell our 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 our new product may be delayed or not rolled out as predicted, if ever, due to technological, market, or financial factors, including the availability of necessary working capital, the risks that market acceptance and sales opportunities may not happen as anticipated, the risks that our integrator program and current distribution channels may not choose to distribute the new product or may not be successful in doing so, the risk that acceptance of our new products in vertical application markets may not happen as anticipated and the risk that evidence of the strength in the mobile computing market may not be indicative of a trend, and other risks described in our most recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission.
With that said, I will now turn the call over to Socket's CEO, Kevin Mills.
Thanks Jim. First I would like to thank everyone for joining us today. I will begin by providing an overview of our business for 2008 and a breakdown of Q4 results, followed by our current outlook on our market and business for 2009.
On many measures, 2008 was a good year for Socket. We grew total revenue for the full year by 10% over 2007. This reversed the declining trend in annual sales we had over the previous three years, when we were primarily a peripherals supplier dependent on third-party device manufacturers. We have successfully transitioned our business to now operate as a systems company meeting the objective we put it forth at the start of 2008. And we see increasing success under our new business model as a mobile systems company.
In 2008, we generated sales of our SoMo handheld computer of $4.7 million representing growth of 350% over 2007. Today we have more than 10,000 SoMo handheld units installed in a variety of mobile vertical markets that are running numerous applications to help drive our customer's businesses. In addition, many SoMo systems are using Socket’s plug-in and Bluetooth bar code scanners and peripherals providing a growing platform for our traditional product.
In the fourth quarter, SoMo sales increased slightly over the third quarter despite the challenges of a very volatile overall economy. We sold more than 3200 units in Q4, up from the 3,000 units sold in Q3. And we are encouraged by strong traction we are seeing in the healthcare category, which represented 77 % of total SoMo revenue in Q4.
The Good Samaritan Society, continued their scheduled rollout by adding 850 more SoMos in Q4, and will be continuing their rollout through Q2 of 2009 to complete their 3,200 unit deployments. Good Samaritan has also agreed to participate in exhibiting their application with Socket at the Annual Healthcare Information and Management System Society or HIMSS show in April. HIMSS is the largest healthcare show of the year.
We also saw good SoMo growth in Europe during Q4. We shipped over 1,000 SoMos for the first time in a single quarter to Europe. And again, these shipments were mostly for healthcare. We are continuing to see strong interest from Europe in the SoMo and have already booked over 2,000 SoMos for deployment in Europe during 2009.
The global nature of the healthcare opportunity is underscored by our recent announcement of a newly signed U.K. based VAD partner, Decoder, who will be initially focusing on the U.K.’s National Healthcare System.
We are excited about the continued market acceptance and growth of the SoMo handheld product line. And the continued momentum it is helping us build in the business and medical mobility market where we have greater control over our business and long-term sustainable growth.
In 2008, the SoMo product line represented 17% of Socket's total revenue. While this growth has not yet significantly contributed to Socket's overall growth, we believe its impact will be more significant and noticeable going forward, as SoMo sales continued to grow and represent a larger percentage of our overall revenue.
Turning to other segments of our business. Our OEM business performed very well in 2008, growing 42% from $6.5 million in 2007 to $9.3 million in 2008. This growth was driven by our embedded Bluetooth module business, which benefited from end of life situation primarily in Q2 and Q3 with sales to a major customer. The OEM business also grew its wire LAN related revenue by 75% in 2008 and we expect this portion of the OEM business to see accelerating growth in 2009.
We do not anticipate the Bluetooth business to experience similar sales this year, since there are significant market dynamics happening within the Bluetooth cordless area. In Q4, our OEM business performed as expected. Due to longer lead times and contractual obligations, the business was less impacted by the general economic and financial market condition.
Within our data collection business in 2008, we saw a revenue decline by about 23%. Some of the decline was forecasted and expected. Our plug-in data collection revenues were anticipated to decline in 2008, since there was a significant reduction of available slots in the market.
With Dell exiting the handheld market and other manufacturers following suit, we knew that even with the growing number of SoMos, it wouldn't be enough to overcome the difference. Our Bluetooth cordless barcode scanning products declined by 20% in 2008. This decline was disappointing, especially since with expected this market would grow.
