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Executives

Kevin Mills – President & CEO

Dave Dunlap – CFO

Analysts

Brian Swift – Security Research Associates

Alex Berger – Hudson Bay

Bernard Bedel [ph]

Socket Mobile, Inc. (OTCQB:SCKT) Q4 2010 Earnings Conference Call February 17, 2011 5:00 PM ET

Operator

Greetings and welcome to the Socket Mobile Fourth Quarter 2010 Management Conference Call. (Operator instructions)

It is now my pleasure to introduce your host, Dave Dunlap, Socket’s Chief Financial Officer. Thank you, sir. You may begin.

Dave Dunlap

Thank you, operator. Good afternoon and welcome to Socket’s fourth quarter and year-end management conference call to review financial results for its 2010 fourth quarter and the year ended December 31, 2010. Joining me today is Kevin Mills, President and Chief Executive Officer of Socket. Our usual host Jim Byers with the MKR Group had a scheduling conflict, and so I am handling the conference call preliminaries.

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 the Socket 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 timing, distribution and market acceptance of products, and statements predicting trends, sales and market conditions and 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 manufacture of our products may be delayed or not rolled out as predicted, due to technological, market, or financial factors, including the availability of product components and necessary working capital; the risk 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 such forward-looking statements.

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

Kevin Mills

Thanks, Dave, and thank you for joining us today. In today’s call we will begin with a short review of our Q4 and overall 2010 results, and then outline the business opportunities we see in 2011.

Our fourth quarter revenue of $2.6 million was much lower than expected due to the impact of an industry wide shortage of LCD components in the quarter, which cost us to defer shipments of over 1.2 million of SoMo related products into this year. The limiting factor in our Q4 revenue was the supply of material as opposed to demand for the products.

We have seen improved bookings in January, which combined with our backlog carry forward into 2011 totaled more than 3.6 million in orders at the end of January that are scheduled for delivery in the first quarter. While 2010 remained a challenging environment for Socket as the overall pace of our business moved forward cautiously and slowly we did see good growth in bookings for both our SoMo and cordless scanning products, particularly towards the end of the year.

These strong bookings for handhelds and cordless barcode scanning products were offset during the year by declining revenue from our legacy plug-in type products that have been phased out, resulting in the overall decline in 2010 revenue.

Late in 2010, we restructured our sales team and realigned our distribution channels to better position Socket for the business dynamics of today’s rapidly changing mobile marketplace. The result is we are seeing greater visibility on our near-term demand side of our business. While in the past we were waiting on customers to make a final purchasing decision prior to deploying our handheld or scanning products, today we are in the position of having those orders in hand due to a combination of backlog and stronger than normal January bookings.

We currently remain limited by supply, but feel the situation is being addressed since the worst of the supply issues will soon be behind us. To give a little more color on the supply problems, they were initially caused by higher than expected demand for screens by Apple and other mobile phone suppliers. This resulted in industry wide consolidation as companies like Foxconn [ph] purchased LCD manufacturers to meet the higher demand from the mobile phone market.

As a result of this demand and consolidation, the display manufacturers readjusted their capacity priorities and smaller companies like Socket and many others were left without any production time in the short run. In an effort to address these supply issues, production was moved to newer facilities, which resulted in additional delays. Unfortunately, these new factories did not come online prior to Chinese New Year. As you may be aware, Chinese New Year just concluded at the end of last week, and the factories are in the process of coming back online.

The supply issues are being resolved and we expect to resume normal supply of handheld products later this quarter. For our cordless barcode scanning business we have seen significant market changes over the past three months that are having an overall positive impact on our business. During 2010, we continue to invest in cordless scanning and in particular 2D cordless scanning.

There is an explosion of activity and market growth around smart phones and tablets. As it appears, tablets are finally gaining acceptance as handheld computing devices. This is extremely positive for our cordless scanning business. Our barcode scanning products add commercial grade rapid and robust data collection capabilities for businesses seeking to deploy these new devices for mobile solution.

Our software and hardware development investments in 2010 are already positively impacting our revenue, and we expect this to increase throughout 2011, and beyond. Let me explain. Beginning in Q4, we saw a significant increase in customers wanting to use Apple and android-based smart phones and tablets with cordless scanners to control their business process.

We have believed in this market for some time and are now in a stronger position to support this. Our SocketScan 7 software was architected to support a broad array of plug-in technologies, as well as cordless scanning, and was primarily written to operate on Windows Mobile platforms. During 2010, we completely rearchitected the software to meet these new market dynamics. Today, we are very well positioned to service the rapidly growing markets that are now becoming available, which Google, Apple, RIM, Microsoft and HP have enabled with a broad array of highly efficient mobile operating systems. We refer to the new software architecture as SocketScan 10.

The 7x, our 2D cordless scanner, which also reads all 1D barcodes, was developed as an extremely robust and reliable scanner. The design benefited from our experience of having been in the cordless barcode scanning business for many years. In addition to incorporating many improvements, we were able to maintain the ergonomic appeal, lightweight, very small form factor and long battery life, which are critical for mobile users and application.

