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Executives

Jim Byers – IR, MKR Group

Kevin Mills – President & CEO

Dave Dunlap – CFO and Secretary

Analysts

Brian Swift – Security Research Associates

Bernard Fidel [ph]

Socket Mobile, Inc. (OTCQB:SCKT) Q1 2010 Earnings Call Transcript April 27, 2010 5:00 PM ET

Operator

Greetings and welcome to the Socket Mobile first quarter 2010 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.

Jim Byers

Thank you, operator. Good afternoon and welcome to Socket's conference call to review the financial results for its 2010 first quarter ended March 31, 2010. Online today are Kevin Mills, President and CEO of Socket, and Dave Dunlap, CFO of Socket.

Socket Mobile distributed its earnings release over the wire service at the close of the market today. The release has 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 call's 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 meaning 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 mobile computer, data collection and OEM products, including details on the timing, distribution and market acceptance of the products, and statements predicting trends, sales and market conditions and opportunities in the markets in which we sells 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 products may be delayed or not rollout as predicted, if ever, due to technological, market, or financial factors, including the availability of necessary working capital, the risk that market acceptance and sales opportunities may not happen as anticipated, the risk that our 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 our products in vertical application markets may not happen as anticipated, and other risks described in our 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.

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

Kevin Mills

Thanks, Jim. And thank you for joining us today. I will first provide an overview of our first quarter of 2010, followed by our current outlook for the markets and business for the rest of 2010. We generated a sequential improvement in revenue in the first quarter and saw continued progress in other key areas. This includes increases in activity in our sales pipeline, recent introduction of additional new products and enhancements that further expand our overall market, and continued progress in maintaining tight controls on our expenses with a focus on achieving profitable operating results.

Our sequential increase in Q1 revenue reverses the trend we have seen over the past two years where Q1 has typically declined from Q4. Overall, while the general pace of business purchasing remains slow, we are seeing a slight uptick in strategic investments by businesses for deployment and expansion of systems for their mobile workers as a cost-effective means to enhance productivity during a period of economic slowdown.

We remain very focused on converting opportunities in our growing sales pipeline into revenue growth. Yesterday we announced a two-year $3 million OEM agreement with Epocal, a leading provider of point of care blood diagnostic products, to supply unique version of our SoMo 650 handheld computer as a natural component of their blood analysis system.

We have been working with Epocal for some time. And over the past 12 months, they have purchased approximately 1,000 of our standard SoMo units to serve their North American requirement. We believe this new agreement reflects the proven success of their blood analysis system, which is in daily operation in many hospitals. To give further color, Epocal has recently partnered with Inverness Medical, whereby Inverness has agreed to distribute the product via its worldwide distribution network, provide fund, and agree to purchase Epocal subject to some performance metric.

The agreement with Inverness changes the size and scope of the opportunity based on their size and market reach. Our ODM agreement with Epocal puts the mechanisms in place to realize the opportunity. Socket will provide customized versions of SoMo and scanner to Epocal under the Epocal name that needs the terms of the worldwide distribution agreement with Inverness and enable Epocal to ship their products worldwide.

The agreement is for 5,000 units over a two-year period and is targeted to generate over $3 million of revenue to Socket. We expect revenue under this agreement to begin in Q2 and be a solid contributor to revenue going forward. Our agreement with Epocal represents the ideal type of opportunity and partnership for Socket.

We are able to leverage our investment in the SoMo hardware and software platform in the medical market via Epocal. And we are also able to get the benefit from the Inverness Medical sales organization, which brings its freedom of speech sales team, their own market focus and its expertise. Inverness Medical is a $2 billion a year company with approximately 9,000 employees.

As we’ve noted, these significant strategic relationships take time to develop. Socket has been working with Epocal for almost two years, prior to reaching this important milestone. We also announced last month a collaboration with 3M under which they selected our SoMo handheld computer for their office and inventory tracking system. 3M sells this system worldwide primarily to libraries and small businesses that need to track inventory and assets, but do not have a lot of IT support.

The package was recently upgraded to include mobile support with SoMo being the selected platform. Again, we expect this program to contribute to our SoMo sales getting into two and run things over there. Our collaboration with 3M is another ideal opportunity in terms of Socket’s business model.

End user customers are purchasing the software solutions from 3M (inaudible) than the SoMo, which means that 3M sales teams will be selling and promoting the solution and Socket will again be leveraging its investment in the SoMo. Obviously, we are delighted that 3M has selected the SoMo for their mobile solution and are now actively promoting the solution to their customers. 3M has asset tracking solutions in over 12,000 libraries. So we feel there is an excellent market potential for this solution.

