Socket Mobile, Inc. F109 Earnings Call Transcript

Apr.23.09 | About: Socket Mobile, (SCKT)

Socket Mobile, Inc. (NASDAQ:SCKT)

F1Q09 Earnings Call Transcript

April 22, 2009 at 5:00 pm ET

Executives

Kevin J. Mills - President and Chief Executive Officer

David W. Dunlap - Vice President and Chief Financial Officer

Analyst

Brian Swift - Securities Research Associates

Operator

Greetings ladies and gentlemen and welcome to the Socket Mobile first quarter 2009 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, [Charles 5:57]. Thank you. You may begin.

Charles

Thank you, Operator and good afternoon and welcome to Socket's conference call to review financial results for its first quarter and virtually first 2009. 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 closed market today. We will be consulted and 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 call completion and a transcript of this call will be posted on Socket’s website within a few days.

We have 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 would like to remind everyone that this conference call may contain forward-looking statements within the meanings of Section 27-A of the Securities Act of 1933, as amended, and Section 21-E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, but are not limited to statements with respect to the distribution, timing and market acceptance of Socket’s products and statements predicting trends, sales or activity, backlog and market opportunity 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 shipments of our products may be delayed or happened 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 the Company integrator program and current distribution channels may not choose to distribute its product or may not be successful in doing so, the risk that acceptance of the Company’s products in vertical application markets may not happen as anticipated, and other risks described in Socket most recent Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. Socket Mobile does not undertake the obligation to update any forward-looking statements.

With that said, I will now turn the call over to Socket's CEO, Kevin Mills. Kevin?

Kevin Mills

Thanks Charles. First, I would like to thank everyone for joining us today. I will begin by providing an overview of our results for Q1 2009 followed by our current outlook on our market and business.

Despite the difficult economy, we continue to see increasing adoption of our SoMo handheld computer. In the first quarter, SoMo sales were up slightly over Q4 to remain at record levels. We sold 3,256 units which is almost three times the number sold in the first quarter last year and slightly above the number we sold in the fourth quarter, which is typically the strongest quarter of the year.

We are pleased to maintain good SoMo sales momentum into the first quarter, which is also one of the weaker quarters. Overall, our Q1 results reflect the three elements. SoMo sales which have based with the fourth quarter; upcoming revenue which was up $700,000 over Q4 and our OEM results where we saw a $900,000 decline in revenue over Q4 level. I would discuss each of these elements in more details and provide our outlook.

Starting with the SoMo. In Q1 that this product line represented 32% of Socket’s total revenue and continues to grow as a component of our overall revenue for our strategic goal. SoMo sales in the first quarter were primarily within healthcare and hospitality, key markets we have strategically targeted. Within the healthcare, opportunities continue to center around medication dispensing, asset control, and process control and we continue to seek further new opportunities in the various.

One of our large healthcare customers, Good Samaritan, has deployed over 2,500 SoMo units to date and we are seeing numerous additional opportunities around the world. To give some examples, in Switzerland we have three hospitals about to face orders for SoMo in Q2, one in [10:07], one in [10:08], and the third is in [10:09].

In Germany, a large group in Stuttgart is looking to supply several hundred, several units to avoid central application for doctors. Another German based company is using the SoMo in a blood sugar measuring application and we are already in the process of deploying thousand units with another healthcare group in Sweden.

We are seeing similar opportunities in the United States with companies like Epocal, a developer of enterprise point-of-care blood diagnostic products using the SoMo in a blood analysis meter. This technology is using the SoMo for healthcare compliance.

While ramp up of these opportunities is typically a slow and steady process especially in the current market environment, we are please with the positive market response we continue to see through our products in healthcare which we believe is a validation of our strategic sales focus.

To further strengthen our position in healthcare, we recently introduced a complete family of medical mobility devices, the RX family, consisting of the SoMo 650 RX, a version of the SoMo made with plastic and impregnated with antimicrobial material. This material helps reduce the spread of bacteria that can survive on the SoMo hereby reducing the strength of bacteria.