The 7x coupled with SocketScan 10 is a very powerful combination. As mentioned SocketScan 10 is a small footprint, mobile phone capable application that allows for both ease of use scanning, as well as the creation and deployment of robust application centric solutions. The end result of our investment is we now have the best cordless solution in the market today for mobile phones and tablets.

The market is just beginning and we are seeing the numbers build, and we expect to ship a record number of 2D cordless scanners in Q1. The supply issues aside, our current orders give us confidence in a solid start to the year.

As we look ahead to 2011, we continue to see increasing interest for our SoMo handheld and greater customer urgency than we have seen over the last two years. It is also clear many customers did not purchase any new handled in the past two years. They simply maintained their existing systems. This indicates the vast majority of the opportunities we have discussed in the past remain in front of us.

In addition, there are growing indications that HP will exit the classic PDA market during 2011. In a number of countries, Brazil and India being the two largest, HP now lists the iPAQ 200 series devices as discontinued. In addition, in Japan, HP states in their web page that the iPAQ products are no longer available. We took the initiative and traveled there in December to meet with a number of HP iPAQ customers to both assess the situation and determine their going forward plan.

All the customers we met with were provided by a last time buy opportunity by HP during Q4, and all availed of the opportunity. In all cases, the customers’ primary investment in the handheld solution was software, and in most cases the customer software was developed over many years, and they were anxious to continue to use their existing software without having to do any redevelopment work.

All the customers have tested and approved the SoMo handheld and intend to switch as the supply of iPAQs are used up, even though the SoMo is slightly more expensive than the iPAQ.

For our handled SoMo business, we expect 2011 to be a very solid year, and expect to ship a record number of units driven by the re-emergence of many opportunities, which did not close over the past two years. In addition, we expect to benefit from the effect of HP phasing out of the iPAQ. And there seems to be a general economic rebound taking place that we think will increase our customers’ investment in capital equipment.

For our cordless barcode scanning business, it is a fast-moving market that continues to show substantial opportunity. The selection of smart phones and tablets in each OS category will provide customers with numerous device choices as they automate their workforces. Customers are able to take the device size that best suits their needs, and also mix and match devices under a single OS strategy, whether that choice is the Apple iOS, Google android, RIM Blackberry, Microsoft Windows, or the HP webOS.

The traditional weakness in all tablets and smart phones from a business application point of view has always been data entry both from an accuracy and time point of view. Barcode scanning is an excellent way to overcome this weakness, and is often used where data accuracy concerns are high, as well as user efficiency is required.

The market for cordless scanning peripherals for smart phones and tablets has not yet really developed. For example, the extremely popular iPhone did not support cordless scanning peripherals until recently, and the android operating system devices are just now getting their implementation of Bluetooth stable enough to support business usage deployment.

We start 2011 with a completely different and lastly improved environment and marketplace for the deployment of business related mobile applications. Today’s customers can choose their screen size, choose their OS, mix-and-match devices, knowing the support of cordless support and other automated data entry mechanism is robust and reliable. We believe these factors will result in the development of a large and robust market for cordless scanning products such as the 7x.

In addition, SocketScan 10 was developed so we could easily support multiple platforms and can quickly update this to stay current in this rapidly changing environment. We will be the first to admit our cordless scanning business has struggled the last two years, since we are unable to support the popular phones being deployed. We would also be the first to remind every one of the solid sales we enjoyed in this category in 2006, when we were able to support the popular Windows Mobile–based phones, when they were wildly popular.

History is repeating itself here, but in a much grander scale due to all the technological improvements in screen resolution and touch inputs, operating systems, battery life, widely available applications and the general acceptance of smart phones and tablets as useful devices. We saw our cordless scanning revenue increase 15% sequentially in Q4 or Q3, and expect to see the rate of growth improve further in Q1 to 25% plus sequential growth, which is exciting.

In summary, we are seeing a much improved business outlook both short-term and long-term compared to the challenges of the last two years. During that time we took a number of strategic steps to resize our organization to fit our new market and revenue realities, focused on development spending on the most strategically vital products, significantly reduced expenses and carefully conserved cash.

As a result, we begin 2011 in our strongest position in years in terms of near-term revenue opportunities and market positioning. With continued execution and resolution of our supply constraints, we are confident in achieving profitability in 2011 resulting in greater shareholder value.

I would now like to turn the call back to Dave.

Dave Dunlap

Thank you, Kevin. Our fourth quarter 2010 revenue was $2.6 million, a decrease of approximately $800,000 over revenue of $3.4 million in the previous quarter.

As Kevin has noted, our ability to ship handheld computers was affected by worldwide supply chain LCD screen shortages, due to increased demand for LCD screens by Apple and other smart phone manufacturers.

These manufacturers essentially absorb the capacity in factories that were producing our screens, and converted those factories into smart phone component production. As a result, we deferred Q4 shipments of $1.2 million in products that would have been shipped prior to the end of the year. And had we done so, would have resulted in an improving rather than a declining quarterly revenue trend.

The good news is that the LCD screens are being produced, albeit in limited quantities relative to the demand, we are shipping products as it is produced and we are working with our suppliers to obtain sufficient components to meet the rising demand for our handheld computer products.

