Socket Mobile's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 6.12 | About: Socket Mobile, (SCKT)

Socket Mobile, Inc. (NASDAQ:SCKT)

Q3 2012 Earnings Call

November 6, 2012; 05:00 p.m. ET


Kevin Mills - President & Chief Executive Officer

Dave Dunlap - Chief Financial Officer


Brian Swift - Security Research Associates


Greetings and welcome to the Socket Mobile, third 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).

It is now my pleasure to introduce your host, Jim Byers of MKR Group. Thank you sir, you may begin.

Jim Byers

Thank you Operator. Good afternoon and welcome to Socket’s conference call today to review financial results for its 2012 third quarter ended September 30, 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 and in addition a replay of today’s call will be available at 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 whishing 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, 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 risk that acceptance of Socket’s products and 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 any 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. In today’s call, I’ll begin with a brief review of our Q3 results and then discuss the business opportunities we see ahead and our outlook for the remainder of 2012.

Our revenue for the third quarter was $2.8 million, consisting of $1.2 million of SoMo related sales, $1.3 million of cordless scanning related sales and about $300,000 from service and other legacy-related products.

Total Q3 revenue was well below our expectation. The result of much lower sales in the month of September due to market transitions that delayed purchasing and deployment decision. This was very disappointing, given September is historically a strong sales month for Socket and also represents over 45% of our total sales in Q3.

Let me explain in detail the factors as we see them, which impacted Q3 sales, as well as the return to a more healthier order pace we’ve seen taken place so far in Q4. Starting with our cordless scanning business. Over the past year our barcode scanning business has become increasingly dependant on Apple IOS devices. This has generally been a very good thing as sales of Apple products continue to increase and more businesses are looking for ways to incorporate the Apple platform into their daily working solutions.

However in September we experienced the downside of working in the Apple world. On the 4th of September after weeks of rumors, Apply announced the intent to launch new products on September 12. On the 12th Apple announced the iPhone5 and iOS6, with availability beginning on the 19th, but in fact the 26th became a more realistic date for actual deliveries.

The impact on Socket negatively affected sales targeted for Apple devices, since many of our customers simply did nothing in September. They waited to see and test the new hardware and software prior to additional or new peripheral commitments. Our Apple related sales essentially stopped during the six-week period, which represented approximately half our quarter. So on the back of a solid July, we had a soft August than it is more September, very disappointing.

There are many benefits of using consumer devices in business, some of which include lower price points, device familiarity, ease of use, little or no training and they are generally liable and dependable when used properly. We are not complaining and certainly we’ve grown our scanning revenue largely based on our leadership position in the Apple environment.

However, when there is a change, a rumored change in product models, the downside is businesses usually stall during these kinds of uncertainty in order to review and evaluate pending plans and models. This is a fundamental difference in the data collection business when you compared the consumer device usage versus more ruggedized units for traditional business, which normally follow a more predicable road map.

We continue to see solid market acceptance of our scanning products and have not changed our outlook for the growth prospects. What we believe, the plain fact is that our Apple business will occasionally be lumpy. Every time Apple seizes our scanning business will likely catch a cold as well. There is little we can do about this, except to plan for it to happen in the future on a once-a-year basis.

We are hopeful future transitions will be less disruptive from the current one, which included the new lightning connector and new smaller form factor travelers, the iPad Mini and operating system optic. The new lightning connector adds the level of complexity for numerous customers, especially those in mobile retail, who are currently deploying mag stripe reader space on the 30-pin connector.

There are currently no mag stripe readers in volume production based on the new lightning connector since Apple has delayed the release of the specifications. We estimate it will take three months before lightning connector base mag stripe readers become available. We are hopeful that current availability of the iPad3 will be able to meet the requirements of our customers in Q4 in the mobile retail segment. Mag stripe readers are not used in many of the applications we support, but they are used by customers in mobile point of sale segments.

Overall the iPad Mini should be good for our many customers who are to share information with their customers on the sales floor, as well as in hospitality and healthcare. The screen size is big enough to share information, but small enough to be more affordable.