We believe we have many software applications waiting in the wings that would further drive sales of the SoMo, applications like the 3M asset tracking software. Some of these applications we know about and some we don’t, as the development process can remain under the radar. Either way, the SoMo increasingly being recognized as a dependable and reliable platform for major energy prices to deploy their mobility applications.

During the first quarter, we saw companies like Hospira, one of our key partners. We launched certain health care solutions at the HIMSS Healthcare IT show in Atlanta. In our discussions with Hospira, they have noted, but due to the changes in the healthcare requirement for closed loop mitigation dispensing systems and the associated reimbursement grace. The market was finally ready to be receptive to the Hospira solution. Hospira has begun to actively market the solution and will be presenting the solution to potential customers at t he clinical laboratory management show in Las Vegas on May 4th and 6th.

Software driven solutions remain the key to similar growth. And both 3M, and obviously our early indicators of an increasing number of new solutions that are again coming to market and will help drive SoMo sales. We continue to have a long and growing list of software solutions that are still more ready and can drive increased sales as these solutions are aggressively promoted by their respective authors. We are excited by the 3M opportunity and equally excited by the increasing indicators that other providers will all be moving their solutions more aggressively into the market.

During the first quarter, we saw solid growth in SoMo sales in the US, reflecting increased supply driven by an increasing number of software solutions. This was offset by lower SoMo sales in the EMEA region in Q1, reflecting several large deals that were delayed or postponed. We have narrowed our focus in EMEA and are now working more closely with fewer partners, and our confidence in SoMo sales in EMEA will be stronger in Q2.

Moving on to our data collection products, we have started to see a general recovery in this segment of our business. First quarter sales were up about 28% over the preceding quarter, and we are slowly getting back to more historic levels. Today, we are primarily selling our compact flash scanning products in conjunction with SoMo, whether in new deployments like Epocal or into our installed base.

We expect this segment to continue to grow through 2010. Our cordless scanners continue to be driven by applications running on third-party host platforms, like Windows-based mobile phones, notebooks, tablets and even desktops. This portion of our business is likely to see stronger sales in the coming quarters for the following reasons. We lowered our pricing to make the solution much more affordable.

These changes are making the scanner more attractive to a larger community. We’ve been able to deliver our 2D solution in the same ultra-small and super light package, and say we will benefit from this later in the year as more and more applications begin to use 2D bar code, particularly in the healthcare markets. We recently announced support for the Apple iPad. The iPad is a new category of device that is highly portable with the big screen and long battery life.

We expect a number of similar devices to come to market in the coming months. While these devices have great appeal in the mass consumer market, they also have a lot of appeal in business markets. These types of devices can be used to replace the many clipboard type paper-based applications currently in use today. For this to happen, someone has to write an application to emulate the current process and can then add the benefits of real-time communication and data capturing. These applications will be written and deployed over the coming quarters, and we expect that many will require scanning, which will drive sales of our cordless scanners.

In the short-term, we will primarily be providing scanners to the Apple developer community, as there are no scanning enabled applications at this time. But even this represents some reasonable numbers. The serious numbers will come after the applications are written and deployed.

Obviously it’s impossible to know for certain, but we feel there is a good chance that we will also be able to support the new soon to be released OS Core based iPhone based on Apple’s desire to maintain compatibility on products using the same Core OS. Overall, our scanning business is recovering and at a faster rate than the SoMo, which we would expect as the sales cycle for add-on scanning is significantly shorter.

Turning to our OEM business, it continues to be a solid contributor to our business. We expect this portion of our business to recover slowly over 2010 and to continue to represent approximately 15% of our growing revenue. A long sales cycle resulted in a slow decline and also a slow recovery. We have completed all the major technical challenges of brain, our new wireless LAN product to market and currently have samples with key customers for evaluating them for inclusion in their products.

In conclusion, over the past few quarters, we have grown SoMo sales and built up our other products with new or enhanced versions so that our total revenue mix is made up of about 40% SoMo sales, 40% scanning, and 15% OEM. This is what we predicted a little over two years ago when we began volume shipments of the SoMo. While we are still short of our sales objective, we have made significant accomplishments within a tough economic climate. During this time, we have also reduced our expenses by some 40%.

We continue to maintain tight control on costs and believe the cost structures we are taking will enable us to achieve positive cash flow in the second quarter. We believe we have the right products and solutions, and with our strategic focus on the healthcare and hospitality markets, we are well positioned to benefit greatly as conditions improve.

We will continue to tightly manage our expenses until we see clear indicators that the economy has in fact turned the corner. We are fortunate to have committed employees who continue to work very hard in these difficult times. With our broad portfolio of products and relationships with key customers, we anticipate achieving solid growth in 2010 and expect t be profitable before the end of the year.

