Socket Mobile's CEO Discusses Q4 2011 Results - Earnings Call Transcript

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 |  About: Socket Mobile, Inc. (SCKT)
by: SA Transcripts

Socket Mobile, Inc. (OTCQB:SCKT) Q4 2011 Earnings Call February 22, 2012 5:00 PM ET

Operator

Greetings and welcome to the Socket Mobile 2011 annual and fourth quarter 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 at MKR Group. Thank you Mr. Byers you may now begin.

Jim Byers

Thank you, operator. Good afternoon and welcome to Socket’s conference call today to review financial results for its 2011 fourth quarter and full-year ended December 31, 2011. On the call today from Socket are Kevin Mills, President and CEO; and Dave Dunlap, Chief Financial Officer.

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 www.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’ve also posted replay numbers in today’s press release for those wishing to replay this call by phone. The phone replays will be available for one week.

And before we begin, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended and Section 21-E of the Securities and 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 Socket sells its 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 factors including, but not limited to, the risk that manufacture of our products may be delayed or not rolled out as predicated 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 be not successful in doing so.

The risk that acceptance of our products and 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.

Now with that said, I’d like to turn the call over to Socket’s President and CEO, Kevin Mills.

Kevin Mills

Good afternoon everyone and thank you for joining us today. In today’s call, I will begin with a brief review of our progress in 2011, then discuss the business opportunities we see ahead and our outlook for 2012. We made substantial progress in 2011 and believe our initiative to strengthen our overall business and enhance our product offerings have set the stage for meaningful growth ahead. Our full-year revenue for 2011 were 17.5 million, up 30% over last year that includes solid year-over-year growth in revenue from both our handheld computer and cordless scanning family of products.

On a year-over-year basis, we also improved gross margin, reduced our operating expenses and strengthened our balance sheet. Our 2011 annual EBITDA performance also improved significantly to a loss of $154,000 or $0.04 per share compared to a loss of $2.5 million or $0.66 per share in 2010. Overall 2011 was a good turnaround year for Socket Mobile. Our revenue for the fourth quarter was $4.4 million consisting of $2.4 million of SoMo related sales, $1.7 million of cordless scanning related sales and $300,000 dollars from service and other legacy related products. While the Q4 total is up significantly year-over-year from $2.6 million in Q4 last year, we are disappointed in Q4 revenue which was impacted by less than expected sales of our SoMo that we believe is primarily a timing issue and not related to underlying market demand.

We were able to clear our long pending backlog of SoMos in Q4 and shipped almost 6,000 SoMo units to our distribution channel in the quarter. Unfortunately, a significant portion of these units did not clear the channels prior to year end and therefore didn’t count from a revenue point of view for our revenue recognition policy. The good news is that our supply problems are finally behind us as confirmed by the SoMo shipments we made in Q4.

We continue to see strong market acceptance and opportunity for our handhelds. But certainly, our SoMo supply problems in 2011 impacted our otherwise long-standing reputation with retailers as a solid and dependable supplier.

We’re working hard to restore the confidence of our retailers and distribution partners and our ability to be a solid and dependable handheld supplier.

With last year’s supply problems are already behind us and significantly improved product availability and delivery performance, we have been aggressively ramping up our marketing activities, especially towards Hewlett-Packard customers to encourage them to transition from the HP iPAQ to the SoMo handheld.

We have been actively reengaging with retailers and distributors to gear off their sales support and promotion of our products and build confidence in the market that Socket is committed to this phase and a reliable supplier of handheld products.

Earlier this month, we announced the upcoming availability of a new and improved SoMo model 655, the next generation of our handheld computer, featuring significant upgrades and enhancements that address the need of the business mobility market and reflect feedback we have received from the markets.