The order pace has been robust in the current quarter with shipments to date plus orders shippable in the quarter now at $4.5 million, but with only $1.9 million in products shipped to date. With nearly half of the quarter to go shippable order demand should well exceed our breakeven point of approximately $5 million in revenue for the quarter, and our ability to report a profitable first quarter will now be determined by our ability to receive sufficient product from the supply channel to meet this demand.

Bookings in 2010 increased for our handheld computers and our data collection products. These products together represented 80% of our 2010 revenues, and bookings were up 15% in 2010 over 2009. Our overall revenue in 2010 declined 3.6 million to 13.5 million from 17.1 million in 2009. All but $1 million of the decline was from legacy connectivity products such as our serial cards and our VCO2 [ph] Bluetooth modules that have been discontinued.

Sales of our handheld computer and data collection products would have been would have been flat for the year if the LCD component shortages not delayed shipments in the fourth quarter. We don’t expect any significant further declines in legacy product categories in 2011 compared to 2010. We are expecting growth in our handheld computer and data collection product families this year as reflected in our improved bookings and in our tracking of any sales opportunities.

As Kevin noted, there are a number of factors contributing to these growth expectations, and we have built these factors into our financial planning for 2011. I wanted to give you some of the highlights of these financial planning assumptions. Sales of mobile solutions offered by our growing base of application partners continue to increase, particularly in our primary vertical markets of healthcare and hospitality. We have been very pleased with the successes that our customer Epocal, has been achieving with its mobile blood analyzer system that uses both our handheld computer and one of our plug-in barcode scanners.

Several large organizations have incorporated our products into their solutions, including the VeriScan medication dispensing system offered by Hospira and the mobile library and management system capability added by 3M. And we have highlighted in our press announcements and case studies the growth in long-term healthcare management systems from organizations such as Good Samaritan, Lancaster Health Group, SigmaCare and WeCare.

We are working with the teams at Digital Dining to enable the expansion of tableside ordering. Our handheld computer is also being offered as part of an events management system Redtech [ph], an events management company in the United Kingdom for processing credit transactions at major events.

Other application providers as we have highlighted include Plasco ID with their student tracking systems for schools, (inaudible) with their sales automation system, patient tracking software from Cardinal Tracking, hotel room servicing by many of our healthcare staffing applications such as (inaudible) being used in the United Kingdom and others.

We are seeing an easing of the slowdown effects of the economic downturn. As many customer projects in our pipeline that were moving slowly or on hold, are now moving forward towards completion and deployment. As Kevin noted, we are benefiting from new products introduced last year, including our lightweight model 7x 2D cordless barcode scanner, which has shown steady growth since its introduction last summer.

We received in January an order for more than $300,000 for the 7x scanners for delivery in the first and second quarters of this year. Our antimicrobial version of our handheld computers is receiving increased interest from healthcare organizations. Also significant has been the release of SocketScan 10, which makes it easy for developers to incorporate barcode scanning into a wide range of applications for smart phones, including our just announced release of SocketScan 10 for android.

SocketScan 10 works on a number of devices, including smart phones, handheld computers, notebooks and tablets using a variety of operating systems, including Windows, Windows Mobile, RIM and android. We will be further updating SocketScan 10 later this year to incorporate its capabilities into Apple and HP’s webOS devices.

As Kevin noted, HP is discontinuing sales of its 200 series handheld computers in selected countries, including Japan, Brazil and India. And we are aware of many HP customers in Japan that have qualified our handheld computer as a replacement product. HP has been the largest supplier of classic PDA to the consumer market, and businesses that have been able to use these classic PDA devices are finding our handle computer to be a logical replacement.

For the past two years, Socket has operated as a significantly leaner organization, including fewer employees and extensive cost reduction programs reducing (inaudible) and discretionary spending.

Our operating costs in 2010 were more than 10% below our operating costs in 2009 and almost 40% below our operating costs in 2008. In our plans for 2011, we expect to phase out the cost reduction programs, consistent with our goal of reporting profitable operating results, while continuing to improve and expand our product offerings. We expect our margins in 2011 to improve with higher volumes to spread our fixed costs over most units produced.

Socket continues to be highly leveraged both on the supply side where contract manufacturers have plenty of capacity to support growth, and on the distribution side, where our many distribution partners and application partners are interacting with customers around the world. Our focus is serving these established partner relationships to support the sales of our products.

In our 2011 planning, we intend to improve our working capital and cash liquidity in anticipation of financing growth. Operating at profitable levels is important, as that adds cash from operations since our bottom line includes several non-cash items, including stock option expense and equipment depreciation. We have also implemented and will continue a number of working capital management steps to maximize cash liquidity, including agreements with several of our customers for rapid payment of receivables, are accepting inventory and smaller, more frequent lot sizes to reduce inventory balances, and continuing to work closely with our vendors to ensure their support even though payments are extended beyond normal payment timeframes.

We raised $20 million in the fourth quarter through the issuance of 18 months convertible notes. Qualified receivables and to the extent needed cash, our collateral for the notes. One unintended consequence of our shipping delays was the resulting order receivables, as vendor requirements for us [ph] to hold a greater portion of the cash we raised as collateral.

Today we are holding approximately $500,000 in cash as collateral for the notes. We would like to get that cash into general business use, and can do so as the notes are converted to reduce our collateral requirements, while shipments increase our receivables levels. No notes have yet been converted.

