Socket Mobile's (SCKT) CEO Kevin Mills on Q4 2015 Results - Earnings Call Transcript

| About: Socket Mobile, (SCKT)

Socket Mobile, Inc. (NASDAQ:SCKT)

Q4 2015 Earnings Conference Call

February 17, 2016 5:00 PM ET

Executives

Jim Byers - Investor Relations, MKR Group, Inc.

Kevin Mills - President and Chief Executive Officer

David Dunlap - Chief Financial Officer

James Lopez - Vice President of Marketing

Analysts

Brian Swift - Security Research Associates

Mike Schellinger - MicroCapClub

Operator

Greetings and welcome to the Socket Mobile Fourth Quarter 2015 Management Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jim Byers of the MKR Group. Thank you. Mr. Byers, you may begin.

Jim Byers

Thank you, operator. Good afternoon and welcome to Socket’s conference call today to review financial results for its fourth quarter and year ended December 31, 2015. On the call today from Socket are Kevin Mills, President and CEO; and Dave Dunlap, Chief Financial Officer. Also joining us today from Socket Mobile is James Lopez, Socket’s Vice President of Marketing to answer your questions on recently announced Socket products and the markets for these products.

Socket Mobile distributed its earnings release over the wire service earlier 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’ve also posted replay numbers in today’s press release for those wishing to replay this call by phone. The phone replays will be available for one-week.

Before we begin, I 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 and Exchange Act of 1934 as amended.

Such forward-looking statements include but are not limited to statements regarding mobile computer data collection and handheld computer products, including details on timing, distribution and market acceptance of products; and statements predicting trends of 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 of factors including but not limited to the risk that manufacture of Socket’s 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 Socket's application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so, the risks that acceptance of Socket's products in vertical application markets may not happen as anticipated, as well as other risks described in Socket’s most recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update such forward-looking statements.

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

Kevin Mills

Thanks Jim. Good afternoon everyone, and thank you for joining us today. 2015 was a very good year for Socket Mobile in which we achieved both revenue growth and increased profitability. For saying the key objectives we outlined at the beginning of the year. More importantly these positive results demonstrated the success of our application driven business model, which provides us with continued opportunity for good long-term growth.

Looking at our revenue results for 2015, total revenue for the full-year were $18.4 million, an increase of 8% over 2014. This growth was primarily driven by our cordless barcode scanning business which grew approximately 16% year-over-year and represented 85% of our total revenue in 2015, up from 79% of revenue in 2014. Our legacy SoMo related business represents 11% of our total revenue in 2015, down from 17% in 2014. The remaining 4% of revenue came from legacy and service related products in both years.

Our higher full-year revenue coupled with our improved gross margin and modest expense growth, resulted in a bottom line process for 2015 of $1.8 million or $0.33 per share. A substantial increase over the $433,000 or $0.09 per share we recorded in 2014. Our positive results in 2015 primarily reflects the success of our strong application driven business model, which has been our focus over the past few years.

Under this model, our scanners are secondary purchase to an application sale. The mobile point of sale market provides a good example of how this model works. The customers primary purchase is the mobile point of sale application. Once this purchase has been made the customer must then chose from along a limited number of hardware peripherals supported by the application provider.

Socket’s success with this process is largely due to our SDK, our application-centric focus and our Apple certified barcode scanners. So that the decision to purchase the Socket Mobile scanner is primarily determined by the customer scanning needs which vary based on items being sold. One of the major benefits of this model is that we leverage the application provider sales force since the application is the primary purchase.

This has enabled us to streamline our own cost accordingly. While this application driven business model requires a great deal of upfront work, there is a significant tail down the line. Most of our integration work is done before the first scanner we sold. And the time from this integration works to initial revenue can be up to two years. However, as the application gains market acceptance and is increasingly deployed by customers there is a steady increase in demand for scanners.

Much of the work we did in 2013 and 2014 begun to contribute to our revenue this past year, which was the prime reason behind our strong growth financial results. We expect to see continued benefits from our investments in this model in 2016 and beyond.

