Socket Mobile's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Socket Mobile, (SCKT)

Socket Mobile, Inc. (NASDAQ:SCKT)

Q1 2012 Earnings Call

April 24, 2012 5:00 PM ET

Executives

Jim Byers – SVP, MKR Group

Kevin Mills – President and CEO

Dave Dunlap – CFO, VP - Finance and Administration and Secretary

Analysts

Brian Swift – Security Research Associates

Bernard Fidel – Private Investor

Operator

Greetings and welcome to the Socket Mobile First Quarter 2012 Management Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. 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 2012 first quarter ended March 31, 2012. 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 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.

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 Socket’s 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 risks that market acceptance and sales opportunities may not happen as anticipated, the risks that Socket’s application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so, and the risk of acceptance of Socket products in vertical application markets may not happen as anticipated and 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 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

Thanks Jim. Good afternoon everyone, and thank you for joining us today. In today’s call, I will begin with a brief review of our Q1 results and then discuss the business opportunities we see ahead and our outlook for 2012. Our revenue for the first quarter was $4 million consisting of $2.2 million of SoMo related sales, $1.5 million of cordless scanning related sales and $300,000 from service and other related products.

Q1 revenue was essentially flat compared to Q1 of last year, reflecting the impact of the transitions we are currently going through with both our product families. Revenue from our SoMo product was impacted by customers waiting for our next generation SoMo 655 which was announced in Q1 with Q2 availability. We expected this transition to impact Q1 sales as we noted on our last conference call.

On our cordless scanning side, sales were also impacted by two transitions. One related to the introduction of our new low cost 7Ci barcode scanner. The second by the Apple associated iPad transition. As you may recall, the 7Ci is our Apple certified low cost 1D barcode scanner that addresses the need of the large Apple community that needs a 1D only solution. The release of the new iPad and introduction of 7Ci combines to the late sales of customers who are evaluating the new offerings.

I’d now like to provide more detail on each of the product families starting with the SoMo. We expect the transition to our new and enhanced SoMo 655 to be completed later this quarter by late June [ph]. Currently, we have provided 18 customers with early development units to allow them to qualify their solution on the new platforms. Getting these early units into the hands of our customers serves several purposes. It provides us with valuable feedback from numerous environments, ensures the product is optimized prior to mass production.

It enables our key customers to evaluate new hardware, so they can assure themselves if their software runs perfectly and that the overall solution will meet their customers’ requirements. And it ensures that there is demand for the new product when we are ready to ship. I am happy to report that feedback from this customer group has been excellent and customers are overwhelmingly very happy with the improvements we’ve made on the performance of the new hardware and associated software.

In addition, our commitments to have the new SoMo 655 device in the market for five years has been noted by a number of customers as a key purchasing consideration, especially those who are transitioning from HP and for those customers that have made significant investments in their Windows Mobile software. During the transition, we continue to serve the demands from customers for existing SoMo 650 which just remains solid.

In Q1, we sold 3,500 standard SoMo 650s which is a solid number especially when compared to about 3,600 units sold in Q4 and about the 1,600 units sold in Q1 of last year. I am excluding OEM customers from these unit numbers to better reflect the underlying demands from the market for a standard PDA. Our SoMo is typical of an iPAQ traditionally sold by HP. Obviously with HP’s departure, we expect to have a substantially bigger share of the market going forward.

A quick update on Epocal, one of our larger OEM customers. We completed our contracts with them in Q1, shipping the last remaining units, and don’t expect to ship any more units until they have qualified the new SoMo 655. Overall, we are feeling very good about the SoMo transition and remain on schedule to ship the SoMo 655 to customers by early June.

Turning to our cordless scanning business. Cordless scanning revenue in Q1 was $1.5 million, which was slightly lower than our Q4 number due to the transitions and were somewhat of a disappointment. However we are excited about the introduction of our new 7Ci and low cost 1D Apple certified scanner, to help us better address the Apple 1D markets. Our 7Ci is about half the cost of our 7Xi but only reads 1D barcodes. The significant price difference which is about $300 per unit coupled with the fact that many of our existing customers don’t typically need 2D scanners likely impacted our Q1 revenues as customers decided to wait for the lower cost version.

In addition, Apple re-announced the new iPad in late February which we believe caused customers to delay any decisions on purchases until they had reviewed new tablets. As the new iPads didn’t ship until March 16, it impacted much of March. March is by far the most important month of the first quarter and typically represents over 40 percent of the entire quarter’s revenue. This resulted in a lower than expected sales of our Apple scanners in Q1.