We also introduced a plug-in to the barcode scanner, the 5X RX and two versions of our Bluetooth Cordless Hand Series 7 RX barcode scanners. All of which contains several antimicrobial material in the plastics. The two cordless barcode scanners, the 7N RX and the 7X RX, can be used in conjunction with the SoMo or any cordless or notebook computer already in used at hospitals or other healthcare environments.

The RX family of products was well received at the HIMMS Show earlier this fall. The RX family of products uses the same guts as the standard version and therefore completely compatible which would shorten acceptance cycle for companies adopting the RX family.

We also continue to see very good interest within the hospitality market for the SoMo which seems to be increasingly viewed as the ideal waiter pack. The SoMo is partly for taking orders at the table which is then transmitted via Wi-Fi to the kitchen. Companies like Digital Dining who have many independent resellers are now offering the SoMo as a recommended device. Unlike healthcare which, as an industry, is more robust and unlikely to stay robust, the hospitality market is moving more cautiously in this times but we believe it will be a key driver of the SoMo business as the economy improves.

Turning to our data collection related business, we saw this business recovered in Q1 but sales levels improving while still lower than historical level. In Q1, we did $1.7 million of business about 33% lower than the same quarter last year but off over 71% from Q4. The increase of 71% is an accounting aberration since we had a large one-time return in Q4 which accounted for our lower Q4 revenues. Without this one-time return, the Q1 and Q4 results were essentially flat.

The barcode scanning business has suffered due to the economy. The good news is we are taking steps to respond to the situation as the product arise and there are signs of increasing purchasing interest and activity. We have also recently released an improved version of our Bluetooth Cordless Hand Scanner at a more aggressive price and we launched our Bluetooth Cordless Ring Scanner. We have added two new products to the Bluetooth Cordless Hand Scanning range, the 7N RX and the 7X RX both of which have antimicrobial plastic housing. These versions target the healthcare market and are ideal companion products to the already installed computers or computers on wheels or carts that are already used in the hospital.

The 7X is a new 2D cordless scanner which we expect to ship in early Q3 and supports the many 2D barcodes that are becoming increasingly popular in hospitals.

Turning to the other segments of our business, our OEM business performed much as expected in Q1. As we continue to complete end of [live sales], our larger Bluetooth customers and move appropriate to Wire LAN. Going forward, we expect the Wire LAN business to be the driving force of the OEM business. The Wire LAN opportunity is both large and long term and we believe the complexities of Wire LAN make our solution ideal. We are experts in Wire LAN and have our module certified to the highest standards like CCX to ensure that our SoMo can offer it seamlessly in these complex environments. We are able to deliver the complete Wire LAN solution to customers who need these capabilities and lack the engineering expertise to develop these concerns. Long term, we expect Wire LAN business to be a solid contributor to both our caller SoMo expertise and our revenue.

Overall, the economy is still very difficult. We see significant opportunities ahead but in these cautious environments customers are currently moving forward at a slower phase. Today, we are primarily servicing a smaller market consisting of those with urgent need and the budgets which is why so many opportunities are in healthcare. However, we see these opportunities as representing only the tip of the iceberg in terms of the long term opportunity for stockers as conditions improve.

In the meantime we have taken substantial actions to reduce our expenses in the networks to achieve both cash positive and breakeven levels in the short term without eliminating essential core expertise.

In summary we believe, we are well positioned with strong products and markets, and that the cost reductions we have completed will enable us to better conserve our resources during these challenging times to emerge stronger when the economic markets improve.

I would now like to turn the call over to Dave for his comments.

David Dunlap

Thank you, Kevin. Revenues for the first quarter of 2009 were $4.8 million, a decline of $100,000 or 2% from the previous quarter and a decline of $1.4 million or 28% from the first quarter a year ago. Revenue is generated by Socket’s computer and peripherals business and by its OEM business. Our computer peripherals business includes our family of handheld computers, our data collection products, including barcode scanning peripherals, RFID and Magnetic Stripe Readers.