But importantly the SoMo 655 will remain available for at least three to five years which is the requirement for qualification for many customers. It also firmly underscores Socket’s commitment to the handheld space. With this many new and enhanced features, long life and professional service and support option, the SoMo 655 enables enterprise to maximize the return on investment and is an ideal replacement for users of the HP model 200 series iPAQ handheld computers that HP discontinued last year.

The standard version of our SoMo 655 has a MSRP of $648 and will be generally available in the US starting in the second quarter with worldwide availability expected in Q3 of this year. Typically street prices are 5% to 10% lower than MSRP. We are very focused on continuing the strong sales momentum we have built up with SoMo and gaining further traction in the markets especially within our key targeted verticals and with the significant opportunity we see that the HP customers as a result of HP’s exit from the classic PDA markets.

In 2011 revenue from our handheld computer family of products and related plug-in centers and accessories grew 21% over the prior year from $8.2 million to $9.9 million and represented 57% of our 2011 revenue. During the past four years, we have sold more than 50,000 SoMo model 650 handheld computers in to mobile business markets, particularly for use with healthcare and hospitality applications. Surpassing the 50,000 unit mark in SoMo sales is a respectable ramp up when considering that these sales occurred in a lesser robust economic climate. So the customers have the alternative choice of purchasing HP iPAQ for about $100 less. And the SoMo 650 was Socket’s first generation product and we were a new supplier to the handheld computing markets.

Our SoMo 655 which incorporates many improvements from lessons learned in the market over the past several years will include many new features to be sold into a more robust economic market. That will no longer have the lower cost HP iPAQ available. In addition the SoMo 655 is fully compatible from a software point of view with the iPAQ and the SoMo 650. We believe all these positive elements will contribute to significantly stronger sales of SoMos over the next four years.

Turning to our cordless scanning business, our cordless scanning family of products grew by 181% in 2011 compared to the prior year from $1.8 million to $5.2 million and represented 29% of our 2011 total revenue. The majority of this growth came from our 2D barcode scanners introduced in late 2010 and work with smartphones and tablets used in the Apple, Android, Blackberry or Windows operating systems. Socket offers easy to use software development kits for each operating system to enable the integration of barcode scanning into a wide range of software applications. We continue to introduce innovate solutions within this product family that increased our available markets.

As I noted on our last call early last quarter we introduced our 7Xi scanner, a robust undependable cordless scanner that we expect will us infiltrate into the sub $200 category and be a volume product for Socket 2012. Or recently we introduced our Bluetooth 7Xi and 7Xi or X cordless scanners that have been search by Apple for the iPad and other iOS devices, bringing productivity benefit by adding costs, by adding robust powerful scanning to Apple’s iOS and the most common mobile devices and platforms today.

These scanners used advanced digital imaging technology to accurately and reliably capture all 2D and 1D barcodes in any orientation. We also recently announced our 7Ci a low cost 1D scanner that is Apple certified and addresses the markets need for a low cost Apple solution.

We continue to see very strong momentum in the markets. Earlier software companies like [Hariyama] and others are reporting very good success with their deployments and solid ROIs, which is resulting in additional orders. We expect to continue growth in our cordless scanning business going forward with sales of our cordless scanners, cordless scanning expected to be up sequentially in Q1 as we continue to build momentum and more and more applications are developed and deployed.

As I noted earlier, we made significant progress last year in strengthening our overall business as reflected in our improved financial performance for the year. We improved gross margin to 41.4% compared to the 40% in 2010 and we reduced our operating expenses from $9.1 million in 2010 to 8.5%.

Higher revenues in 2011 in combination with improved margins and lower operating expenses reduced our EBITDA loss to $154,000 or $0.04 per share compared to a EBITDA operating loss of $2.5 million or $0.66 per share in 2010. We also strengthened our balance sheet during in 2011 by converting $1 million convertible notes into common stock and we restored our working capital pipeline.

In summary, we are into 2012 with a very complete portfolio of products that we believe will enable us to continue to grow at the rate we experienced in 2011. On the cordless scanning side we have completed our Apple development and can offer both low cost 1D scanning and sophisticated 2D scanning under a single [STK] allowing us to service the requirements of the entire scanning market.