Our annual meeting of stockholders is scheduled for April 27, 2011, at the company’s facility in Newark, California. The record date for voting is February 28, 2011. Proxy materials will be distributed starting in the second half of March. On the ballot this year will be the election of directors and ratification of our selection of Moss Adams to serve as independent auditors for 2011.

I’m pleased to report that all of our current directors have agreed to serve for another year. We continue to receive strong support from our vendors, our customers and our application partners, and we’re particularly appreciative of the dedicated work and the continued and unwavering support we have received from our employees and from our stockholders who share our vision of mobile opportunities in our key vertical markets of healthcare and hospitality, and the improved productivity that results from enabling mobile workers to collect and process information while mobile.

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

Question-and-Answer Session

Operator

(Operator instructions) Our first question is coming from the line of Brian Swift of Security Research Associates.

Brian Swift - Security Research Associates

Hi, guys.

Dave Dunlap

Hi, Brian.

Brian Swift - Security Research Associates

Hi. I guess, I heard you right, you said that with your shipments that you have done so for the quarter and backlog, orders whatever in hand, if you had the supply you can do 5 million this quarter, did I hear that right?

Kevin Mills

Actually you heard, yes, we were 3.6 at the end of January, and right now I think we’re at 4.5.

Brian Swift - Security Research Associates

4.5 right, and the normal pace that we see coming in will easily take us well above the 5 million number in terms of what we are capable of shipping if we had the product.

Kevin Mills

Yes, so your question is, if we had the products, we would be in the $5 million range this quarter is a realistic expectation based on the fact that we are 4.5 right now, so our I would say our concerns have switched rapidly from getting orders to fulfilling orders.

Brian Swift - Security Research Associates

Right. I would assume that you would have – what is the normal amount of turns business that you do here in the quarter, usually don’t have such a big backlog…

Kevin Mills

Our traditional backlog in and out of a quarter is about $1 million. It varies between $1 million to $1.2, and we started Q1 with $2.4, which is abnormally large, and again, I would say we would exit Q1 with still an abnormally large backlog because of supply issues, but certainly demand seems to be very strong at the moment, and the numbers will be very strong if we had the product.

Brian Swift - Security Research Associates

I am sorry, your cash flow break even going forward as far as the first quarter with adjustments and stuff that you have been making in the past, what is that now?

Dave Dunlap

$300,000 to $400,000 less than our breakeven point.

Kevin Mills

Probably 4.6.

Dave Dunlap

4.6, 4.7, somewhere in there, Brian.

Brian Swift - Security Research Associates

4.6 to 4.7 is cash flow break even?

Dave Dunlap

Yes.

Brian Swift - Security Research Associates

Bottom line profit is…

Dave Dunlap

About 5.

Brian Swift - Security Research Associates

Okay. Could you talk a little bit more about the SoMo in terms of, we heard a lot about the proliferation of Apple and android, RIM and other type of products that are out there that are giving customers lot of choices as far as what the use is as far as the handheld was concerned. What does that do for the outlook for the SoMo brand, if HP makes it widespread that they exit that is an opportunity that is also an opportunity for people to use these other more popular devices. So what do you see happening on the SoMo going forward?

Kevin Mills

Okay. So it is a very interesting question. So, we really see some bifurcation in the market if you will. And all the AIDC markets, whether it be people using a Motorola or (inaudible) type device et cetera, today that probably is supported 95% by windows mobile based devices. And we would expect in the short term that trend to continue. Many of those developers who developed applications for iPAQ or Motorola, or (inaudible) type devices, SoMo obviously being one of them, and we will continue to leverage that software, and certainly in a window centric world, where you have a lot of database stuff et cetera, and the windows mobile OS in the business world I think has a very, very strong foothold.

And we wouldn’t expect to see a lot of android or other devices coming in quickly for a few reasons. As the life of the products is still expected to be I would say 3 to 7 years, and certainly the newer OSs haven’t reached the level of maturity that they are going to be stable. I mean they are literally changing on a quarterly basis right now. On the consumer side, you have a very different situation. And we believe that the Apple, android, RIM and other OSs will be used to automate processes currently not automated.

And people will use these phones in conjunction with peripherals, barcode scanning obviously being one of them and to do business processes. So, we’re not really seeing many of our traditional SoMo customers looking for android-based stuff at this stage. What we are seeing is a lot of people who have a big investment in their software, particularly that were relying on HP and coming over and looking for the SoMo so they can leverage their software development, and we also are continuing to develop, and we have a number of trials ongoing where people are pretty committed to large number of windows mobile based devices, because they know they are going to get the stability over the next 3 to 5 years. So, we don’t see that impacting, and I would say the android stuff is lighting up a different section of the market, and would only drive or impact sales of our cordless scanning product.

Brian Swift - Security Research Associates

So, it sounds like you don’t have plans to have these other OSs available on the SoMo, just the use of the SocketScan 10 for your scanner type of products to be able to kind of universally used on Android…

Kevin Mills

That is correct. That is correct. I think that the SocketScan will allow universal adoption on multiple OSs. Certainly in 2011, our focus for SoMo would be window based devices. And that is not to say we would exclude in 2012 having a version of SoMo with android, and we don’t know. I am certainly based on having been in this business now for a little while, it doesn’t move rapidly because there is a lot of software development, as well as deployment prior to a large roll out. And I think we will have to look going down the road and having alternative OS choices for our customers, but we won’t have anything that would impact SoMo revenue I would say in the next 12 months.