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

Dave Dunlap

Thank you, Kevin. Our first quarter 2010 revenue was $3.8 million, an increase of 5% over our previous quarter’s revenue of $3.6 million. But a decline of 20% compared to first quarter revenue of $4.8 million a year ago. First quarter revenue growth compared to the previous quarter was primarily due to increases in the sales of our bar code scanning products.

Bar code scanning product sales increased by $320,000 or 28% to $1.45 million and represented 38% of our first quarter revenue. Bar code scanner sales increased across all product categories, including plug-in scanners, cordless hand scanners, and our ring scanner. New product sales, including the newest version of our cordless ring scanner and our newest 2D bar code scanner model 7X were contributors to that growth.

We also experienced increases in sales of our entry level bar code scanners, reflecting the introduction late last year of laser-based entry level products to replace imager technology based products. And we also experienced increases in our plug-in bar code scanner sales, as customers such as Epocal, which uses the plug-in scanner as part of its blood analysis system, increase their purchases of these products.

Our handheld computer sales for the first quarter of 2010 were 1.5 million, flat with the previous quarter and down 4% from the first quarter a year ago. Handheld computer sales are very dependent upon the timing of product deployments. And although our sales pipeline is signaling significant growth in deployment, particularly in healthcare, our first quarter sales reflected lower hospital deployments in Europe compared to the previous quarter, with a number of hospitals expected to increase deployments in the second quarter.

As Kevin noted, many of our application partners are also signaling growth, and our OEM agreement with Epocal announced yesterday is a good example with a progress being made by our partner. Epocal and we are targeting a minimum of $3 million in sales in both handheld computers and bar code scanners, both undergo for their mobile blood analysis systems over the initial two-year period of the agreement.

We’ve also continued to develop our accessories program to meet specific needs of customers, including a DuraCase, a hard cover with rubber corners to add protection against rubs and scratches without affecting the easy-to-use features of the handheld computer, and other accessories such as headsets, a wide range of chargers, accessories to add a wireless network card that speeds the transfer of data over a mobile phone network, and through our stall our third-party accessories program, keyboards and other accessories such as mobile printers that are in the works.

Our OEM sales revenue in the first quarter of 2010 was $0.5 million or 14% of our first quarter revenue, a decline of 17% compared to the previous quarter and a decline of 4% compared to the first quarter a year ago. We enable the Bluetooth and wireless LAN that we use in our own products to be incorporated into non-competitive third-party products.

As we reported in our year-end conference call, our OEM customers were transitioning in 2009 out of older discontinued Bluetooth technology products and older wireless LAN 802.11bg technology products. And the OEM sales team is now shipping the newest 802.11abg technology products, which include the use of Socket’s WiFi companion software with Cisco, TCX security extension.

Socket’s WiFi products directly support Windows Mobile and Windows CE operating systems. And through our development partner MY [ph] support other operating systems, including Linux, ThreadX, and Nucleus. OEM sales require design wins. And if these design wins are one and the products move into production, our OEM sales are expected to increase as we move through the year.

As a final comment on revenue, Socket offers extended three-year service warranty on its handheld computers and its bar code scanning products. And we recognize service revenue over the service period. We also offer product refurbishment and repair for out of warranty products for a fee.

Our service revenue in the first quarter of 2010 was $193,000 or 5% of our first quarter revenue. Service revenue in the first quarter of 2010 was up over 300% in the first quarter a year ago. These service contracts provide customers with increased protection from breakage and enhanced warranty protection and are becoming a more significant part of our quarterly revenue stream.

As Kevin noted, customers in our sales pipeline are increasing their activity needed to resume their purchases of handheld computers and bar code scanning products. Both are updating existing application, and for deploying new productivity enhancing solutions for their mobile workforce. Based on this activity, an accelerating order pace compared to last quarter, we anticipate revenue growth in the second quarter and beyond, as the economy continues its slow improvement.

Much of the activity relates to our newest products, including our 2D bar code scanner, our new entry level laser bar code scanners, our more ruggedized ring scanner, and our handheld computers as we see them deploy in more and more software applications. Our operating expenses in the first quarter of 2010 were $2.6 million, a reduction of 9% from first quarter operating expenses a year ago of $2.9 million.

The expenses reduction during 2009 that continue into 2010 have included a combination of lower headcount, reduced salary levels for employees, and lower discretionary spending. At the same time, we have maintained essential product development program and key sales and marketing program. We are continuing our cost reduction programs in the second quarter to improve operating results while maintaining essential program and services.