However we are confident this will be corrected this quarter, now that the new iPad is released and our 7Ci is available. The introduction of our 7Ci is very important to the long-term health of our Apple centric scanning business. As we are now offering both an aggressively priced 1D scanner and a sophisticated 2D scanner, both of which are Apple certified and supported by a single common SDK. It is unrealistic to expect customers to pay for a 2D scanner when they have a 1D only requirements because of the cost difference is very significant as $300 MSRP.

Obviously in the development phase, customers are less price sensitive as you are only buying a few scanners for your development team. However when you move into the deployment phase, it makes a significant difference. We believe having both these offerings is the right recipe for success as customers can choose the right solution for their situation. The 7Ci is now shipping so that scanning transition is behind us and we expect to see good growth in our scanning business in Q2.

In summary, as we anticipated, Q1 was very much a transition quarter. However, we now have the quarter scanning transition complete and believe we have established a strong position in the markets. We expect to resume growth in Q2 and see solid growth continue in the coming quarters. We expect our cordless scanning sales continue to be driven by the growth of mobile phones and tablets as business application devices with the scanning requirements.

The SoMo transition will be completed this quarter which will enable us to resume growth in the SoMo business as well. The SoMo 655 is being very well received by both new and existing customers. Having visited a number of customers within the last few weeks, I am very excited about the level of interest we are seeing and expect to see this interest convert to sales as we start to ship.

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

Dave Dunlap

Thank you Kevin. Our first quarter 2012 revenue was $4 million, flat with the first quarter a year ago and sequentially down from revenue of $4.4 million in the fourth quarter of 2011. As Kevin noted, our new model 7Ci linear low cost Apple certified barcode scanner began shipping in April. Predictably that slowed down first quarter customer purchases from our higher performance model 7Xi Apple barcode scanners and our entry level barcode scanners, our model 7E, as customers evaluated whether the new Apple certified linear scanner could meet the requirements at a lower price points.

With the new low cost Apple certified barcode scanner now in the channel, the growth momentum with our cordless scanning product is expected to resume. Addressing our SoMo handheld computer, we’ve placed sufficient SoMo model 650 products into the channel to meet estimated customer demand during the first and second quarters and the sales of nearly 4,000 SoMo 650 units during the first quarter were similar to the sales volumes for this product in the previous quarter.

With the announcement of the new SoMo 655 predictably cost some customers to wait for its arrival. The SoMo model 650 product sales in the first quarter were flat instead of growing. Customers who have sampled the new SoMo 655 as Kevin noted, have been quite pleased with the product and we expect strong and growing demand once we commence SoMo 655 shipments in early June.

The SoMo handheld computer is an ideal replacement for the HP 200 Series and other discontinued HP Windows Mobile based PDAs as the model 650 or 655 will run the same application software without modification and the products have a similar look and feel minimizing any training requirements for employees. As Kevin reported, we are in the final stages of gearing up production for the SoMo 655 which has been doing well. We will continue to offer our SoMo handheld computers until supply is exhausted.

So the channel is fully stocked, order backlog entering in the second quarter has returned to more normal reorder levels of approximately $1 million for all of our products. Our first quarter operations resulted in a net loss of $872,000 or $0.18 per share compared to a first quarter loss a year ago of $928,000 or $0.24 per share and the fourth quarter 2011 loss of $375,000 or $0.08 per share.

Our margins improve with higher sales which better absorbs manufacturing overhead. Thus our margins at $4 million in revenue were 38.5% in 2012 and 37.5% in 2011, whereas at $4.4 million in Q4 2011, our margins were 43.1%. As our revenues grow, we expect our gross margins to continue to improve. Our operating expenses in the first quarter of 2012 were $2.4 million, up from $2.3 million in Q4 primarily reflecting the bulk of the annual cost of our year-end audits which are incurred primarily in the first quarter.

In the second quarter, we would expect increases in revenue as the product transitions complete, improving gross margins with higher volume sales and relatively flat operating costs. Our operating costs in the second quarter will include development costs associated with new products including products for release later this year and higher sales and marketing costs as we ramp up selling and marketing activities relating to our new products.

Our second quarter revenue will be held by sales of the new 7Ci barcode scanner. Sales of the SoMo 650 are likely to continue throughout the quarter with upside revenue opportunities for handheld computer sales, if we deliver the SoMo 655 in early June is scheduled providing time for the channel to process and ship the initial deliveries. We held our cash balances at the end of March level with end of year balances at just under $1 million.

We will continue to closely manage our working capital, hold down our expenses to those deemed essential and stay focused on our new product launches to move the product into and through the channel quickly while building customer demand. We continue to enjoy close cooperation 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 Socket’s revenues to profitable operating levels, and building shareholder value.