Brian Swift - Security Research Associates

Okay. So, how do you feel about SoMo growth prospects for the next 12 months?

Kevin Mills

They are actually, I mean what we are actually seeing in the start of the year is a lot of the applications we have worked on are coming back. And so we actually feel that the market for us will grow rapidly for the next 12 months on SoMo, as we convert some of these larger opportunities into I would say deployments, and we’re also seeing I would say a strong up tick, and from the departure of HP in certain areas, and should they exit globally, which is our understanding they will do, and I think that will have a hugely positive impact on SoMo sales in the next 12 months also, because people are married to their software.

As I mentioned in my comments, I did go to Japan and meet a few of these customers and in all cases I asked them how much time it would take them to just recreate their existing application on a different OS. And the shortest answer was nine months. So it is not easy as people think to change from one OS to the other. It is a longer term commitment, so I would say many of the HP customers will come our way so they can leverage their existing investments.

Brian Swift - Security Research Associates

Okay, and one more before I turn it over to the next guy. From what you know now, how would the mix of business look in do you think in 2011 as a percentage of sales from say SoMo, scanners, OEM and legacy?

Kevin Mills

Okay. And I would say, well first of all let me just say that SoMo and SoMo related because the plug-in scanners today are 95% to 98% sold in conjunction with SoMo. We would expect that SoMo related would represent about 50%. Okay, and that would include the SoMos and the plug-in scanners. I would expect about 30% of our business by the end of the year will be cordless scanning, and probably 15 and 5 OEM and legacy.

So, I hinted that we have lost a lot of the legacy stuff during the last two years, and we would expect it doesn’t make a material difference to our business right now. And there is two things driving our business, the SoMo and the cordless scanning. And we would expect both of those to grow both in terms of numbers and percentages.

Brian Swift - Security Research Associates

Okay, and if I come back will be to discuss a little bit of what has happened in OEM, you didn’t discuss much about that, but I will let the next guy.

Kevin Mills

All right. Thank you very much Brian.

Operator

Thank you. Our next question is coming from the line of Alex Berger of Hudson Bay.

Alex Berger - Hudson Bay

Good afternoon gentlemen. I just wanted to ask you if you could elaborate on the use of Socket products in the market place, specifically uses that you know as in the medical and the restaurant spaces?

Kevin Mills

Sure. So, certainly with the SoMo, we are seeing I would say long-term healthcare as our primary medical category right now. And we, as we have reported we have 3500 devices currently in daily use at the Good Samaritan Society, and we’re also seeing others like Lancaster, SigmaCare, WeCare and actually when I was in Japan the largest opportunity we discussed with a HP customer there was also in long-term health care.

They, for example, had I think if I remember correctly about 4000 iPAQs in daily use, and in this type of long-term healthcare environment. Certainly that would be our largest category. We are also doing quite well in areas of medication dispensing and tracing and tracking samples within hospitals, where people are scanning a sample and within the hospital using the SoMo, and then that being used as a reference for tracing and tracking it through the various hospital processes.

We have also seen an uptick in the UK in orders for clinical related work as well as for what I believe is a doctor nurse paging system, all of which are SoMo centric. In the restaurant trade, I think that we are continuing to see traction in tableside ordering. It is where people are bringing SoMo to the tableside, or we did an announcement recently where American Movie Grill [ph], who have over 200 systems are using it to take orders, and I think processing something in the region of 1800 people a day, and taking orders in movie theatres et cetera.

So, over the last two years I really think we have honed in and found where the SoMo is the best product. And certainly inside the four walls, where you need a nice portable computing device, and we seem to be winning strong. And again, I mean the incumbent has been this market has been HP, which is a difficult adversary in many ways, and with their departure we feel that we would continue to penetrate the market.

On the cordless scanning side, we are seeing a very different set of dynamics, but I don’t know if you wanted me to extend the answer to include that as well.

Alex Berger - Hudson Bay

Sure.

Kevin Mills

I mean, so on the cordless scanning side, I think the market dynamics are very much, people are out and about, they are using a mobile phone based device with 3G, 4G coverage, and they are adding scanning to control a simple application, whether it is take orders from customers, take (inaudible) from customers and defective material, order processes, stock shelves, and merchandising, and a lot of these or what I would describe the new application, where people previously using pen and paper based systems, and now can switch over.

So we don’t see a lot of overlap between I would say the dynamics of the android Apple world and what people are trying to do. I would say the only area where we see overlap is probably with the iTouch [ph] in the restaurant trade, there is a lot of activity to use that. And I think one of the difficulties of using consumer grade devices in the restaurant trade is it is a pretty abusive environment, and within a short space of time we have seen commercial grade products tend to be broken or misused and abused, and therefore people, even though they initially start with iTouches I think a fair percentage will return to a more dedicated device for the application.

Alex Berger - Hudson Bay

Thank you.