Our cordless products also fully support Android, Blackberry and Windows based solutions. We are confident that we would continue to see some growth in this category for the next few quarters as we have for the first mover advantage in the Apple market and strong software tools for the developer community, make it easy to incorporate our scanners into their solution, which is key to long-term growth.

On our SoMo handheld side, we have resolved our supply issues and began the transition to a newer 655 version. The 655 will allow us to make the barcode requirements of providing a device that is available for three to five years. This requirement is regularly mentioned by customers and is especially important to the many of the long-term iPAQ customers who are now evaluating the SoMo as a replacement.

The fact that we can assure these customers that the SoMo 655 will be available for three to five more years is a key requirement for them in moving to our handhelds. It also assures all our existing and potential customers that we remain committed to the handheld market. So while there is some uncertainty in all transitions, the timing of our new SoMo introduction is very good and this next generation model is important to the long-term health of our handheld business, especially as many customers are completing their evaluation now..

And while we expect the transition to have an impact on revenue in Q1, it did not impact our overall first half revenue as we expect a substantially stronger Q2 on the back of the transition.

Overall, we entered 2012 with a product portfolio that is the strongest we’ve ever had and that we believe will enable us to maintain the growth levels we established in 2011 and reach profitable operating level for the year.

I would now like to turn the call over to Dave for a review of the financials. Dave.

Dave Dunlap

Thank you Kevin. 2011 was the year of positive achievement for Socket Mobile including significantly improving financial results and laying the groundwork for continued positive momentum in 2012.

Our 2011 revenue of $17.5 million grew 30% over 2010 results. Our cordless scanning product revenue of $5.2 million was the largest growth driver up a 181% from the previous year. Cordless barcode scanning has grown from being 14% of our revenue in 2010 to being 29%of our revenue in 2011.

Our ability to provide professional, mobile bar code scanning for smartphones and tablets combined with a growing adoption by developers for mobile applications with our easy-to-use software developer kit and the growing adoption in the industry of 2D barcode scanning all benefitted our revenue in 2011.

We firstly c introduced our model 7X 2D bar code scanner in 2010 to initially work with many smartphones and tablets including Android based smartphones from Google, Blackberry smartphones and tablets from RIM and windows based mobile phones from Microsoft. This product could be used in a HID or direct access mode with Apple devices.

In 2011 we added Apple MFI certification through our 2D barcode scanner with the model 7Xi enabling the use of our software developers kit with Apple iOS 4 devices. This announcement of apple MFI certification, we’ve been announcing the adoption of Apple version of our 2D bar code scanner by developers in Apple based applications who have integrated our barcode scanners into their applications and are promoting views of our products. We’ve sold to-date more than a hundred software developer kits and we expect many more applications integrating barcode scanning into Apple and other smartphone and tablet devices to be released in 2012.

And finally the announcement yesterday of the pending new release of an Apple MFI certified low cost barcode scanner our model 7Ci will extend the Apple users to benefit from our lower cost linear scanner for those who do not require 2D scanning further expanding our target market in 2012.

Revenue in 2011 from our SoMo 650 family of handheld computer products was $9.9 million, up 21% from 2010 despite screen shortages slowing down deliveries for the first nine months. Handheld computer products and related peripherals and accessories represented 57% of our 2011 revenue.

By the end of 2011, our order backlog was back to normal levels at about $1 million; channel inventories were restored to normal and in some cases above normal levels where product was awaiting distribution and our major resellers including Dell, CDW and Amazon.com were all showing our products as available.

As Kevin has noted, our SoMo family of handheld computers are a logical replacement for the Hewlett-Packard 200 Series handheld computers that were discontinued by HP last year. We’ve continued to see growing demand from the HP customer base for a general purpose handheld computer designed for mobile professionals in business and healthcare and other environments.