Our Annual Meeting of stockholders is scheduled for tomorrow, April 25, at the company’s facility in Newark, California. On the ballot are the election of current directors and the ratification of Moss Adams to continue to serve as our independent auditors for 2012.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) One moment please while we poll for questions. Thank you. Our first question is from the line of Brian Swift with Security Research Associates. Please go ahead.

Brian Swift – Security Research Associates

Hi guys.

Kevin Mills

Hi Brian.

Brian Swift – Security Research Associates

I really got a call during the conference so I didn’t catch of it but maybe you can fill in something for me, you mentioned as part of your SoMo sales, you had some OEM revenues that were kind of end of life on that product. Could you give us an idea of what the significance of that was for the quarter and how long it will be before they ramp-up again?

Kevin Mills

Sure. So I was referring to Epocal. I think the significance for the quarter was probably less than $100,000. And Epocal, we signed a deal with them for 5,000 units almost two years ago. And essentially we’ve been fulfilling that contract over the last two years. To give you some I would say comparison, if I look at Q1 2011, Epocal represented $800,000 of our SoMo revenue or $800,000 of our $4 million.

And as the year went on, they faced down because the contract was coming to an end. We will provide them with the 655. We’re waiting for another special component for them that we will have probably in another month or so and we believe then they will qualify. So I think the earliest they could run pack up [ph] is probably late Q3, early Q4.

Brian Swift – Security Research Associates

Okay. And could you give us any kind of color on some of the customers that are – that you have kind of in the pipeline for 655 as – what do you anticipate the rollout of that product to do and then when do you think the 650 will be done?

Kevin Mills

Well, okay so I think that we stay true to our hospitality and healthcare related customers. We currently have about 18 customers who are evaluated. And we seem to have a lot of interest in the hospitality markets particularly tableside ordering et cetera. And I would say the upside looks very, very strong but it’s too early, I mean it’s easy for people during an evaluation phase to be very bullish. And well there seems to sizeable opportunities in the several thousand at some of these customers that we’re now evaluating.

We’re also able to now deal with the HP customers who want to transition. Obviously previously with the 650, probably the first question we got asked was if I transition to the SoMo 650, can you guarantee it’s going to be available for three to five years? And we didn’t have a good answer for that. Now we have a very good answer for that, so we’re able to – we’ve designed the 655 with components. We are pretty confident it will be available for five years, and therefore I would commit to customers that if they go with us we will then be able to support them for multiple year switch and a lot of these applications is critical.

So on this recent trip, I visited two or three different hospitals, things like the phlebotomy departments where they are using our device to scan patients prior to drawing bloods and then print a label for the blood that goes on the vial and those type of applications. They are still in trial. They are still not changing but we seem to be a logical candidate in many of these process improvement applications.

I would hope that the ramp-up of the 655 is pretty strong particularly in the second half but I don’t have firm numbers yet. I have projections from customers but until we start shipping, I think it’s too early to be giving out numbers. As regard to 650, I think as Dave mentioned we have stock available. We will continue to sell that. I think we will be all done by July, August at the latest. It’s not possible to have the 655 available in all territories at the same time. So we will move out of say territories like Japan last, but we have to go through extra certifications. So 650s we might still be shipping there in August whereas they might ship in Europe after June.

So we do have our plan to make sure that the inventory is all used up and today demand would strongly suggest that we won’t have a surplus on the 650. So sorry, that’s a long answer. Okay, I think that should give you a lot of color on the situation.

Brian Swift – Security Research Associates

Okay, thank you.

Operator

(Operator Instructions) Our next question is from the line of Bernard Fidel [ph], a private investor. Please go ahead.

Bernard Fidel

Hi, Kevin and David.

Dave Dunlap

Hi Dr. Fidel.

Kevin Mills

Hi Dr. Fidel, how are you?

Bernard Fidel

Okay. Well it looks like we’re getting out of the transition things so it should be – when you look towards this quarter, look for growth in sales?

Kevin Mills

Well on the scanning side, we’re through the transition so we are able to basically service the requirements pretty well. We’re pleased to have both the 7Ci which is aggressively priced and very good in terms of 1D scanning and the more sophisticated 2D. When we started last quarter, we didn’t obviously even at our conference call, we didn’t know that Apple was going to announce the new iPad. So that was a bit of a surprise because they tend to really surprise the world anyway.