Our cash target for the first quarter was to achieve cash breakeven results, and we accomplished that objective. Our cash balance at March 31, 2010, was $1,982,000 compared to $1,940,000 at December 31st, 2009. We partially financed growth in quarter-end receivables compared to the previous quarter end to additional draws from our receivables, base bank line of credit, and we continued to generate cash by reducing our inventory levels.

We’ve continued to receive strong support from our distributors. They have a long history of primary payments to us for our product and from our vendors in maintaining flexible credit terms. As is typical of economic recessions, our distribution channel in response to lower business activity has reduced its stockage [ph] of our products to about half the level they were holding a year ago, which puts pressure on our cash as we are paid by our distributors when we ship products to them. As the effects of the recession turn around, we would expect to see shipments and distributor stocking level return to higher levels for the benefit of our working capital and cash balances.

An important element of our working capital is our working capital bank line that we use to finance our receivables. The bank line is helpful in enabling us to generate cash to pay our vendors for products shipped to customers by receiving payment from our customers. And because the availability in the line grows as our receivables grow, it is particularly valuable when sales are growing.

As many of you will have noted, we did not meet our first quarter revenue covenant threshold of $4,565,000. And we are in discussions with our bank to enable them to consider a waiver of these covenants for the first quarter. We will report on the results of these discussions in a Form 8-K within a few days. Our priorities for 2010 remains to grow our revenues and manage our costs to achieve near-term profitability, while we maintain essential product development, sales and service programs for 2010.

Our annual meeting of stockholders will be held this Thursday at the company’s headquarters in Newark, California, located in the San Francisco Bay Area. Six of our seven directors are standing for re-election to serve the company for the ensuing year. Standing for election is a new Board member is Dr. Charles Emery, Jr. Dr. Emery has had a distinguished career in healthcare IT services. The last 10 years of his business career as Senior Vice President and Chief Information Officer of Blue Cross Blue Shield of New Jersey.

Most recently, Dr. Emery has been active with Arizona State University and the University of Maryland teaching graduate classes in healthcare information system, strategic planning, and healthcare finance. With over 35 years of experience within the health insurance and healthcare provider sectors, we welcome the opportunity for Dr. Emery to serve on Socket’s Board with our focus on healthcare as one of our primary markets. We would also like to recognize the significant contributions of our retiring director, Dr. Ando Turisi [ph] who has worked closely with us for the past 10 years.

In summary, as I noted in my comments at the end of February, while no one can predict the certainty, the timing, or pace of economic recovery, over this past 15 months, we have made significant adjustments in our cost structures, and we continue careful management of our cost and expenses and our working capital. We’ve done so with the support of our vendors, our customers, our bank, our partners, and our employees. And we are very appreciative of their unwavering support.

And we particularly wish to thank our stockholders for their continued support. With that support, we’ve been able to move forward with the essential programs that are continuing to establish the SoMo handheld computer family with its data collection option at systems of choice in key vertical markets, particularly in healthcare and hospitality.

We are continuing the development of potential programs and product improvements to keep pace with newer technologies, and the needs of our customers in the vertical markets that we serve. And we are maintaining Socket standard as a quality product and respond to customer support.

We remain focused on further building on the growing and active pipeline of customers showing an increasing interest in ordering our products. We are monitoring and supporting our solution partners product development activity and their marketing progress, and providing an environment that encourages them to bring productivity enhancing solution into the business mobility markets that we serve.

We are looking forward to a much improved year in 2010 compared to 2009 with a combination of new products, anticipation of an improving economy, maturing days of productivity enhancing applications in our key vertical markets, and the experiences of operating as a lean organization.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is from Brian Swift with Security Research Associates. Please go ahead.

Brian Swift – Security Research Associates

Thank you. Can you give us a little bit more color on how you expect this 3M association to roll out? You mentioned that they are in libraries. You mean book-type libraries or software library, what kind of library –?

Kevin Mills

It’s mainly book-type libraries, Brian. And they essentially have an asset tracking solution, targeted small business where you can track a number of assets. They list a whole slew of them on the web page, but it’s designed for people who need to track either books in the library situation or critical assets in a small business, etc. You subscribe to the service. It’s an annual type service. And then you can either use the SoMo or you can use a tethered bar code scanner in conjunction with a notebook to scan the assets and then put them in your database. They support both 1D, 2D and RFID tags.

So then based on the type of assets you are tracking, you would scan it into your database and then basically maintain it over a period of time. So they have just started to promote it. They are basically beginning to sell us. If you go to their web page or you go to their brochures, they essentially give people two choices. They give them a stationery-type solution that’s based on our desktop and tethered scanner, or they give them a mobile-based solution, which is based on the thermal – with our plug-in RFID scanner combination card.