Looking at our Q4 results, our performance was stronger than expected as the Mobile Point of Sale segments of our business did not taper off seasonally as anticipated. The combination of stronger mobile point of sale driven sales coupled with our stronger sales from other segments in Q4 resulted in record cordless scanning sales of $4.2 million in the quarter.

While our SoMo product is now legacy product. We saw good SoMo sales in Q4. Q4 also included a one-time legacy deal together resulting in a total of $5.4 million revenue for the quarter. On the bottom line, we achieved earnings per share of $0.17 so our gross margins in Q4 were about 2% higher due to the one-time legacy deals in the quarter.

As we move into 2016, we expect to see a repeat of the sales pattern we saw this past year with a bulk of our revenue coming in Q2 and Q3. And we expect to achieve both continued revenue growth and increased profits in 2016. The majority of our business will be driven by small specialty retailers purchasing our scanners to complement the mobile point of sale application [indiscernible].

Most of these customers have annual revenue of less than $50 million and would be viewed by the AIDC industry has been at the low-end of [indiscernible]. While most of you might think of Walmart when you mentioned the term retail. Our customers are very different marketers with different requirements.

As such we are now using the term specialty retail to better describe our primary market. We expect these specialty retail customers continue to deploy solutions from Socket, light feet and square to name a few and a good percent to continue to purchase those scanners as part of their overall solution. We expect to see continued solid growth in this market and to benefit from that growth throughout the year in a cycle similar to 2016.

In addition to generate and continued growth from our existing products they are also bringing new products into the markets, while we don’t expect these products to significantly contribute to our revenue in 2016 due to our long sales cycle. We do expect to see meaningful contribution in 2017 and beyond.

We expect our new DuraScan durable barcode scanning product line to begin shipping early Q2. This product is designed for harsh environments and serves through requirements. We are seeing from developers who want to use Apple and Android tablets in more traditional AIDC applications like logistics.

Currently, the lack of a small, tough weatherproof Apple certified scanner prevents developers from properly servicing these types of markets. The DuraScan series will make it possible to service the business requirements and encourage developers through our [indiscernible] software.

We will be working with a number of interested developers during 2016 as they complete their software field trials and get their solution ready for the markets. The same is true with our new DuraCase solutions. This product was created based on feedbacks from developers who looked at our 8 series scanners, but didn’t deploy because they needed a captive one-handed solution with an improved charging arrangements.

As no one wants to write software for hardware that doesn’t exist. The DuraCase enabled us to begin another design win cycle that we expect to bear fruits later in the year. In January at the National Retail Federation expo, we introduced our TouchPoint product line. This product line will enable our mobile point of sale partners to expand their offerings to their customers by enabling RFID token exchange to support for loyalty and customer service including token based payments over time.

The TouchPoint product is currently only available to our developer community as it needs to be an ingredient in their overall solution. Therefore, software has to be written and copyrighted into their mobile point of sale offering. Once the software is written and deployed the product will be sold to our normal distribution channel.

The hardware is the last design to allow a small specialty store to exchange tokens with customer regardless if token is a loyalty card about pass or a smartphone. Once the token has been exchanged and the customer identifies additional loyalty services can be provided such as special promotions, discounts and application payments.

Socket Mobile will provide the hardware and developer tools required to help our partners integrate this into their mobile point of sale offering. And we are excited to expand our scanning business to also include RFID data capture.

So in summary, 2015 was a very positive year and further validation of our business models in which we grew our revenue and profitability and significantly improve the balance sheet. We expect to see a continuation of this trend in 2016 with Q2 and Q3 remaining our strongest quarters.

In addition, we are introducing new products and expand our markets and enable our developer partners to service more customers. We expect to see meaningful revenue contribution from these products in 2017 and beyond.

Our goals for 2016 are to grow our revenue with our many existing partners and to share in their group, to expand our business in the markets to provide new hardware solutions that enable our partners to expand their offerings especially in the RFID markets and with our improved balance sheet return to listing on NASDAQ.