The Bluetooth cordless hand scanning revenue declined for the year by approximately $700,000, or about equal to the two large returns we had in Q4. These returns can be directly attributed to the customer's inability to pay due to the economic downturn. Dave will discuss this in more detail in a few moments.
Overall, we believe we should have done better in the Bluetooth cordless data collection category and have taken actions to improve our performance in this category going forward.
In Q4, the rest of our business slowed dramatically as everyone put off our delayed purchases and deployment trends as companies initially froze spending, then cut expenses as quickly as possible.
We did see increased bookings in December, which carried forward to 2009 and allocated monies were used, but very little came with urgent deployment needs. Overall, we view the 10% growth we achieved for 2008 as respectable but disappointed, based on the strong gains we achieved after the first three quarters. This is the equivalent of shooting a level par round with a Triple Bogey on the last.
In Q4, we saw the business slow in October and slow very severely in November and then resume in December, but not quick enough to make a difference. So Socket, like everyone else was and continues to be negatively impacted by the economic slowdown. As a result, we've taken significant actions to reduce our expenses based on the expectations that the slowdown will remain for a while.
I would now like to give you more detail on our strategic plans and outlook going forward. First, we have implemented substantial cost reduction plans, including reducing headcount and reducing salaries to the remaining staff. These salary reductions ranged from 10 to 40% plus based on the current salary ranges of the individual. Based on these actions, we have lowered our cash break-even revenue to $5.5 million per quarter, which is $2 million less than our previously required revenue levels to reach cash break-even. We believe these lower levels are achievable in today's markets.
Secondly, we had generated a substantial portion of our SoMo handheld revenue from the healthcare sector. We have strategically targeted and believed this will be less effective than other areas of the economy during 2009. In addition, this quarter will complete the development of our medical mobility line of products, which will be launched at the HIMSS show in early April. This includes our SoMo 650 RX and docking cradle that SoMo made with the plastic and impregnated with antimicrobial material, which helps to reduce the spread of bacteria, an important consideration in hospitals today.
The SoMo 650 RX has not contributed any revenue to date but should provide a positive contribution going forward. In addition, we are launching a medical Bluetooth cordless bar code scanner the 7N RX and a medical plug-in bar code scanner the 5X RX to complete the medical mobility product line.
The fact that we completed the majority of these development initiatives in Q4 has allowed us to reduce expenses without impacting our ability to bring vital products to the healthcare market, thereby enabling us to maintain our focus and gain further traction in marked positions in the healthcare sector.
We also believe the economic stimulus package will help us going forward. In all, $19.2 billion is set aside for healthcare information technology, which includes significant incentives for both physicians and hospitals, who make progress in moving to electronic healthcare records or EHC. This is an area where the SoMo is already gaining traction and excels in terms of its processing power and portability.
We are also anticipating other countries will provide funding in the healthcare area as the problem is global in nature, much as the current economic crisis is and government spending in this key area is very likely across the world.
In summary, we believe, we are well positioned with strong products and markets, and the cost reductions we have completed will enable us to conserve our resources during these challenging times to emerge stronger when the economic markets improve. We have made significant reductions in our expenses to achieve break-even at reduced revenue levels and feel we have sufficient opportunity in our pipeline to meet these reduced levels.
I would now like to turn the call over to Dave for his comments.
Thank you, Kevin. As Kevin reported Socket's annual revenue for 2008 was a record $26.6 million, up $2.4 million or 10% from 2007 despite the sales weaknesses that we experienced in the fourth quarter. The SoMo family of handheld computers first introduced in 2007 was our strongest contributor to growth generating $4.7 million, or 18% of our revenue, up a total of $3.4 million from 2007 levels.
Our OEM product sales were also at record levels of $9.3 million, or 35% of our revenue, up $2.8 million from 2007 levels of $6.5 million. Sales of our OEM Bluetooth module and products grew by nearly $1.9 million and sales of wireless LAN modules and products grew by another $900,000. Partially offsetting these increases we're declines of $2.8 million in sales of our data collection family of products, much of which occurred in the fourth quarter as part of a general business slowdown that began near the end of October and continues through November.
The uncertainty caused by market turbulence in the fourth quarter and the efforts by companies to reassess through spending plans resulted in delays, but not cancellations as many of the projects, that we have been tracking. We saw a pickup of sales in December but not enough to makeup for the first two months slowdown.