Kevin Mills

You are welcome.

Operator

Our next question is coming from the line of Bernard Bedel [ph], a private investor.

Bernard Bedel

Hello.

Kevin Mills

Hi, Dr. Bedel, how are you?

Bernard Bedel

Fine, how are you doing?

Kevin Mills

Good.

Bernard Bedel

Okay. A couple of questions, as far as the supply channels, when do you expect it get someone to somewhat normal shall we say, do you find the supply is coming in at this point?

Kevin Mills

Okay. So, first of all we are getting some supply and we have shipped somewhere in the region of you can say 1000 some so far this quarter. So, it is coming in. Obviously Chinese New Year and soft thing for two weeks, and we expect the supply to continue to improve, and currently our VP of Engineering Operations, Tim Miller, is in Taiwan with our suppliers.

And the screens are being made. However there is a long line of people, ourselves included, looking for that allocation. We think the situation will continue to improve through Q1.I don’t think it will get normal probably for another I would two months, but we don’t need it to be normal. We just need it to get back to a situation where we can guess a reasonable supply to clear our backlog. I think that will start happening starting in March.

Bernard Bedel

Okay. Now, you mentioned that you have orders about 4.5 million?

Kevin Mills

Yes, I mean that is correct. I mean the way we track things is, and you know, we have orders on hand that are shippable in the current quarter. And obviously we started this quarter with a larger than expected backlog due to the material shortages. We have also seen a general pickup in business, plus we have seen some larger order demand. So, today if we receive no more bookings and we only shipped what was available based on orders currently received and available to us, the number for Q1 assuming supply will be 4.5 million.

Bernard Bedel

So, I will tell me something, since it is the middle of the year, middle of the quarter, if you go further and still have another month and a half, those orders will probably be in the 6 million to 7 million.

Kevin Mills

Well, again, yes, I think that we would hope that they will continue, we will carry a big backlog into Q2. But yes, I think the order pace has picked up. I think a lot of the uncertainty that seem to be in the market for the last two years has abated, and there seems to be a little bit more urgency with our customers. So yes, I mean the rate of orders is very encouraging, and you know unlike on previous calls, where I think we were always chasing the order in the hope that would come in in time, and we would ship rapidly as we were able to do.

Right now the situation is very different, we have the orders and all our focus is on supply. And the orders keep coming in. So we’re pretty pleased with the order side of the business, but as we pointed out on the supply side we have a whole new problem.

Bernard Bedel

What do you expect to be able to ship in the first quarter?

Kevin Mills

It is very difficult to say because we are dependent, and this is one of the things that happen in a supply situation. We are dependent on the information we get from our factories, who in turn is getting information from the screen manufacturer. The information has not been what I would describe as highly reliable, and outside factories have influenced allocation of those things at the last minute. So I think the short answer is I don’t know. If we believe right now the current available information, I think we could ship another, I would say 2000 to 3000 SoMos this quarter on top of the 1000 we shipped, which would put us back in the 3000 unit range, maybe a little bit higher if we can clear all the backlog, and so I think we will still be constrained by supply.

And our scanning side has been stronger than we expected, where we are not constrained by supply. So that is also helping. So I really don’t know is the short answer, but I want to let you know that every effort is being made to make sure that we can ship as much as physically possible in the quarter.

Bernard Bedel

So, you expect to be profitable for this quarter, is that a fair statement?

Kevin Mills

I can’t say that with great certainty. I can say that I will have the orders to be profitable this quarter, and I will be working hard, and we will be working hard to make sure we ship as much as possible, and I think it will come down to the last week, and I can see us shipping 20%, 30% of the quarter’s requirement in the last week of the quarter. So, I don’t know and we certainly will have the orders to be profitable, yes.

Bernard Bedel

Okay, good. (inaudible) on a couple of things there, how are you dealing with Hospira?

Kevin Mills

I think that – well certainly since the start of the year, we have not had a lot of opportunity to reach out and talk to many of the customers, as we have had other issues on our minds. But I would say, in general, we have seen a general pick up. Hospira is still selling our products. And they didn't have a particularly good year, and I did speak with them late in 2010, and they felt the hospital market really wouldn't flourish for them until I would say mid to late 2011, because the regulations that are driving the dispensing system don't come into effect until January 1, 2013. And generally people have other I would say issues ahead of that in their IT priority list. So, I think they are doing okay, but I don't think they are doing great. They strongly believe in the solution and expect it to, I would say, drive a lot of business prior to the laws coming into effect in January 2013.

Bernard Bedel

And the call, are sales picking up?

Kevin Mills

Their sales are great. I mean, we are in backlog to them. They are in backlog to their customers. They have really done very well and we are a little bit apologetic to them that we can't support them better, but this is the reality of the situation. I don't know the exact number, but our business with them was probably up 200% or 300% last year, and we expect it to be up again that amount this year if we have the supply to meet them. They seem to be doing quite well in the market and they are in backlog. Yes, that's very good.

Bernard Bedel

Okay. What about the Australia, the nursing homes in Australia, are we getting orders from that?