So I think that the two big transitions are behind us. So we would expect to see good growth in the cordless scanning this quarter. On the SoMo side, the most important thing we have to do is to ship the 655 on time. And we’re able to serve existing customers with the 650, but realistically we can’t service any of our new demands for new deployments until the 655 ships. So those customers are obviously waiting and we already have a number of them lined up.

So I would expect the SoMo to be generally flat to marginally up, but generally flat. But will be through the transition and we will be able to service the demand we’re seeing from customers who want to transition from HP and customers who want to deploy new solutions. And we expect the existing business to support the SoMo 650 to support the existing customers but you’re not going to get a lot of new customers going through a product that’s already been in the market for five years. And its new version is just around the corner.

Bernard Fidel

Okay. Well we’re almost through April, how does the sales for April particularly on the scanners, do you see pick up on it?

Kevin Mills

Yes, I mean April has been okay. I would just say that we did because of Easter and Passover for the first two weeks of April of its pretty dead as lot of people take time off particularly in Europe and other places in the world. We’ve seen things picked backup since mid-April. But I would say we remain on track. We have seen deployments of the 7Ci starting already which is very encouraging. But it’s very early days of the quarter and particularly on the back of that two week holiday for most of the world to be saying if we’re ahead or behind.

I would say on the scanning side, we’re not worried at all at this stage. Things are very much in line with our expectation.

Dave Dunlap

But by just comparing the flow in the April versus the flow in January, we’re a week before the end of April and we’re about even with where we were in January. So we’re already seeing some pickup even without any of the new products contributing much to revenue growth on the scanning side and certainly in 655 contribution if any would be in the June time period.

So we’re running consistently as we would expect, perhaps a little bit ahead of the first quarter, but as Kevin pointed out, it’s very early in the measurement period. The momentum for this quarter will clearly be in the second half of the quarter.

Bernard Fidel

Okay. Now do you have any of estimates of what you see for the second quarter? Thanks.

Kevin Mills

Yes, I mean obviously we have an estimate but we’re expecting to see it up and to be a little bit stronger priced and to resume growth, because our numbers are still relatively small, it’s very difficult to peg a number but because one or two deals. A deal can be a quarter of million dollars. So I think that from my point of view there are two things that are very important in Q2, which is we have to ship the 655 on time, and we basically need to get as close as we can to cash breakeven almost. Those are our two, I would say main concerns but – and that would give us a reasonable growth over Q1, but launching the products and getting the SoMo business growing again, we have already pent-up demand delivering against that I think is key. And there is work to do. And we have people working very hard to make sure this happens.

Dave Dunlap

And you recall Dr. Fidel, our revenue recognition is based on what we sell out of the channel. So shipping these in-products into the channel is step one but it’s up and gets to the point revenue recognition until the channel can turn it around and ship it onto their customers. So there is always some time delay. We don’t control the timing of what the distributors are doing. Again the important thing for us as Kevin is noting is getting these products into the channel as early as we can.

There is not an issue with the barcode scanner because we’re still early in the quarter, but when we get to the point of being end of May or early June, then a week or two makes a big difference.

Kevin Mills

Yes. And yes I am just back from a trip to customers and I have to say I was extremely encouraged by the feedback we’ve gotten on the 655 and the improvements in management engineering point of view has seemed to be absolutely in line with people’s expectations and requirements. So I think that as the 655 will be substantially better PDA as basically equivalent to rise [ph] and without the HP in the markets, will be both a low price leader as well as a very, very full featured SoMo device.

So a lot of hard work has got into this. We’re not there yet, but we’re desperately close enough.

Bernard Fidel

Well on the 655, let’s assume that you have it available at the end of May beginning to June.

Kevin Mills

Yes.

Bernard Fidel

Do you have orders for them ready?

Kevin Mills

Yes. But we certainly – so having orders as far as I think as part of the process. The 18 customers that we selected to get early units, it had multiple purposes. Obviously thy are 18 different types of environment so we get lots of feedback from different environments to make sure that the units are really robust and dependable before we turn on that mass production.

One of these customers are in need of units to deploy. So yes, we expect to receive orders from them and have received the orders already from some of them. So I don’t have a big concern that we’ll have orders on the books waiting for the 655 when it comes along.

Bernard Fidel

Okay. Two more questions. For this quarter, could you see cash flow positive? What do you need to – how many – where sales have to be for that?

Kevin Mills

Probably – go on.