Fourth quarter results were also affected by an unusual return of $722,000 of data collection products from two resellers to two of our distributors. Our anticipated sales to their customers have slowed down. Since we defer revenue recognition until product is sold out of distributor inventory. These returns reduced our fourth quarter revenue recognition. After these returns, fourth quarter revenues would have been $5.6 million. Such returns within the distribution channel are very unusual and there have been no further returns this quarter.
Our operating expenses for 2008 at $15.1 million declined slightly from operating expense levels from $15.3 million in 2007. And our operating expenses for the fourth quarter of 2008 of $3.6 million, compared favorably to operating expenses of $3.8 million in the fourth quarter a year-ago.
We use cash for operations before working capital changes for the year at $1.3 million. Of which $1.2 million was used in the fourth quarter due to the unanticipated sales slowdowns in that quarter.
As Kevin reported, because of the uncertainties associated with the timing of customer and partner program sales opportunities that we are tracking, we took the steps in the middle of December to reduce our workforce and to defer new hires. Our workforce today is some 18% lower than it was at the end of the third quarter. In addition, we have reduced compensation levels and deferred discretionary spending to bring our break-even point in the first quarter down from revenue of $8 million to nearly $6 million. And our first quarter operating cash break-even point has now reached a quarterly revenue levels of $5.5 million.
We can and are prepared to reduce our expenditures further in the second quarter should there be a need to do so. But we believe absence an additional unusual market conditions and based on the customer opportunities that we are tracking that we have paired back or operating expenses sufficiently to weather the current market slowdown that we have been seeing.
Our backlog at the end of the year, orders on hand that are scheduled to ship in the next quarter were back to more normal levels of $1.2 million and our shipments and shippable orders to-date this quarter are now over $3 million. Sales momentum has continued to accelerate through the middle of February and our outlook of March is for a continuation of this trend.
Our cash balance at the end of December was $757,000 compared to cash of $5 million at the end of December a year-ago and cash of $4.1 million at September 30. As I mentioned, we used $1.2 million in cash for operations before working capital changes in the fourth quarter and with working capital contributing $200,000, we used net cash from operations of $1 million. An additional $2.3 million was used in the fourth quarter to pay down our bank line resolving credit balance by $2 million from $3 million to $1 million and to pay off an installment loan of $300,000 with our bank.
I'm pleased to report that our revolving credit line of $2.5 million has been extended to end of March 2010. We also expect to bring down our inventory balances during the first quarter from end of year levels as we adjust to lower sales activity further freeing up our cash.
On the Investor Relations front, Socket will be participating in the Security Research Associates’ Technology Investor Conference taking place in San Francisco on Monday, March 9. We plan to webcast that presentation and will announce the time of the webcast about a week before the event, or you may view the webcast on a delayed basis any time thereafter.
Socket’s annual meeting of stockholders will be held on Wednesday, April 29, 2009 at the company's headquarters in Newark, California. All stockholders of record on March 2, 2009 will be entitled to vote. On the ballot are the Elections of Directors and ratification of the selection of the company’s auditors for 2009. Stockholder materials will be distributed during the second half of March.
Now let me turn the call back to the operator for your questions. Operator?
(Operator Instructions). Our first question is from Paul Bornstein with Black Diamond Advisors. Please go ahead with your question.
Yes. Hi guys. I guess you’re making a little progress, at least on the cost side. I guess from the last call business has slowed down. And I'm just curious what is your expectation of cash flow break-even given that you have reduced the cost. I'm wondering if you’ve reduced them enough. And have you guys reduced your salaries enough where there is enough incentive, because with your one-for-ten reverse, the stock really doesn't trade and it really hasn't gone anywhere since the last call a little while back. So I’m just kind of wondering, what are the goals for 2009, in terms of financial goals? So far you really haven't hit them. It is not a disaster, but given where you were, and you haven't been cash flow positive for a number of years. And so I'm just kind of trying to understand where you think you are kind to be going. I talked to a lot of CEOs, no one can really can predict what the economy is going to do next within six months because there is too many uncertainties. So I'm just wondering if you can cut cost enough to get to the cash flow break-even level?
So, you had a number of questions in there Paul.