Brian Swift – Security Research Associates

Okay. And is this primarily public library or –?

Kevin Mills

I would say it’s primarily school and small libraries. I’m sure they cover public libraries, but the vast majority of the business seems to be for organizations that don’t have a lot of their own in-house IT support. So again, I think in smaller public libraries, that may be the case. If you get to bigger libraries, often they will have their own IT facility and maybe do things like you differently. But the software package is designed for small business and on the assumption that you are not going to have a lot of in-house expertise.

Brian Swift – Security Research Associates

Well, certainly in this economic state, funding for those types of entities is rather scary. So what is their anticipation of how quickly this can ramp? This doesn’t seem like just a product that public libraries go for and –?

Kevin Mills

Well, again, it’s an existing product. So it’s not a new product. And essentially what they did was they upgraded the product to allow people to go mobile. And I would say today the product is primarily a stationery based product. And the new version that’s coming out this year includes this mobile option. And as they sell it as more of a subscription, I think that it won’t be a new purchase. It can be an upgrade to an existing install. And we are still working closely with 3M together arms around and the exact rollout schedule. But they intend to sell this product worldwide. So I think we’d have a better answer over the next four or five weeks.

We have a meeting scheduled with them, I think, in the next two weeks where our sales representatives will be sitting down and going over the plan. So I don’t really have all the answers right now other than they have rolled out the product. They have basically selected the SoMo as their mobile, and we get more color and details going forward. And this is one of the situations where we didn’t have a lot of, I would say, interaction with 3M as they developed this product. And they came to us really when the product was fully developed and operational. And we’ve got involved with them over the last six weeks.

And obviously, the fact that people can spend a year developing a product, testing is going to certain customers kind of under the radar mix forecasting, somewhat more difficult. Right? But also kind of suggests that there is a lot more going on. I think people have generally slow rules. There are new developments into the market because there is not a lot of virus. And I think we are saying in a few situations people changing that attitude. So they are moving them out, as I pointed out in the case with Hospira, where I think they sat on the program and did very little promotion or activity for almost 14 months. And just having re-entered the markets at the HIMSS show to re-market the product because of changes in the environment.

Brian Swift – Security Research Associates

Maybe you can elaborate a little bit more on what the – there are some incentives that the government through their –

Kevin Mills

Reimbursement mechanisms.

Brian Swift – Security Research Associates

Yes. Those types kind of (inaudible).

Kevin Mills

Yes. So I mean, in our discussion with Hospira and one of the things that I would – we convinced them to re-engage with the market more definitely was the fact that the government has mandated that everyone needs to have a closed loop medication dispensing system in place, I believe, by January the 1st, 2013. Okay? And as an incentive to have those in place, they are providing, I think it’s an extra 2% on all expense reimbursements in 2010, an extra 1% in 2011 and ’12. And then if you don’t have a system in place, you get deducted I think 1% in 2013 and 2% in 2014. So there is both tariff and stick kind of approach.

Obviously medication dispensing errors is a big problem and causes a great deal of cost as well as it can have serious consequences for everyone involved. It’s been targeted as an area of improvement. And Hospira, if you remember, purchased the (inaudible) software, which is this VeriScan software with (inaudible) to medication. Hospira is an organization of about 14,000 people. Their primary business is IV pump, and they have something in the region of 0.5 million installed. And then they are enhancing this with the VeriScan system. And they are just starting again. And I think I pointed out that they will be at the clinical show in Las Vegas in May 4th and 5th.

Brian Swift – Security Research Associates

Okay. Well, I’ll let somebody else ask you question and I’ll come back and –

Kevin Mills

Thank you very much, Brian.

Operator

The next question is from Bernard Fidel [ph], private investor. Please go ahead with your question.

Bernard Fidel

Hello, guys. Kevin?

Kevin Mills

Hi, Dr. Fidel, how are you?

Bernard Fidel

You were just speaking about 3M, and I think you emphasized the libraries. But the way I understand is, it isn’t solely for library. It’s for small and medium businesses to keep track of their inventory or items, whatever it is. Am I correct in that assumption?

Kevin Mills

Absolutely. I think that they actually have three segments in their literature of what they do. And two of them are not libraries. Libraries is one. And obviously it allows people to track books in and out of a library situation. But I think as you correctly point out, it also allows people to track any valuable assets they have on their business, both (inaudible), demo tools, various other types of assets that they are viewed as critical for their business.

Bernard Fidel

Yes. And I understand. But the nice thing about it is that this is not even come and get from scratch. It is not an expensive system for the small and medium businesses versus having to do with themselves. I think it’s only a couple of thousands bigger than this [ph].