Our legacy connectivity plug-in products including modems and Ethernet cards and our service revenues relating to these products. Our OEM business consists of products designed as third party products including Bluetooth and Wireless LAN modems and cards using the technologies that we build into our own products. We also classify our legacy serial products as part of our OEM business.

As a way of background, 2008 was a record revenue year for the Company up 10% over the previous year despite a significant slowdown in our business we recorded in the fourth quarter and that we attributed to business cautions among our customers over general economic conditions. For the fourth quarter sales decline, our 2008 results for computer and peripheral products compared to 2007 was essentially flat, a $15.8 million in 2007 versus $15.6 million in 2008. On the positive side, our SoMo product family sales grew by $3.4 million to $4.7 million in 2008, however our barcode scanning sales declined by $2.7 million or 23%, on our legacy connectivity product sales declined by $850,000 or 35%, effectively offsetting the growth in handheld computers.

Fourth quarter barcode scanning revenues were also reduced, as Kevin mentioned, by a one time return of $700,000 for products from resellers to our distributors and that further reduced fourth quarter 2008 product revenues to $3.1 million.

In the first quarter, computer and peripheral product sales increased to $3.9 million with sales of barcode scanning products holding at fourth quarter sales level asking for one-time return. Year 2008 was also a record revenue year for our OEMs business with revenues of $8.3 million in 2007 increasing to $11.9 million in 2008, $6 million of our 2008 OEM revenues were from the sales of Bluetooth modules that reached their end of life during 2008. The sales of these modules were in the third quarter of last year and these sales completed we experienced to draw [19:53] sales in dollars in the fourth quarter of 2008 and an additional drop of $900,000 in the first quarter of 2009. Thus the increase in computer and peripheral product revenue of $800,000 in the first quarter was effectively offset by the drop in OEM revenue in the same quarter.

As we look forward, we expect our computer and peripheral business to resume growth in handheld computer sales based on increases in activity in our sales pipeline including the F1 exposure, our antimicrobial model received at the recently completed HIMMSS Healthcare Show. New data collection products such an updated version of our Ring Scanner that is now shipping and antibacterial version of our Cordless Hand Scanner and our compact class card like in barcode scanner does not include the healthcare industry are also expected to contribute to revenue growth.

Looking forward, the OEM group is completing an update of our Wireless LAN technologies replacing 802.11bg technology cards and modules with newer 802.11abg technology card and module that are faster and worked well in a secure mobile environment. These products were shipping in combination with our Wireless LAN software that includes the Cisco CCX4.0 extension and are being adopted for a number of our OEM customers.

As we viewed the economic landscape in the middle of the fourth quarter, it was apparent that we needed to scale back our operating expenses in order to counter the effects from business slowdown and get the Company back on track to achieve positive cash flows and profitability at reduced operating levels. We initiated in December a number of cost reduction steps that have included streamlining our operation and reducing our headcount which today is around 70 employees worldwide compared to 89 employees five months ago.

We have also reduced employee’s salaries and discretionary costs. The salaries costs will be placed back in as our revenue levels improve. As result of these actions our operating expenses in the first quarter of 2009 were $2.9 million compared to operating expenses of $4 million in the first quarter of 2008, a reduction of 28%. Further cost reduction actions taken at the end of March and the seasonality of added expense which is concentrated in the first quarter are expected to result in a further reduction of operating expenses in the second quarter.

Total cash flow for the first quarter was positive. The cash increasing from $757,000 as of December 31st, 2008 to $1.4 million at the end of March 2009, we achieved positive cash flow from operations during the quarter resulting from improvements in our working capital balances and we also made prior draws on our bank line compared to year end. As expected in the slower economy, we decreased our inventory balances by $1 million and our accounts payable balances by $800,000 and we will continue to closely manage both the operating results and our working capital balances as we move through the next few quarters.

Socket will hold its annual meeting of shareholders a week from today on April 29th, 2009. Seven current directors are standing for reelection and the appointment of Moss Adams to continue as our independent auditors for 2009 is also being voted upon.