Let me try and answer them and Dave can also assist here. First on our cash flow break-even. We’ve reduced our number so that the cash flow break-even at 5.5 million. And again Dave can correct me. We were positive cash flow both in Q2 and Q3 of last year. So we had been cash flow positive as we entered Q4. In terms of salary reductions, the amount of salary reductions varies but I would say among the executives there are higher earners. Our average salary reduction is probably in the 30% range per person. And so, that's substantial. Yes, we believe we have reduced our expenses to be inline with our revenue. We are seeing I would say some uncertainty in the market. We are seeing less uncertainty in certain segments, particularly healthcare. And as we pointed out in the call, we had 77% of our revenue, which was the revenue that seems to be the least impacted in Q4 in the healthcare sector. I think as Dave pointed out can reduce further, but I think we have reduced to the point where further reductions could seriously impact the long-term benefit of the company. And we have not reduced our sales force. And we have not reduced investments in what we view as being core technologies like the SoMo, wireless LAN and data collection. And so right now we're pretty lean. And to give you some perspective, our expenses have been reduced. We believe by about $1.2 to $1.3 million of a base of $3.8 million. So, you are talking about a overall reduction in expenses of about 30%. It's aggressive and we feel at these levels, we will be able to get our revenue above our cash break-even point.
Paul, Socket continuous to have a highly leveraged business model, because we do contract manufacturing for our major components. We can change the volumes fairly quickly up or down. And in terms of upward, we can do that at a lower unit cost as the volumes grow. We don’t have a lot of capital expenditures and other things required in the manufacturing side. And there is a lot with capacity. On the sales side, because we use the general distribution channel for all but our OEM business, we can double the volumes through the distribution channel, and we have the infrastructure in place to manage it. So once again most of the benefits of growth go through to the bottom line. By cutting our expenses, we brought the base down. And therefore, as we start to see revenues grow again by keeping our expenses in line with that revenue growth, you are going to get that leveraging effect. Our goals haven't changed. We are looking to generate cash from operations. And we are looking to run the company at a growing and profitable level. And we have at this point, a much better opportunity to do that by starting from a much lower expense base.
And then one last thing just on the reverse stock splits. I haven't looked at the numbers yesterday or day before. But certainly for our Board meeting, it was interesting because we did a little look back and the average volume has increased by 70% since we did reverse stock splits, which I know is contrary to what people expect. But we have had more volume in the stock, after the stock the ten-for-one reverse splits than we had prior, it was six months prior at least.
Okay, I guess when you start off very low level. I guess you can have a big increase in volume.
Well, yeah, but it is going the right way.
Yeah, well, I mean if you’r a shareholder you like to see stock go up with a little volume and/or more. So, we haven't seen that yet and hope we have to leverage here in order to make it happen on a continual basis be cash flow positive, because we don't have a lot of cash left, and so you can't be negative anymore?
Okay, we understand this.
Okay, all right. Hopefully things will improve significantly next two quarters.
(Operator Instructions). The next question is from Walter Ramsey with Walrus Partners. Please go ahead with your question.
Hi good afternoon. Thanks for taking the call. In the press release you indicated there are approximately 200 either current or developing business application for the SoMo. Can you quantify how many are actually done and operational? And how many are still in development? And what do you think the ones that aren't being sold will turn into?
Okay. I would say that of the 200 VIP partners, we probably have about 20% currently contributing. Okay, so we still have a lot of people who are finishing applications are beginning rollout, and whether they be internal or to the markets. So, I would say, we probably are on the 80:20 rule right now where we have 20% generating most of the revenue. And we are seeing opportunities as we pointed out both in the healthcare opportunity, and there is a number of companies with programs to help automate various processes, whether it be drawing blood or dispensing medications, et cetera. We are also seeing a lot of traction and hospitality. And those two, I think, are beginning to standout as the two categories where we are seeing the most. We have announced a number of initiatives. Our customers who have done applications in the education markets, we announced with Plasco who have a truancy and student monitoring system, which they’ve just started. And I believe we have about a 100 units sold. They just started in Memphis, Tennessee at a school and now they intent to bring that application to all the schools that they can reach out to across America. We also have a very good application in the library space. We have worked with a very good partner, EnvisionWare. They have just completed their software. Again they bought maybe a 100 units so far. And they are installed in 6,000 libraries. Where there are mobile library systems, they are currently going through final trials. They've hired more people to sell this. So we would expect companies like that to really help us, generate more revenue going forward. The list is quite extensive. We are trying to put as much as we can up in our web page. And now to categorize into different areas and we continue to do that and this is why, I think, we have a very good leverage sales model.