With that said, I would now like to turn the call over to Dave for his review of the financials. Dave?

David Dunlap

Thank you, Kevin. Our fourth quarter revenue was $5.4 million compared to revenue in the previous quarter of $4.5 million and revenue in the same quarter a year ago of $3.9 million. The fourth quarter was sequentially higher than the third quarter by 19% and higher than the same quarter a year ago by 38%. We found that the mobile point of sale selling season this year lasted longer than last year and we experienced higher sales from other mobile categories.

Cordless barcode scanning revenues were $4.2 million or 78% of our revenue for the quarter, up from $4 million in the previous quarter and up from $3.1 million in the fourth quarter a year ago.

SoMo handheld computer sales in the fourth quarter were $857,000, up from $379,000 in the previous quarter and an increase of $146,000 over the fourth quarter a year ago. Adding to our fourth quarter total, for legacy product orders of $231,000 and service revenues of $101,000.

Our fourth quarters SoMo handheld computer revenue included $320,000 or 20% of a $1.6 million SoMo order shippable over several quarters that we mentioned in our last conference call.

Our margins on Q4 sales increased to 51.5%, up from 49.5% in the previous quarter and up from 44.6% in the fourth quarter a year ago. The increase in Q4 over the previous quarter of 2% as Kevin mentioned reflected one-time sales of legacy products in the quarter. Our margins after those sales were similar to the previous quarter’s margins.

Over this past year, higher unit volumes have enabled us to reduce some of the component pricing for our products to spread out our manufacturing overhead costs over more units and to increase our manufacturing efficiencies.

In 2015, we sold 65,500 cordless scanners worldwide, up 19% from unit sales of 55,000 in 2014. The increase in our margins has been a significant contributor to our bottom line growth.

Our operating expenses in the fourth quarter increased 7% or $110,000 over the previous quarter and 4% over the same quarter a year ago well below the rate of growth of our revenue and margin contribution.

Our net income from the quarter was $958,000 or $0.17 per share and up from $530,000 or $0.10 per share in the immediately preceding quarter and up from a loss of $21,000 or $0.00 per share in the fourth quarter a year ago.

Turning to our balance sheet, our stockholders equity at December 31, 2015 increased to $3.3 million, up from $2.2 million at the end of the previous quarter and up from $1 million at December 31, 2014.

Equity growth reflects the combination of profits which were $958,000 for Q4 and $1.8 million for the year. Stock option compensation expense of $58,000 for the quarter and $210,000 for the year and option and warrant exercises of $84,000 for the quarter and $287,000 for the year.

We expect to remain profitable and to further increase our net capital balances during 2016. Our intensions are to apply for return to a NASDAQ capital market listing, once our net capital balances as of the end of the quarter exceed $4.0 million. Profitability in combination with managing the elements of our working capital generated net cash from operating activities during the year of $100,350,000.

During the year, we paid down our accounts payable fully into a current status and we funded growth in receivables and inventory. We invested approximately $400,000 in new product tooling added a new accounting and operations management ERP system, which is now online and purchased other equipment needed to operate the business.

On the financing side, we had $280,000 in proceeds from option and warrant exercises reduced by our bank line balance by $816,000 to zero paid off $100,000 in subordinated notes and allowed our on hand cash balances to grow. We will use our bank line to provide liquidity for future opportunities such as large orders that may require us to pay our vendors in advance of collecting from our customers and to manage short-term fluctuations in our cash.

We are extending our current bank line credit arrangements for two years and as of the end of January we fully paid off all remaining related party subordinated credit line notes in the amount of $500,000 which further reduces our debt and interest expense.

Looking ahead, our Annual Meeting of Stockholders will be held on Wednesday, May 11, 2016 at the Company’s Headquarters in Newark, California. Stockholders of record on March 14, 2016 will vote. Matters to be voted on consist of the annual election of directors, approval of the executive compensation policies and practices known as say-on-pay and ratification of our external auditors for the 2016 fiscal year. Proxy materials will be available at the beginning of April.