Dave Dunlap

Yes, well one might look at that Dr. Fidel is, if you look at our operating expense levels, about $2.4 million this quarter. Let’s say at $2.4 million that I talked about it being flat. Included within that total are at least $300,000 of non-cash costs, your stock option expensing and your depreciation. So you’re trying to fund the $2.1 million in operating costs from contributions from your sales. And with about a 40 percent margin, you’re not getting up into the high $4 million, $5 million level as being both profitable and wellbeing cash flow positive. And then you’ve got to cover that other $300,000 to the actually profitable which should be another $600,000 $700,000. So around $5.5 million gets you to profitability.

Bernard Fidel

Okay. Now do you expect to be profitable in the second half?

Kevin Mills

In the second half, absolutely. The second of the year, yes. I think that we said on the previous call that transitions are difficult because there is a great deal of uncertainty. You don’t know which way customers are going to go. Some will go for the 650 because it’s less expensive and they’ve tested and qualified it, some were right [ph]. I think we’ll be through the transition by the end of this quarter. And we’ll have a very clean, I would say product line, sales channel, et cetera lined up and certainly based on early indications, I don’t think that we will have demand issues for the 655. And that will give us the additional revenue to get into the profitable territory.

Dave Dunlap

And you recall Dr. Fidel our growth rate on revenues last year was 30% overall.

Bernard Fidel

Yes.

Dave Dunlap

And it covered both of our major product categories, both barcode scanning and our handheld computers. You’ve actually got a stronger opportunity in the second half of this year. And once we get the new products out, given that we now are addressing with the low cost barcode scanner, the 60% or 70% of the market that only does 1D scanning and that will open it up with the lower cost to more people using the Apple products as well as other products that scanner works with multiple smartphones and tablets.

And the SoMo 655 really opens up opportunity to a number of HP customers that by now are seriously looking to face down an alternative without having to abandon their applications. So the opportunities we see in the second half of this year, we like.

Bernard Fidel

Okay. So you can see that in third quarter being potentially a profitable quarter, is that a fair statement?

Kevin Mills

I think that’s a fair statement, yes.

Bernard Fidel

Okay. And for the quarter we’re in now, could that be a cash flow positive, in other words, would we get growth from the first quarter, let’s put it that way?

Kevin Mills

Yes, I think we’re comfortable with our goals in the first quarter but and we will strive to get a built cash positive as we can and beyond this. So we’re doing everything to basically get cash positive. I just think we have to be a realistic. A lot comes down to when we ship the 655 and as Dave mentioned, the difference of a week clearly makes a difference of several hundred thousand dollars whether it clears the channel or not clears the channel. And we just don’t know that at this stage of the game.

Dave Dunlap

And for those who went for 650, there is plenty of products in the channel and we can hit the cash breakeven targets even if there were some delays on the 655 but the question is how many of those will ship out of the channel by the end of June. And it does get harder to harder issue go on down through this quarter and into next quarter because those products are stripped throughout distribution channel. Customers have relationships with some but not with all. We can certainly guide and direct people to where the product is, but once the company is out of the 650, then the product availability with be in the distribution channels as quickly as this sales out that will complete the life of that product.

So we’re hopeful that customers will take advantage of the availability today and bring in the 650 that they need and we’ll get the 655s out just as quickly as we can.

Bernard Fidel

Just one question, I think you’ve actually – I didn’t quite understand that, the Canadian company that you have?

Kevin Mills

Epocal.

Bernard Fidel

Epocal, right.

Kevin Mills

Yes.

Bernard Fidel

Okay. When were you going to contract with them? In other words, are you going to be meeting with them or something for that?

Kevin Mills

Yes, so we will – first of all we have to get them a final version of our 655 with some additional componentry which we will have ready. They have to qualify us and then we could have contract discussion. If they don’t qualify the device, there is nothing to discuss. So that’s the process and we would expect to start it this quarter and probably – and it should hopefully before Q3 but it’s up to them in terms of the timing. They are the customer. I think that what we have to offer will be better and less expensive for them than what we offer them previously which they like.

And so I can’t give you any guarantees but yes, we will be meeting with them and we will provide samples so they can qualify the 655. And we’ve built in a number of features in the device that were specifically for them. So we feel there is a good possibility that they will be a customer going forward again.

Dave Dunlap

And Epocal has inventory of our 650s so we’re not disrupting their ability to ship their products as we move through this transition. It’s all been coordinated with them and we expect it will be a smooth transition.

Bernard Fidel

All right.

Kevin Mills

Okay.

Bernard Fidel

(inaudible).

Kevin Mills

All right, thank you very much Dr. Fidel.

Operator

Thank you. We have no further questions in queue at this time.

Kevin Mills

Okay. So we would just like to thank everyone for participating in today’s call. I wish you all a good afternoon. Thank you very much.

Operator

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

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