We will also be presenting to investors attending the American Electronics Association Micro Cap Conference on May 4th, 2009. One of the 30-minute afternoon sessions will be webcasted which will give us a chance to update investors on our progress. We will announce more details in the webcast as the conference date approaches.

Now, let me turn the call back to the operator for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Swift - Security Research Associates.

Brian Swift - Securities Research Associates

My recollection was of the Good Samaritan order that you got a year ago was going to be very well spread out and coming I think to completion in Q2, can you bring us up to date on that and what maybe you might have lined up to be replacing that because I guess the one silver lining in the quarter was the fact that the SoMo revenues are holding up and hopefully as we kind of regain footing in the economy that we have seen in the growth period or the growth rate that is at hand, what is kind like to see what do you have or what your pipeline is like and what kind of comfort level where you have will be able to see another growth spur in the SoMo handheld? I know you have the RX models coming in to play and I did talk to somebody over in the United Kingdom for that application over there for barcode scanners for patients who are going into the hospitals and so on. Can you give us a little idea how I can hold in and in relation to one of the steady customers that you have?

Kevin Mills

Okay. So, I think that as we said that Good Sam had a roll out of 850 SoMos and right now we have 25 but we expect as they will supply the next 700 units in Q2. We do not know if they will have further deployments or if they will upgrade any of the units to include barcode scanners all the things going forward and obviously when we started Good Sam was a large percent when we started the 500 units at quarter out of our [26:45] represented 50%. Today, there are 700 units out of 3,500 represent the smaller number.

We are seeing similar opportunities from a number of sources including in Europe. I mentioned that we have a roll out beginning and with the Company in Sweden they have placed an order for thousand units of which I believe they have only taken 135 to date and we would expect then to be picking up the pace by the time we get to the end of Q2. We also have a larger opportunity in Germany where again the order has been placed. The order was actually combined with another hospital but the total order was a thousand units also but they are expecting to take 500 units again in Q2 and Q3 and again today we only have deployed I think somewhere in the region at 10 to 15 units.

Today, we do have a lot of opportunities both in the medical space and the hospitality space. So, I am pretty confident that we will be able to replace the Good Sam business going forward as we have a lot of people who are very much in the early stages and have been I would say moving forward slowly but moving forwards, and then with any type of uptick in the economy we think to pace of this will take off.

Brian Swift - Securities Research Associates

Okay. Thank you. And that the United Kingdom opportunity that I mentioned, I think the demand date is effective July 1 of this year, when do you anticipate demand that might start impacting your….?

Kevin Mills

Well, we actually asked the large healthcare show in the United Kingdom on the 28th, 29th and 30th of April, if the HIMSS show in Chicago was any indication I think they is budgets in healthcare and people are, I would say are at the latter part of making decisions and generally speaking I think people leave this thing go till the last minute. So, I think a lot of people will make decisions after as they have gone to the healthcare show [29:10] in the United Kingdom and I would expect to see activity in the June timeframe generally once you have started during compliance. We did also announce earlier this year that we have signed up with Dakota who is the largest provider to the national healthcare and for some of these applications and they will be built at the show as well as demonstrating our product to the National Health Service or NHS in the United Kingdom. I would say at the end of this month time.

Brian Swift - Securities Research Associates

About section one that I have talked to, they were quite enthusiastic about the opportunity particularly some on the…

Kevin Mills

One thing that was very evident what we are seeing across the world as well as at the HIMMS Healthcare Show is that the problems are very real and people are genuine. They are looking for solutions. They are finding that is a small handheld like the SoMo is an ideal complement to the nursing staff. Many have tried computer on wheels and even though they have a lot of big improvements the lack of portability has been an inhibitor to both adoption and effectiveness and having a small handheld device allows them to be closer to the patient when they give medication. Their information was always visible to visitors in the hospital and etc and there is a little more discretion and it is easier for the nurses.