Kevin Mills

I don’t think it’s even a couple of thousand. I think it’s a relatively inexpensive system. And again, I think software developed as a solution, becomes very attractive because you get to leverage the investment in the sulfur to many, many different people. And again this is not a new product. This is a product area that 3M has been involved and the market leader. And they have upgraded an existing product to basically add the mobile capabilities. So again, not only do you get new customers, but you also get to re-sell or to sell to the installed base.

Bernard Fidel

I think it’s very interesting that 3M told Socket because they are a very large operation. They probably did a lot of research, and this had held computer probably came out the best. And so therefore that’s a positive workflow. I think – and see if you could correct me on this – is that the 3M could be a relatively substantial assorts of income for us because we can go into a program for just a couple of hundreds. If it’s worldwide, the potential to give 10 of thousands of these type of systems.

Kevin Mills

Yes. I mean, obviously we hope so. And as I mentioned when Brian Swift was on the line a minute ago, we do have a meeting set up and we will have more details probably in the next two or three weeks. But yes, large companies generally when they invest in something need a reasonable return and essentially when you are talking about companies like 3M that’s already got billions in this category. They don’t do it for the sake of a small number of units. And also it tends to be for the long-term. I think that just with 3M and with others, we are seeing that when we engage with someone and they do test the SoMo, I do feel that in this category of products for at durable, dependable, reliable platforms that won software.

The SoMo continues to do better and better and we continue to win deals like this. Similarly, with Epocal, I mean, they worked closely with us for two years. We have addressed all of their issues. The SoMo has continued to get better and better as a product, more stable, more dependable. We’ve continued to upgrade it with the latest and greatest from Microsoft and others. We are up to 65.1 where we will be able to go six five. And I think it’s our commitment to also the same that has helped people to, I would say, standardize is probably too stronger word here. But really select SoMo as their spectrum of choice.

Bernard Fidel

On Epocal, you mentioned that that is slightly over 3 million over two years. Am I correct?

Kevin Mills

That’s correct.

Bernard Fidel

That’s undoubtful approximately, an additional 400,000 every quarter assume it’s an even thing, you know?

Kevin Mills

Yes. Again, that’s I mean on what’s nice at Epocal is not only do we get the benefit of their sales organization, but we also get the benefit of the planning. And so at the beginning of each quarter starting in Q3, we will know basically how to count on for Epocal. One of the things that’s been a real challenge for the last, I would say, four or five quarters has been the fact that the business has been so lumpy. And the fact that you can start with 0.5 million or 600,000 or 700,000 in the quarter as a known certainly helps, for planning purposes, for smooth of operations purposes, and just basically for comfort of revenue purposes.

Bernard Fidel

Yes. By the way, that $3 million you mentioned before, that to be increased. Am I correct?

Dave Dunlap

Yes, Dr. Fidel. That’s based on just the minimum expected quantities for that contract over the initial two-year period. So not only do we expect it will be renewed over multiple additional years, but my sense is that they were being cautious in trying to set minimums. I would love to see their business do substantially more than that over this next two years. And in the second quarter, are we going to start with (inaudible) or something?

Kevin Mills

Well, again, it will depend on partly how much we sell and what Epocal’s desires are. We continue and love to highlight the activities of our partners where they are becoming significant to our operations. So I’m anticipating we will be addressing progress with Epocal as we go forward. And they are just in the gearing up mode now. They are looking to increase their business around the world, and we will certainly be behind that process as we move forward. We’ve already gone the past year substantial improvements that helped the system work more effectively. And I think it’s been a very close and a very excellent partnering arrangement.

Bernard Fidel

Okay. Couple more questions. April was almost over, Kevin. How are we doing? Is it that you expected or –?

Kevin Mills

Yes, I mean it’s – again, April is, I would say, reasonable. It’s not what I would have experienced (inaudible). I think we will end up being ahead of where we were in January, at the end of the April period. But again, I mean, most of the business happens in the second half of the quarter. And even on our SoMos, I mean, Q1 was a little bit strange and that we had a lot of our SoMo shipments towards the end of the quarter as deals happen. And overall, I would say, April is reasonable and solid. I wouldn’t say it’s way ahead or way behind our expectation.

Yes. Orders are coming in each day. As of yesterday, I think our shippable orders that – the orders we have on hand that will ship during the quarter, now total somewhere in the $1.5 million to $1.6 million level. As we move each day, that number obviously increases.

Bernard Fidel

That’s good. That’s especially the second half of the quarter is going to be usually the strongest. Am I correct?