In conclusion, I’d like to thank our stakeholders for their continued support including our investors, our registered developers, our suppliers, our distributors and retailers and our employees.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Brian Swift from Security Research Associates. Please proceed with your question.

Brian Swift

Yes, thank you. A couple of things, one I didn’t get the numbers on the - number of barcode scanners sold in 2015 versus 2014, how do I miss that. You mentioned a number 65,000…

David Dunlap

Yes, the number was 65,000 in 2015, 55,000 in 2014.

Brian Swift

Okay, 65,000 versus 55,000. Okay, and then secondly on the SoMo orders, [indiscernible] you shipped 857,000 I think that’s the number for Q4?

David Dunlap

That was the total SoMo sales in Q4 Brian, 320,000 was the portion of the $1.6 million orders that we shipped in the fourth quarter.

Brian Swift

No 320,000 of the $1.6 million?

Kevin Mills

320,000 of the $1.6 million it was included in the total SoMo sales for the quarter. So the balance –we’ll ship up all over the next quarter or two or three.

Brian Swift

Okay. Can you give us any kind of guidance in terms of how much of that should be in Q1? I mean it will be similar to Q4 or something more…

Kevin Mills

I’d say a lot of that will depends on the customer.

Brian Swift

Okay. So they haven’t given you a rent around that.

David Dunlap

We’re coordinating our activities with them and we’ll make that judgment with them as we go, but the order that we have is firm.

Brian Swift

Okay. I’m just trying to figure out how much of an influence that’s going to be in terms of modeling the year. Okay, well I have some others I’ll come back into the queue. Okay thanks.

Kevin Mills

Okay thank you, Brian.

Operator

[Operator Instructions] Our next question comes from the line of Al Troy, a Private Investor. Please proceed with your questions.

Unidentified Analyst

Hi gentlemen. I’d like to congratulate everybody at Socket for having a record year; it’s quite exciting to see the growth in the Company. Do you still have about 75,000 of the Hudson Bay warrants that are out there?

David Dunlap

Yes, Troy we haven’t seen any activity from Hudson Bay since they exercise lot of their warrants in the first quarter a year ago, so remaining warrants that they hold are 75,000 at $1.25.

Unidentified Analyst

And they expired in May of this year, is that correct?

David Dunlap

On May 20, that’s correct.

Unidentified Analyst

Okay, fine. Now I just feel the price of the stock is so ridiculously low in comparison to the earnings growth and amount of profits you are making. Do you have any plans to publicize these results and see people getting some kind of PR firm or something?

David Dunlap

Let me start. Yes, go ahead Kevin.

Kevin Mills

So, yes I would do. But I think our first goal is to get back on NASDAQ because the flow of information once on the NASDAQ market makes U.S. stock much more available to many people, right. So we are now quite slow and I think on the back of getting back on the NASDAQ markets, we will have more aggressive outage scope.

Unidentified Analyst

There is no question getting on NASDAQ would be a tremendous event for the Company and certainly effective price of the stock and create more interest in the Company, but I think the prices stock has to be over $3 in order to qualify the NASDAQ?

David Dunlap

That’s correct.

Unidentified Analyst

Okay. So what I’m saying I think it would be advice of the Company to generate some more interest, let people know what’s going on. I mean these results are incredible and right to the stock I feel should be much higher than it is right now.

David Dunlap

Let’s see what happens over the next few weeks. I think the fourth quarter because we had a downturn a year ago and seasonally low results, we are still an uncertainty for many investors.

So now that we’ve had a strong fourth quarter and are commenting that we expect the first quarter to also be profitable that will change those receptions. The other thing that will be substantially improved when the quarter’s results of $0.33 for this year, we’ve added $0.17 in the fourth quarter against zero number in the fourth quarter a year ago.

So now the trailing 12 months has a much different price earnings ratio and that may increase investors to consider the stock as well. So I think there is a number of mechanisms that will be happening now that our results are published that could be helping move the stock price in the direction we’d all like to see it go.