Kevin Mills

Yes, again all of – right now actually we are getting orders from everybody, and that's the good side of the problem. I mean, everyone now is going yes, I mean, we have struggled for the last two years to get the orders, as you are well aware and then all of a sudden people are going, yes, and I'll take it now, and we are going, okay can we get back to you in six weeks. It's a good thing as many customers are pretty committed because of their software development and investments, and therefore the customers are waiting, and we do go through a long list and yes, most of the people that we talked about are beginning to order. So on the order side things haven't looked as good in a long time.

Bernard Bedel

Okay, remember the order last year about this time from the hospitality from England that fell through?

Kevin Mills

Yes.

Bernard Bedel

How is that working out?

Kevin Mills

Again, I haven't actually physically spoken to them since I think December. They seem to be doing fine, and we haven't received any order from them. We will touch base with them I would say in the coming weeks, but literally I haven't been able to get out to talk to some of those people due to the fact that we've been working so hard with supplies and…

Bernard Bedel

I remember during December it was a large order pending for a nursing home in the United States?

Kevin Mills

Yes, so that is still pending. They should finalize the test this month. We’ve weekly calls ongoing with this hospital chain and it's pretty large and substantial. On the last five or six calls they have reported no issues, and we believe they will make a decision towards the end of Q1. I would say it's going particularly well, and we would expect to guess, to win this business and I think winning this business will substantially strengthen our SoMo business in 2011, but if it comes any sooner I don't think we'll be able to support it.

Bernard Bedel

Okay, three more questions. The OEM, how is that coming along?

Kevin Mills

Well, as you know, we moved our Ring Scanner over to the OEM group, and our wireless. They're actually having a pretty good start to the year also. We've some solid Ring Scanner orders now. We're working with a few customers and on the wireless LAN side we have a number of customers testing. We have not had any major deployment. We have had one I would say medium-size deployment in Japan, which we’re now servicing, and so I think that is a pretty solid and dependable as it's been. I don't think it has big numbers as just yet, but I feel that briefly on the wireless LAN side, it's starting to grow again.

Bernard Bedel

Okay, now I notice that you're paying your people for developing applications.

Kevin Mills

Oh, we're not paying people for developing applications.

Bernard Bedel

I am probably using the wrong terminology.

Kevin Mills

Yes, what I think is that we put together a program whereby developers of applications, who use or embed the Socket scanners. We can provide them with some additional revenues for selling that scanner.

Bernard Bedel

That's what I meant, right.

Kevin Mills

Yes, so we – I mean one of the things that is difficult in I suppose in the development environment is for people to have an incentive to use your stuff, and a lot of developers are very agnostic, and want to support everything and as a way to make sure they understand the benefits of our products, and how robust and reliable they are we basically incorporated in our software, the mechanism whereby should an application, we will take something like book selling application or car selling application, basically require a scanner and that scanner is a socket scanner. We are willing to pay that the person who developed that application a bonus for doing this.

Bernard Bedel

How is that going by the way?

Kevin Mills

It's just starting. I mean, with all software developments and –

Bernard Bedel

That's a good idea. It's something like an incentive.

Kevin Mills

Exactly. So, I mean, essentially if we care more, the developers will care more, and that's in the (inaudible) case, which we are just rolling out now. I would say you know, the (inaudible) for android and Blackberry, Windows mobile et cetera will support this new feature. It will take developers probably 90 days before they have applications in the market, and then we'll see how it goes, but certainly it gives us more of a reach into the developer community, and this is an area where we really want to work more closely with the developer community to make sure that we are meeting their needs for data collection products.

Bernard Bedel

Okay, just two more questions, I will let someone else. You mentioned that Dell is dropped out in Japan, India and Brazil.

Kevin Mills

Yes, Brazil. And it was actually HP. So –

Bernard Bedel

You are right, HP. Now, when will that relate to orders in the factors [ph] towards our SoMo?

Kevin Mills

Well, again – I mean we can generalize, but I mean, one of the things I did I was actually went and traveled to Japan. We have a very good distributor there, and I asked to meet with people who were long term HP customers to see the impact, and what they did was they had worked closely with HP, HP had advised them, and they all have been given the opportunity to do last time buys, and all of them availed of that opportunity and I would say that really happened in November.

I was there in December. We have seen orders starting to pick up from our Japanese customers in late January, February and today I would say that two of the three customers have started up to switch over to the SoMo. We expect the third switch over in March, and so I would say it's going to take three to four months when the supply stops. Now, the other thing that's happening is and it depends where you are in the chain, and if you are a small customer of HP and buying 10 or 15 units, and the products just goes away and you don't get a notification, and those customers come in and start buying from us more quickly, and we are seeing a combination of both, but I think that I would expect to see HP you know, phase out over the next quarter to quarter and a half, and we should see a much stronger second half to the year based on HP's departure than we will first half. But, as you know, the first half we’re pretty much, we've got the orders we need anyway.

Bernard Bedel

Yes, for the units, how many units do you estimate to come our way with HP leaving Japan?

Kevin Mills

Just Japan?

Bernard Bedel

Yes, well, let’s say Japan for instance, yes.

Kevin Mills

I would say I would estimate that we could sell 3000 to 4000 units in Japan this year as opposed to the ’10 we sold last year. So it’s big numbers.