On the positive side, we continue to sign up developers at a rate of more than one per day and have signed up over 120 in the past 90 days. Ultimately developers create applications, which drive our business and create positive growth. The majority of our developers are writing applications for Apple iOS devices and we’re also seeing a strong, but smaller group of Android developers, which is also steadily growing.

As I noted earlier, we are seeing our scanning business return to more normal levels, even though the uncertainty has not completely been removed. Going forward we expect to have nine to 12 months of uninterrupted Apple centric business and expect to be able to grow our business strongly during this time, as the demand for our scanning products has not diminished.

With respect to our new SoMo655 handheld computer, the modern transition has dragged on longer than expected. We entered the summer with about 2000 units of our older 650 model left in distribution and we had expected them to sell out during July and early August, but the reality was they sold out by mid-September, thus delaying the transition of many existing customers for the SoMo655. The transition delay is now behind us and we are seeing customers beginning to move over to the 655. In addition what is equally important, we are also seeing solid interest from new customers.

Earlier this month we launched an SDK for the SoMo655, which allows us to interact with the software developers who are the lifeblood of the applications business, which possibly changes the dynamics of the business going forward.

As we have pointed out many times, much of our customer base is made up of original HP iPAQ users, which subsequently switched over to he SoMo as a compatible and somewhat improved device, with the primary motivation being its software compatibility.

As many of our customers were unwilling or unable to change the software applications, we’ve only been servicing the replacement business. When iPAQ broke or became unusable they added SoMo’s to their population of devices. The result is that we have many customers who have several hundred of both SoMo’s and iPAQ, but who are running older software optimized for the older iPAQ device.

The addition of the SoMo SDK changes the dynamics for both Socket and the developer, as it enables customers to easily optimize solutions for the SoMo and enhance the overall efficiency and productivity of the worker. Previously we were unable to provide an SDK, which made it difficult to get developers to optimize the software for the SoMo device or improve or upgrade their software.

We believe the SDK will both enable us to interact wit key developers, enable them to improve and optimize the software for the SoMo and this will help us grow the business going forward.

Overall Q3 was a disappointing sales quarter and was a significant setback for us and our goal of returning Socket to both cash flow positive and a profitable company. In light of the lower than expected results in Q3, we will further reduce our expenses during Q4 to align them with revenue and get back on track.

We believe we can get back on track with sales in Q4, based on the demand we already have and the ongoing demand from our many developers who have completed their application, including the likes of NCR and like LightSpeed in the mobile POS business. We also believe we will see stronger SoMo sales as more and more customers move to the 655.

Our Chairman has agreed to provide additional capital funds, providing a short term financing mechanism, which will provide us with sufficient time to enable revenues to return to more normal levels.

With that said, I’d now like to turn the call over to Dave for his comments.

Dave Dunlap

Thank you Kevin. Our third quarter 2012 revenue was $2.8 million, a decrease of 31% from the previous quarter and down 40% from the third quarter a year ago. Net loss for the third quarter was $983,000 or a loss of $0.20 per share compared to a net loss of $755,000 or a loss of $0.16 per share in the immediately preceding quarter and compared to a net loss of $727,00 or $0.16 per share in the third quarter a year ago.

Much of the slow down occurred in the month of September, which historically yield a highest third month percentage of any of our quarters as customers return to work from vacations around the globe. For our cordless barcode scanning products, Apple’s announcement of the iPhone5 which stand most of September from their initial product launch, caused customers to slow down their quarter’s barcode scanning purchases in September until the new product could be evaluated.

Our Socket scale of software has been submitted to Apple for certification on the iPhone5 and many developers have already successfully upgraded their barcode scanning applications for our products to work on the iPhone5, but the delay’s were sufficient to drop our quarter’s barcode scanning revenues from $1.527 million in the second quarter to $1.243 million in the third.

Sales of our low cost model 7ci continued to grow up 28% over the previous quarter and represented 29% of our quarter’s barcode scanning revenue for the third quarter.

Product transitions also impacted our handheld computer product revenues. We successfully staled out the remaining supplies of our analysis continued in SoMo650 handheld computer earlier in the quarter as supplies in the channel were nearing zero by mid-September.