Unidentified Analyst

Right, I think now it’s only selling like seven-time earnings. Okay, gentlemen thanks for your answers and keep up the good work. I’m very pleased with the results.

Kevin Mills

Thanks.

Operator

Our next question comes from the line of Mike Schellinger from MicroCapClub. Please proceed with your question. Mr. Schellinger you may proceed.

Mike Schellinger

Sorry. I was on mute. Can you hear me now?

Kevin Mills

Yes, we can.

Mike Schellinger

So in Q4 how our sales for the inventory applications, it sounded like most of the growth which is tremendous in Q4 was for the point of sale and maybe not too much in inventory space.

Kevin Mills

Yes, I mean maybe I should ask this question over to James Lopez. We have a much better handle on how our markets are evolving and maybe James can add a little bit of rise on that - how we saw in 2016 and in Q4?

James Lopez

Yes, to answer directly about the inventory is you are correct, we are still seeing most of the growth coming from mobile point of sale, inventory still follows where we’re starting to see more inventory activity is happening around of our durables, which kind of leads into our new DuraScan scanners that we’re going to be coming up with shortly, but the inventory is still coming.

Mike Schellinger

Okay, great. Actually for more upside is tremendous growth in scanner sales revenue in Q4.

Operator

[Operator Instructions] We do have a follow-up question from the line of Brian Swift. Please proceed with your question.

Brian Swift

Just to follow-on from the last question, can you give us an idea of when you expect to kind of see a ramp up in the new products and the kind of influence that’s going to have on the products used in inventory management as opposed to point of sale? And then also give us a little update on what’s happening in the enterprise side of the picture.

Kevin Mills

Sure, so we started seeing products like our DuraCase starting to appear at the end of this quarter and our new DuraScan at the beginning of next quarter. DuraCase is great particularly for inventory because it frees up hands as well as provides a much better charging solution and sort of a single hand solution for people doing the inventory work as well as kind of complement that inventory demand that we see coming very well.

And then the DuraScan products which were designed around more regular environments needing more durability so concrete floors and freezers and environments whether elements involved that’s going to be coming out in the beginning of Q2, which also services inventory but also can go into other applications in the AIDC space. So that currently fits with our mobile point of sale but it also complements other markets.

Enterprise mobility is something that we are also seeing emerge. That’s something that we hope DuraCase will service well, but we also know that our DuraScan is an important product for those environments as well, because we are looking for something that’s tough and they want the insurance of a product that could meet a specification like IP54 and so we designed our DuraScan product around those things.

Brian Swift

Okay, thank you.

Kevin Mills

You’re welcome.

Operator

[Operator Instructions] We do have a question comes from the line of [Greg Savory], a Private Investor. Please proceed with your question.

Unidentified Analyst

I do, thank you. Do you have anything on the developer number, where you see an increased sale?

Kevin Mills

Absolutely and we’re always seeing some growth in the developer number so we try not to measure ourselves too much on the developer number itself, it’s much more about the productivity we’re seeing from our developers. So it’s more in maturity of our developer community which is a couple of years old now and as Kevin mentioned in his early remarks we are starting to see a lot of - starting with those relationship a couple of years ago materialize and the deployments that are happening now.

So we are always keeping the pipeline flowing with new developers working in new spaces, but a lot of the new developers are starting to come from other areas other than mobile point of sale. Mobile point of sale is typically been our breadbasket for a while. Newer developers are starting to come from other places like Lopez mentioned before enterprise mobility.

Unidentified Analyst

So do you guys still [indiscernible] the scanners together in house?

David Dunlap

Yes, we do. We can track with manufactures around the world to build the components to our specifications, but final assembly, testing and packaging all comes from our location here in Newark, California.

Unidentified Analyst

Thank you guys. It’s been quite rise. So we are excited for the future and good luck.

David Dunlap

Thank you.

Operator

[Operator Instructions] There are no further questions in the queue. I would like to hand the call back to Kevin Mills for closing comments.

Kevin Mills

Thank you, operator. I’d just like to thank everyone for participating in today’s call and to wish you all good afternoon. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And have a wonderful day.

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