We are currently providing samples of our recently announced new handheld computer the SoMo 655 designed as an upgraded version of the SoMo 650 with additional wireless LAN or memory and other improvements. Most importantly, the announcement gives former HP and other handheld computer customers more choices and reaffirms our commitment to the mobile handheld computer marketplace. As with the SoMo 650 we have committed to make the SoMo 655 available for at least three to five years.

Our revenue in 2011 from our two primary product lines, handheld computers and cordless barcode scanning with both lines growing was 87% of our total annual revenue, with the balance from sale of products to OEM customers, some product sales and service revenue. We expect our two major product lines, handheld computers and cordless barcode scanners to continue to be the dominate portion of our 2012 revenue and the main drivers of additional revenue growth.

With growing sales volumes our margin results will improve up from 40% in 2010 to 41.4% in 2011. We also benefited in 2011 from organizational changes in our sales organization in North America to centralized our formerly region wise line sales team, from closely managing our discretionary expenses and from the continuation of many of the cost reduction steps we initiated several year ago. Our operating expenses further decreased in 2011 from $9.1 million in 2010 to $8.5 million in 2011. These three factors increasing revenue, improving margins and lower operating costs all contributed to bottom line improvements.

Measured on an EBITDA basis, or Earnings Before Interest Taxes Depreciation and Amortization our EBITDA net loss in 2011 was reduced to $154,000 or $0.04 per share compared to an EBITDA net loss in 2010 of $2.5 million or $0.66 per share.

On a GAAP basis, our 2011 results included $1 million of debt discount amortization related to conversion in 2011 of convertible notes that were issued in November 2010. So our GAAP net loss in 2011 was $2.4 million or $0.56 per share compared to a GAAP net loss in 2010 to $4 million or $1.05 per share. Our last debt discount amortization charge was recorded in the third quarter of 2011 with the full conversion of convertible notes in the common stock.

Our balance sheet also improved during 2011 with the conversion of $1 million in convertible notes into common stock with the issuance of another $0.5 million of common stock in the first quarter to our primary contract supplier to help lower trade balances payable and with the addition of working capital bank line of credit of $2.5 million in the fourth quarter.

Many of the components of working capital also improved with significantly higher receivables and lower inventories reflecting increasing shipments, lower payables reflecting faster payment to our vendors and revolving bank line draw of $1.1 million replacing $1 million of notes payable at the end of 2010.

On a cautionary note the, first quarter of 2012 like the fourth quarter of 2011 is somewhat of a transition quarter as selling programs for our handheld computers get fully turned back on, as customer deployment planning re-engages, as Apple and other developers continue to complete and launch additional barcode scanning applications and as customers evaluate these new product alternatives with our recently announced SoMo 655 handheld computer and our model 7Ci Apple certified low-cost barcode scanner.

Transitions can have the effect of slowing revenue growth in the short-term while strengthening the opportunities for revenue growth beyond the transition period. For example, in the fourth quarter, we shipped a net $5.3 million of product into the channel, but with typical holiday slowdown, and because we recognized revenue based on sales to channel, only $4.4 million in revenue was recorded for the fourth quarter.

To expedite our moving through this transition period, this quarter we are closely monitoring the completion of pre-production launch task for our newly announced products which are going well and we are expediting customer evaluations of our new products through the availability of samples and technical information.

In summary, 2011 was a positive momentum year with revenue growth it was driven by new market opportunities and new products by improving operating results and by a strengthening balance sheet.

Our markets are recovering from the worldwide economic downturn experienced over the past several years. And we have maintained our key development activities for products for the mobile workforce. We continue to enjoy close cooperation and support from our suppliers, our customers and our employees. Our objective in 2012 remains focused on serving the emerging mobility markets in business and healthcare, growing stock at a profitable operating level and building shareholder value.