We also commenced shipping our new SoMo655 at the end of the second quarter, so that customers could proceed with their evaluations of SoMo655 while SoMo650’s were still available. Although the SoMo655’s are being well received and have a number of improvement over the SoMo650, a number of customers continue to purchase the SoMo650, began to use up supplies of the SoMo650 that has been previously purchased and deferred to start up their valuations until late in the third quarter. As a result our SoMo sales revenue declined from $2.1 million in the second quarter to $1.3 million in the third.

We knew these transition impacts in the third quarter that affected both of our primary product families has an anomaly and our order pace in October has been picking up, up some 29% over July. We expect these growth trends to continue to accelerate as we move through the fourth quarter, as our customers complete their evaluations of the newest Apple products, including the Mini Tablet, and as the growing number of companies and organizations with programs that are adopting our barcode scanning and handheld computer products, mainly for resale with their application continues to gain momentum.

Our gross margin on sales for the third quarter were 35%, down from 37% in the second quarter. Lower margins resulted from product mix with our 7ci low cost barcode scanners with somewhat lower margins being a larger percentage of total.

From additional price discounting associated with encouraging the selling out of the SoMo650 handheld computers and with fixed costs, which reduced during the quarter, being a somewhat larger percentage of total cost of sales due to lower revenue levels. With higher revenues and with the SoMo650 now sold out, we expect these margin trends to improve in the fourth quarter and beyond.

We further reduced our operating expenses in the third quarter to $1.887 million, a reduction of 15% from the previous quarter. We have taken and are taking additional steps to continue to reduce our operating expenses. We are continuing to ask our employees and executives to accept reduced compensation levels during this transaction period.

We are maintaining our current development programs. We are at the point with many of our products under development, where much of the work and expenses during the fourth quarter is with our engineers and we can further reduce the cost of outside services and for the fourth quarter we are curtailing certain discretionary marketing activities, relying on our website and our own press announcements to convey information about the company.

Our focus remains on achieving positive cash flow on operating level from a combination of near term revenue growth and reduced operating cost. One cost that we have decided to differ is a cost of trading the company’s common stock on the top OTC-QX tier of the over the counter markets.

Accordingly we have advised the OTC market that we will move trading back to the bulletin board level of the OTC markets, until such time that these costs could be assimilated within a cash positive operating budget. We will continue to maintain the governance of reporting practices that qualify us for the QX tier, which is the same as required to trade on the NASDAQ exchange.

We’ve continued to receive excellent support from our production and service suppliers. From our customers and from our valued employees and we’ve taken some additional steps to insure that we have the cash and working capital to fund our operations during the quarter and beyond.

In early August we announced completion of a subordinated convertible note financing of $400,000 by selective officers and directors of the company. Socket’s board has approved the fourth quarter extension of this program as needed for up to an additional $350,000. We believe this approach, which we can tailor to our specific requirements on a week-by-week basis will provide additional liquidity as needed to bridge the positive cash flow levels.

As Kevin noted in his remarks, we believe that our barcode scanning products are well position to benefit from the growing adoption of smart phones and tablets by businesses and retail point of sale applications in healthcare and in hospitality and other commercial services applications.

Our new SoMo655 hand held computer provides an extended five-year commitment to businesses using Windows Mobile based applications for their mobile workers. Particularly for those companies who have adopted the now discontinued plastic mobile handheld computers from Hewlett-Packard.

Business applications running on these HP handheld computers can be run without change on the SoMo655, avoiding the expense supporting to other operating systems, where (inaudible) is the larger and more expenses Windows Mobile based industrial grade terminal.

We are excited by the opportunities immediately before us, and we continue to request your support.

Now let me turn the call back over 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 with Security Research Associates. Please proceed with your question.

Brian Swift - Security Research Associates

Yes, I just want to go quickly first to the financial side. You filed an 8-K after the last quarter that you had raised about 400,000 in these notes from the insiders and I’m looking at your press release today and you have notes payable of like some 760,000. So are those part of that or is there some other notes that I don’t remember being in that.