Kevin Mills

I mean, that’s the usual trend. I mean, essentially when if I look at Q1, January was like – February was stronger, March was stronger still.

Bernard Fidel

Okay. That’s a pretty good point. I’ll tell you that. Do you anticipate or can you be profitable in the second quarter? What‘s sort of the map you need to be profitable?

Kevin Mills

Well, we are targeting to bring down our operating costs in the second quarter. That happens because, one, the – some of the first quarter non-recurring costs like our audit fees and cost of publishing our annual materials doesn’t recur in the second quarter. And then we are continuing to very tightly manage our discretionary costs. And so we are looking to bring somewhere between $300,000 and $400,000 out of our operating cost in the second quarter. So you can calculate the breakeven point for us. The cash breakeven point is probably around $4.5 million, and we would hit profitability assuming we can hit those cost and our typical margins at around $5 million for the quarter.

Bernard Fidel

Okay. So this is probably a good chance that you can lead the bank of an inside [ph] guess?

Dave Dunlap

Well, I think it will depend on what we work out with the bank. Typically when we don’t meet the covenants, as happened in the first quarter, we will look to the bank to reset expectations for allowing us to continue using the bank line. And if the bank is amenable to that, typically we will set new covenants that we will provide them a basis for either simply a grain that we are meeting expectations, or if we are not, that gives them the opportunity to take another look to make sure that the risk that are associated with that bank line are reasonable for the bank. And we are very sensitive to that. But we will see – we will report probably in the middle of next week in a Form 8-K what the going forward plan with the bank is, and it should have all those details in there.

Bernard Fidel

Yes. Going back to – if we have sales for the first half [ph] of 1.6 already, that’s an average of 5 million for the quarter, not counting the second year, which is usually stronger. So I think that we could easily do that. And there is a solid chance of being profitable. But we don’t have to comment on that anyhow.

Dave Dunlap

Yes. Again, orders can vary in terms of their timing and the types of orders will vary as well. Our standard products, typically we see orders come in just a week or two before people are looking for delivery. But for our OEM products, you often see orders in on a much longer time period. So it’s always hard to equate based on your orders as to what you are going to get over the next couple of months. But I think the start that we have right now, as Kevin mentioned, is a bit stronger in the second quarter than we saw in the first.

Bernard Fidel

Yes, okay. Now, have you people evaluated what you think that the 3M deals could possibly bring in?

Kevin Mills

We – as I said I think to Brian, I think we have a meeting set up in the next two weeks and we are meeting with the 3M people to basically assess their market potential and assess some expectation. So we don’t have a number right now, but we will have probably in the next two weeks.

Bernard Fidel

Okay. Just two more questions, and I’ll let the others and I’ll go back. How is Europe going, in Germany, the deals in England for the hospitals that you announced with the handheld etc. etc.?

Kevin Mills

No. I think overall that we were a bit disappointed with the results in Q1 in Europe. We had a large deal that we were pretty confident that we had – and I think you asked the question and I answered in the last call, approximately 800 units. And we got to the point of the various parties sitting down to do signing of contracts. And when one of the parties changed their mind and the deal fell apart. This was a surprise that certainly weakened our sales in Europe. So basically the hospital stuff continues to proceed, but hospitals tend to be slow.

Germany, we had expected one deployment in the first quarter that didn’t happen; in talking to our distributor, he saw it didn’t happen because of vacation and out-of-office related issues for personnel involved as opposed to any business decision not to do it. So we still think we have a very big opportunity. I’m actually going to Germany to meet the distributor and be there next Tuesday to actually go over the specifics of all the deals. So I don’t have the exact numbers, but I’ll be happy to report as we get more information about these deals.

Bernard Fidel

Okay. That 800 units deal that you spoke to have was basically folks change.

Kevin Mills

Yes, I mean, without going into all of the details, there were two parties involved, and there were both the franchisee and the fresh new loans, and the close relationship (inaudible) describing us. They didn’t reach an agreement, we believe, in 2011. The contract would be amended. So that’s our system or the system involving the SoMo will be possibly going forward plan. But as the contracts are awarded on an annual basis, we don’t think there is much opportunity for it to be revisited in 2010.

Bernard Fidel

Okay. And last question right now, maybe I’ll get back one or two and to someone else. Where do you see the major growth in the second quarter?

Kevin Mills

Again, we are actually quite bullish on our scanning. We are seeing, I would say, a marked uptick in our scanning. I guess Dave pointed on his remarks, scanning was up 28% Q1 over Q4. Certainly scanning recovery can happen a lot quicker because the sales cycle is shorter. So I would actually say – I would expect scanning to lead the way in Q2. And with SoMo to be also growing that and closely aligned. I think those are the two main drivers. OEM, we expect to be, I would say, slightly up but again I think that Dave pointed out, we get more visibility in OEM because the lead-times are low.