So, we do see a lot of opportunity because of those and it is pretty universal. As I mentioned we are seeing this in Switzerland, we are seeing this in Germany; we are seeing them at the United Kingdom as well as here. So, as these problems get solved, it will bring a lot of opportunity for us.

David Dunlap

And Brian, even security is the motivator to use the product like the SoMo not only do we have CCX capabilities or within a Cisco environment which is probably the largest number of Wireless LAN environments used in healthcare company. But the traditional way of even nurses entering data at a nursing station leaves that data available for people to see the screen and as if potentially comprises the security of that information and if they have to log off many times they are just a step away to come back to taking care of the patients or as using the SoMo you can put it into a cradle. You can still use a keyboard and a mouse, enter the data and then when you pull that SoMo from the cradle the data screen is obviously goes blank and the data has been entered and security is maintained.

So, these accept the examples of where the SoMo would become very attractive to use in a hospital environment or where security is an issue.

Kevin Mills

And just very one last thing, I think the fact that we have done the RX version, I would suffice, I must say at the HIMSS Show about how many people came up to our booth and said “Oh, here are the guys with the RX, with the antimicrobial version.” I can really tell that we are interested and focused on the healthcare space and I believe we are the first company that really has focused on the space with the product that is more designed for the nursing staff and the conditions etc and this is much appreciated and we got a lot of very positive feedback at the healthcare show about this.

Brian Swift - Securities Research Associates

Okay. And addition to the hospitality side, it sounds like the indications are that this is like in hotels that they are being used in the restaurant operations on these hotels, can you elaborate a little bit more because there are some handhelds sort of have been in use for quite sometime in the restaurant industry or…?

Kevin Mills

Yes, I quickly elaborate that a little bit on this. We are seeing really three areas for hospitality. Areas like restaurants whether they be stand alone restaurants or in hotels. We are also seeing areas like mini-bars where people are managing what is going into rooms as well as some customer facing at the patient where people are using loyalty cards and they are using a handheld sort people into whether gold, premium, and platinum whatever the various programs are. The restaurants trade there is a real desire to have an electronic device at the table so that orders can be sent wirelessly to the kitchen. Historically, people have used, I would say, a simple device whether that be the MC50 or the 8800 and generally those devices have been in the thousand dollar range, the penetration rate is probably just a few percent, maybe less than 10% and what we are seeing with the SoMo is that unlike many of the old devices which have built in scanners that was never used.

The SoMo is much more effectively priced at around $500 range. It does not have a built in scanner but in the restaurant trade they were not using it anyway and applies in portable and the battery life plus it needs all the requirements for Wireless LAN. All of these solutions are application driven and the big application for writers are people like Digital Dining and AACS and many of them have qualified to SoMo and they are now having their franchisees or promoting themselves and the work horse in this area was the MC50 which was a Motorola product and which was recently gone end of life and they have moved up to the MC55 which I think is less applicable to the restaurant trade. It is a little bit bulkier, a little bit heavier, and a little more expensive and it has a keypad on it which is often not used in the restaurant trade.

So, it is less applicable and the cost difference between an MC55 and a SoMo now is almost 50%. So, we are seeing a lot of interests. I do not think that the hospitality market is as robust and it could be based in this economy and what we are selling is the best and I think last quarter we did about 20% of our sales into that market. We have not complied with the entire breakdown for numbers this quarter but we will do that but we think it can be a good number of 30% range.

David Dunlap

It is also interesting, Brian to see how sometimes these applications crop industry line one of the applications we understand for that the some of the European hospital purchases was actually being taking up patient orders for meal which then get transmitted down to the kitchen. So, these applications can become somewhat widespread.

Kevin Mills

We have one company in Germany that is in the process of deploying 500 SoMos purely as a hospitality application within healthcare.

Brian Swift - Securities Research Associates

Okay, well, I think it will be best to allow somebody else to ask a question.

Kevin Mills

Well, I think that is correct. Thanks.

Operator

(Operator Instructions) There are no further questions at this time. Gentlemen, do you have any closing comments?

Kevin Mills

I would just like to thank everyone for joining us today and to wish you all a good day. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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