Dave Dunlap

Actually those are not notes they are grouped I think, but we did obtain an addition cash advance basically from a merchant account structure. It’s a cash-in; it’s not a formal note and its just repaid on a weekly basis over a period of about five months. So that’s systematically paying down in small weekly increments, but that’s the rest of the total.

Brian Swift - Security Research Associates

Okay, so in that $764,000, that includes the $400,000 that.

Dave Dunlap

Yes, it does Brian. $400,000 is the amount that’s outstanding with the officers and directors.

Brian Swift - Security Research Associates

And how much additional do you have authorized?

Dave Dunlap

The board has authorized up to $350,000, but I think the intent is that it will happen over again an extended period of time, probably measured in months and it will only be drawn as needed.

So it provides comfort and security that we will be able to meet our obligations, but particularly if we are looking to finance growth. But that’s the purpose of it, and it will only happen as the company requires it.

Brian Swift - Security Research Associates

Okay. So what was the cash loss for the quarter?

Dave Dunlap

Well, overall we had a $700,000 loss from operations, but that consisted of almost $800,000 when you add back the non-cash items to your net loss, which was $983,000. Our working capital changes were slightly positive, so your total is $700,000 loss from operations.

Brian Swift - Security Research Associates

Okay. So your receivables were like $1.3 million. So when you collect those and your operating expenses are just under $2 million, you have the balance of the – I’m just trying to figure out where the cash is going to come from to get you though this latest debacle here.

Dave Dunlap

Well, in addition we have some additional expenses reductions and on top of that we are seeing a pickup in orders and shipments. So your operating results we expect will improve.

Kevin Mills

And then we also have our bank line in place. The bank line basically allows us to generate cash on shipments and as long as it’s reasonably linier in Q4, with the reductions and expenses coupled with and prove shipments. Basically we need to be cash flow on a positive, on near weekly basis. The bridge money thus for getting will allows us sufficient time to get positive on a weekly basis, but our main concern today is cash and cash management.

Dave Dunlap

But the bank line as you know varies with the level of receivables. So as our shipments go up, our bank line drawing capability goes up. We did drop from $900,000 to about $650,000 from end of June to end of September. We would expect as we increase our shipments in the fourth quarter that our ability to draw will grow possibility as much as double with what we have today. It really is a function of timing and how quickly we are able to get shipments out the door.

Brian Swift - Security Research Associates

Okay. So anyway, you don’t think you need to do anything else in order to get you from here to the next quarter, unless something hiccups during this last quarter. So lets turn to the business side of it. You did mention the NCR business. Could you give us a little more color on how that is ramping and where the end markets are going and what your typical contribution is on an installation with that.

Kevin Mills

Okay, so I think there is a number of questions. So I would say that we saw a good ramp in August and September and basically we saw things slow down subsequently. We’ve had discussions with NCR of where they are.

But before I get to that, let me just example the opportunity. NCR recently had an Investor Day and during that Investor Day they explained to their investors, they believe there is a market size opportunity of 8 million worldwide, iPad centric, point to sale systems will be sold over the coming years, okay, and they explained that they believe they can capture 20% plus of that.

What they are offering people is a solution that for $70 per sales associate they will do your financial transactions and the person may or may not be equipped with equipment that is purchased directly from NCR. The solution includes an iPad, a cash draw, a printer, a barcode reader are the elements and a mag stripe reader.

So there is five elements in the solution and depending on your situation you might use as little as two of them, the minimum said being the iPad and the mag stripe reader and then depending on whether you are going to email people the receipts, you may or may not need a printer, whether you are taking cash, you may not need a cash draw and depending on what you are selling you may or may not need a barcode scanner.

The market acceptance seems to be there. I think one of the dilemmas that NCR faced is that the mag stripe readers they were using was an iDynamo, which was a 30-pin connector. Now Apple have come out with an iPad that has a lightning connector and there is no mag stripe reader that supports the lightning connector.

So on the retail point to sales systems, we are trying to establish – I mean in our discussions with NCR, they believe may of their customers will proceed with the iPad three. We don’t know how long that will be available for. I mean currently you go to the Apple store its available, but as you know that may stop and that will be a little while before there is a mag stripe reader with the lightning corrector.