Bernard Bedel

Well, that's quite large, and does the same thing for India and Brazil?

Kevin Mills

And again I mean, you can extrapolate this, there are 138 countries in the world, the numbers can get big, but based on what we know and that's what we know right now and I don't want to you now, oversell us. I haven't been to India, and I haven't been to Brazil and I haven't talked to people. So that would be more conjecture in the case of Japan I actually went there. I talked to different customers. I think that the 3000 to 4000 units for Japan is a realistic estimate of what might happen based on the conversations, the factors, it is not available and what orders they have started to send our way, and then I leave it up to you and others to extrapolate.

Bernard Bedel

Yes, then the last question is it's a great, great story, okay, even though we've been disappointed every quarter so far, but I think the way you are presenting it right now, I'm very optimistic for, this is like the beginning of the beginning factor thing you know. Now, I think a lot of people are not even aware of sockets. Is there any plan to do some public relations or get a report out or something to that effect?

Kevin Mills

Yes, we will do all of that. I mean I think we have to do that to tell the full story, but before we do this I think it's important that we have sufficient funds to buy the product and ship the product, and I think we're only still in the game because we were, we aggressively reduced our expenses over the last two years, and conserved every penny that we could.

So I think you know, yes we will spend money, we will do PR, we will reach out to investors, we’ll do road shows, but I think our first and foremost responsibility is to get our supply chains lined up, make sure we have sufficient funds to pay our suppliers and ship our product. Once we have that done which we hope to have achieved by the end of Q1, we will certainly be on the road and telling the story in a much more positive way and we do share the – you know it has been a long time coming, but I do feel that there is more momentum in the business than we've had I would say anytime in the last three to four years.

Bernard Bedel

Actually we – are we looking for other suppliers if this person can't provide us with enough?

Kevin Mills

Yes, on the supply side, believe me we're doing everything to both have additional suppliers, but all of this costs money, and again we've been managing our limited cash very, very tightly to make sure that all this happens and all the money must go and stay in that direction until we have the supply chains clear.

Bernard Bedel

Okay. I think that's enough, and hopefully – when is your next release of earnings…

Kevin Mills

No, I think the shareholder meeting is on April 28.

Dave Dunlap

27

Kevin Mills

27. So we would – I don't know where we will be on Q1.

Dave Dunlap

Typically we’d release earnings…

Kevin Mills

The following day.

Dave Dunlap

Either right after or perhaps even as much as a week before. A lot of it depends on the closing schedule and we haven't set any of that yet, but we’ll set it as we get closer.

Bernard Bedel

Okay. All of my questions have been answered. I will let someone else go.

Kevin Mills

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

Operator

Thank you. We have a follow-up question coming from the line of Brian Swift. Please state your question.

Brian Swift - Security Research Associates

Yes. Two things, you did elaborate a little bit on the OEM side of the business but maybe you can tell us what you know, if you can briefly just what is there that's compelling that would make an OEM want an easier solution in the wireless, and then the second question would be last year there was obvious excitement when you announced a deal or 3M announced that they had selected your product, and we haven't heard from them again and so where are they in the scenario?

Kevin Mills

All right. So two questions. First on the OEM side, I think the compelling product we have in OEM is our wireless LAN, which we provide in both SD form factor, which we – primarily in SD form factor, and it allows somebody to design a product and add wireless LAN capability, and to some but not all of the products. And we do a particularly good job on the software elements, and when we sell this it often is provided with CCX, which is the various levels of software inscriptions that are required to support physical and other – well, that one is physical but other infrastructure.

So we spend I would say a million dollars a year in staying competitive in wireless LAN. A lot of it is so we have the best wireless LAN in SoMo, and then we leverage that by providing it to third parties, and because of the downturn there was some unexpected end of life, which resulted in what I would describe as missing a design cycle. We're now back in the new design cycle, and we grow that business back up, and that really is on the OEM side.

We will also move the Ring Scanner over there and we have, we're working with a few strategic accounts. The Ring Scanner even though it works tremendously well, provides enormous productivity benefits to people is a difficult sales, difficult product from a sales point of view, and we were the bridesmaid in many, many opportunities but never seemed to be the bride, and we pulled it back from distribution. We're working directly with a few customers. We still deliver everything through distribution, and that now is in the OEM category.

As regards our friends at 3M, yes, unbeknownst to us they have developed a product for asset tracking, and decided to target that market using the SoMo. They did a press announcement and our stock went crazy, and they subsequently disbanded the group, and nothing ever happened. They have taken the SoMo product and moved it over to their library [ph] systems and our, and basically are now selling a library based portable system based on the SoMo. And we haven't done a press announcement on this. We'd like to see them get a few successes onto their belts, and if they do we’ll certainly do a press announcement.

The last time I think you know, the excitement certainly didn't turn out to be warranted and we're reluctant to do that again, but they seem pretty committed to this new product and they do literally own the library market in terms of controlling books in and out and checking people in and out, and their current solution looks quite compelling on the SoMo. That's where we are with 3M.

Operator

Thank you. There seems to be no further questions in our queue screen. Do you have any closing comments?

Kevin Mills

Yes, I just like to thank everyone for their continued interest and their time today and I’d like to wish everyone a good day. Thank you.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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