Dave Dunlap

Yes, as Kevin noted, we – in Europe – Europe was where sales of the SoMo were actually down in the first quarter. Sometimes you will see lows in terms of deployment planning and we were running at about twice the pace through the four quarters of 2009 in Europe on deployment of SoMo’s in the hospital environment. And we just hit a low. There was one deal that had slipped out, but it was going forward. But we were down by about $400,000 in total revenue. And the good part of that was the SoMo in Europe in the first quarter. You combine that with the 800-unit deal that Kevin talked about, which would have added to those totals. And so our expectations in Europe were significantly higher in the first quarter than we actually achieved.

Now, with the hospital deployments coming back, I think that law was just a first quarter issue. Again, you will see growth there. There is a number of other – that our group is tracking down. The US grew by with bar-code scanning being the big driver, but the US grew by some 31% in the first quarter over the fourth quarter. So even though it was substantially offset by some decline in OEM and by European sales dropping, if we can simply see how you are picking up to the phase that was achieved in the United States in the first quarter, everyone will start to appreciate the results.

Bernard Fidel

Okay. I’m going to let the other who wants to come back. I took off most of your time. And then I have another question also.

Kevin Mills

Okay. Thank you very much, Dr. Fidel.

Bernard Fidel

Okay, take care.

Operator

(Operator instructions) The next question is from Brian Swift from Security Research Associates. Please go ahead.

Brian Swift – Security Research Associates

Close enough? Getting back to the 3M, what do you get on revenues when they make a sale? I mean, they are renting this or leasing it or whatever, but you get paid.

Kevin Mills

Yes, we sell through standard distribution. I would say, we’d be in the $700 to $800 range per system. It included both the thermal and a combination RFID and bar code scanner, which looks like it would be their defaults and choice of equipment.

Brian Swift – Security Research Associates

Okay. Thank you. That’s it for me.

Dave Dunlap

Thank you.

Kevin Mills

Thank you very much, Brian.

Operator

We have another question from Bernard Fidel, a private investor. Please go ahead with your question.

Bernard Fidel

Yes, hi. This is the last one. In England, Kevin mentioned before, there was something that the handheld was going to be used, possibly be introduced to all the hospitals for the physicians to take it around to be on call, etc. etc.

Kevin Mills

Yes –

Bernard Fidel

How is that getting along?

Kevin Mills

Perfectly going. Continued to go quite well. This is the iBleep solution whereby they are using it as a (inaudible) upgraded paging system where they can page the doctors on call and the doctor can accept or reject the page and pass it to another doctor. We did get two or three more hospitals. I think, Wolverhampton and Maidenhead both went forward with our pilots. I think as I explained previously, the way it works in the UK is that there are essentially around 700 hospitals.

And within that, there is about 160, what they call, trust funds. Each trust fund looking after four or five hospitals. And this solution has been deployed to a number of hospitals, and as it gains acceptance within a particular trust, then that trust can propose it to the national house servant [ph]. And it would be deployed by all hospitals. We are still, I would say, down the path to do that. And again, as I mentioned, I’m actually heading over to Europe this week so that I can catch up. So that deployment is still, I would say, on track moving a little less quickly than we’d like, but we are making good progress in that category.

Bernard Fidel

Okay. Last question, then I’m finished. The large deals you announced, do we have only additional large deals in the pipeline or is there anything that’s trending for the near future?

Kevin Mills

Yes. I would say that we continue to have people approach us on an almost daily basis with opportunities and deals. So yes, we actually are quite busy, as a lot of people are, I would say, actively involved in the sales process. Not enough of them are purchasing really in the short-term, but we are seeing a marked improvement in that category.

Bernard Fidel

Anything pending in the relatively near future, let’s go that way?

Kevin Mills

I don’t want to be given the kiss of debt like I did last quarter. I’d say that we gave the 800 units that seems to have killed in a hurry. So I’ll avoid doing the same this quarter.

Bernard Fidel

Okay. Think that as a positive, but you don’t want to kill it. But listen, Kevin, you have a good trip in Europe.

Kevin Mills

All right. Thank you very much, Dr. Fidel.

Bernard Fidel

Okay.

Operator

There are no further questions in queue. I’d like to turn the call back to management for closing remarks.

Kevin Mills

Okay. We would just like to thank everyone for participating in today’s call and wish you all a good day. Thank you very much.

Operator

This concludes today’s teleconference. You may disconnect your lines. Thank you for your participation.

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