Our annual meeting of stockholders is scheduled for April 25, 2012 at the company’s facility in Newark, California. The record date for voting is next Monday, February 27 2012. Proxy materials will be distributed starting in the second half of March. On the balance this year, there will be election of Directors and a ramification of our selection of Moss Adams to serve as Independent Auditors for 2012. I am pleased to report that all of our current directors have agreed to serve for another year.

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

Question-and-Answer Session

Thank you. (Operator Instructions) Our first question comes from the line of Brian Swift from Security Research Associates.

Brian Swift - Security Research Associates

Could you give me a little help on the, I heard the ASP on the handheld at 648 was that for the new model 655 and how does that compare to the 650 ASP?

Kevin Mills

Well first of all let me just say that we only quote MSRP which is Manufacturers Suggested Retail Price and then products are sold at a discount to that through to the distribution channels. Generally speaking, the devices are available somewhere between 5% and 10% lower than that price through various outlets. And so that would put you into the high 500s and I would say generally speaking it will be 10% no more than 10% higher than the current 650 model.

Brian Swift - Security Research Associates

And that’s because it has the wireless LAN?

Kevin Mills

It has a number of additional benefits including the improved wireless LAN with BGN and about 4 gigabytes of memory and it will have a more robust connecting and charging arrangement which I think people will like and able to support things like charging in the unit cases with added case to the SoMo to make it even more durable and historically we’ve been unable to charge the devices in those cases which was a negative for people and that they had to remove the device or some portion of the case.

So with a lot of feed back and improvements in the device it will also shift with Windows Mobile 6.5 instead of 6.1. So those are the highlights of the features. I think for many customers the fact that its software compatible will allow them to continue to run the many programs that already are developed either for the 650 or for the [iPAQ].

Brian Swift - Security Research Associates

And that’s available in Q2 is that?

Kevin Mills

Yeah, so we will start shipping in Q2. I think as Dave mentioned, we are already sampling and we have a beta program in place. We are working with key resellers and developers to make sure that everything is working well and making sure all the feedback is incorporated before we go into full production.

Brian Swift - Security Research Associates

So that's part of the transition issue that you are referring to; the potential they can have from where customers decide they want to have the 655 but it’s not going to be shipped until next quarter if that could have an impact on this quarter?

Kevin Mills

Yeah, so I think that’s I mean transitions are never easy, but they are always required; so most of our customers basically take I would say 90 to 120 days to qualify hardware with their applications. We eventually are announcing it now and providing samples to key customers so that we can have I think a stronger Q2 and through the rest of the year. Obviously, some existing customers will slow down their deployments to wait for the 655 if it solves or improves their deployment issues and that solves I think a part of the challenge with the transition.

Brian Swift - Security Research Associates

And secondly, could you give us the – David talked about the spillover from what you shipped to (inaudible)?

Kevin Mills

5.3, yeah.

Brian Swift - Security Research Associates

Recorded 4.4 so do you have a little bit of a head start into the quarter. How are things looking so far as you are more than half way through?

Kevin Mills

Okay, so I think that’s about, first of all in general, one of the reasons that things been through this channel is we eventually cleared our backlog; it was, I would say late November, New Year and Thanksgiving and the Christmas holiday period in general and also our traditional situation is, January is a pretty soft month for everyone in the AIDC.

I would say this year we’re running in line maybe marginally ahead of our January was last year and nothing significant. But we see good momentum in the market right now. So I mean things are I would say on-track, so I wouldn’t describe it must being overly robust or concerning. But January is traditionally a very weak month every year and this year was no different and we are seeing a more robust February.

Operator

Thank you. (Operator Instructions) We have no further questions at this time. I would like to turn the call back over to Kevin Mills for closing comments.

Kevin Mills

Thank you very much. I would just like to thank everyone for participating in today’s call and we look forward to announcing results in April. And thank you all very much and have a good day.

Operator

Thank you. This does concludes today teleconference. You may disconnect your lines at this time. Thank you for your participation.

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