Yeah, I think the count, Walter, on our web page probably will give you visibility on about 160 of those partners. So, that's a good place to certainly take a look.
Okay. Now last year the SoMo contributed little less than 20% of the total revenue. Do you have an idea of what it should do this year?
Yeah, we would expect it to be up in the 40% range. We expect the SoMo to be the driving force. When we did with the SoMo two years ago, we were at that stage a 100% peripherals company. We said back then, and it is still true now that once SoMo is about 30%, then it would really start to be enough of an engine to drive the company. And we were close to that in Q4, but we were close to that for the wrong reasons because the rest of the business basically suffered in the economic situation. But I believe by second quarter, we'll be in the 30% range and then I think you'll see better acceleration of growth.
In the international business is that showing any more life than the domestic or how's that doing?
Actually I would say the international business has not been as badly impacted as the domestic business. The dip in Q4 wasn't as severe and they have seemed to recover. And as I mentioned in my remarks, we already booked over 2,000 SoMos for deployment in Europe, one in Sweden, one in Germany. And again those will rollout on a 100 units a month, but they are both good, long-term prospects and we are seeing good traction in markets in Europe, particularly with the SoMo.
And there are a couple of factors, Walter that will help in the international space. One, we added foreign language support, international language support last summer and in particularly in countries like Germany, the availability of the German language on the SoMo has been very helpful. In addition, as we have seen some of the larger computer manufacturers changing their emphasis and moving away from the classic handheld computers at the consumer level. Siemens was one of those in Germany that's done that and their Loox has been come off the market. And that was a very popular model in Germany and the SoMo is an ideal replacement for that particular device. So, we saw orders in December, for example, from several hospitals in that area that are looking to begin deploying the SoMo as a replacement for either HP units or for the Loox.
And then the two resellers that returned the $700,000 worth of products, did they just do a lot of business or what was their story?
Essentially there was inability to pay, and I think as Dave pointed out it's a very unusual situation and we are pretty conservative in the way we recognize revenue. We only recognized revenue on sales out of distribution. Certainly in the 14 years, we did not have this situation. But ultimately the reseller told the distributor, “I can't pay. Do you want the product back or you want the bad debt?” that type of situation so we took the product back.
In the largest case, I think the reseller had purchased the product from the distributor in anticipation that it would move on to the customer. And then the customer apparently ran into some unanticipated delays, and the ability of the reseller to pay for that product, while holding in inventory apparently was limited. All of our distributors in fact have very limited return rights. But in this case, I think they made a business decision faced with the inability of that reseller customer of theirs to pay. And because, we rather have a conservative revenue recognition policy of waiting until product ships out of the distribution channel, because we very seldom see any type of returns, that's been a pretty good policy for us. Where in this case where our product did came back then it did have an offsetting effect.
And then just one last thing. I don’t know maybe I heard this wrong, but during the presentation did you say that orders so far in Q1 were already $3 million?
Yes, the orders on hand that are shippable this quarter have now passed through $3 million mark.
I mean that sounds fairly high. So that's why I was wondering.
Well it starts with $1.2 million in backlog, so recognize that orders are coming in the latter part of March often are products that we ship in the following quarter. But we also tend to find that the second half of the quarter becomes the stronger period, first quarter has that typical pattern. And our own internal views of the business that we are tracking is suggesting that pattern will continue. So, we are looking for further acceleration of orders coming in over the next six weeks.
And we have seen a pickup in the pace. First two weeks of the year were extremely light. We saw an increase in sales activity, I would say over the next two to three weeks, without receiving a lot of orders. But we are beginning to see orders now coming in as people are making decisions to proceed cautiously in this environment.
So the odds are reasonably good, you can make the $5.5 million this quarter?
I think they are reasonable. I mean again, I just would caution that there has been uncertainty. We have been very transparent. We are telling you where we are and we feel good about it, but and we are half way along at the half way point, which is not a bad spot to be in.
Great. Now it sounds good actually. Okay, anyway thanks for taking all the questions. I appreciate it.
Thank you. Welcome.
(Operator Instructions). There are no further questions in queue. I'd like to turn the call back over to management for closing remarks.
Okay, we just like to close by thanking everyone for participating in today's call and wish you all a very good day. Thank you.
This concludes the teleconference. You may disconnect your lines. Thank you for your participation.
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