So having said all that, its hard to gauge the exact up-tick, which is why I think I said in my comments there is still some uncertainty, particularly in the mobile point of sale and this run across a number of people including LightSpeed, ShopKeep and others.

Fortunately we have a lot of people who are not using mag stripe readers and our now moving across to the newer devices. Unfortunately everyone has to resubmit their applications to Apple to have them re-certified for the iPhone5 and iOS 6. So it’s not a simple process. We have submitted for example our scanning product, but they are as of few hours ago not approved. But we expect them to be approved in the next day or two.

So this confusion in the market doesn’t help us in the short term and we have seen things return more to normal, I would say over the last two weeks and bookings have been more in line with what we expected and applications are coming on.

I did mention that we now have 180 developers. We’ve added over 120 in the last 90 days. So the developer communities are very aligned with is in terms of the applications, but it’s the uncertainty of the hardware in the short term, which caused this disaster in Q3.

Brian Swift - Security Research Associates

The mag stripe reader, the new version is three months away or three months from what?

Kevin Mills

Yes, three months. Apple has to approve the mag stripe reader. We don’t make a mag stripe reader, so we don’t know exactly where they are away. But anyone using an iPad3 has no issue. Anyone who wants to use the iPad4, the iPad3 with retinal display has to have a different mag stripe reader. So there is some uncertainly still on that topic.

Brian Swift - Security Research Associates

And so what potion of the NCR business uses the impacted…

Kevin Mills

I would actually say probably 80% of people have to have a mag stripe reader at the cash registers. So if the customers want to wait for the iPad 4 or the mini-iPad, then it delays the business by another 90-days. If customers are happy with the iPad3 as many of them were before the iPad4 was announced, it doesn’t delay us at all and that’s a customer-by-customer decision, I can’t do anything about that.

But that’s the dilemma of actually those working with Apple, is that for the consumers they want to surprise everyone with new and exciting stuff and they are pretty good at it. On the business side we don’t do so well with surprises, because we like to plan and so now fortunately we also support androids, so we are seeing good demand in the android side, on the BlackBerry side and actually we are expecting good things in the Windows side with Windows Ace, the tables, etcetera, we will sport those, but today we are overly dependent on Apple and these changes have put a spanner in the works in the short term.

Brian Swift - Security Research Associates

So how is Windows 8 impacting your 655 opportunity?

Kevin Mills

It’s actually not impacting us at all. I mean we end up servicing groups of people who want a small handheld device and again with Windows 8 the spec is for 10-inch tablets. We only have customers who need a pocketable, highly portable device and those are in the healthcare hospitality markets and I think that over the years we honed who can use it and someone who can’t and there still is a good demand for people who can’t.

We’ve completed trials during the summer, large organizations like Kaiser Permanente and their solutions will roll out to staff there and there SoMo is the ideal device and they’ve looked at other devices, but it’s a portability issue. So I don’t think it impacts the SoMo at all and I did mentioned we did put out the SDK.

Historically we didn’t haven an SDK for the SoMo, which meant that we were still running the older non-upgraded, non-improved versions of software that people originally develop for the iPAQ. I think it was essential to get the SDK in the market, so people could improve the user experience with the newer and better-improved hardware and we now have that done.

The SoMo has been slower, but we still believe there is lot of road ahead for us. In fact even today, HP, we’re at the largest health conference in the U.K. and they were demonstrating the SoMo as their handheld solution to customers in the U.K. at that health conference, HP was.

Brian Swift - Security Research Associates

So where are you seeing the biggest momentum as far as – you said October was pretty good relative to July.

Kevin Mills

Discounting stuff is defiantly where the short-term business is coming back. Android driven, Apple Drive, mobile phone centric driven, now that some of the dust has settled as regards what Apple is doing, a lot of people were able to verify during late September and early October that the application that they had written still ran on the iPhone5 if they got one and iOS6.

Again, I don’t know if it’s generally known, but many applications stopped working and many applications that were written for iOS4 simply stopped working on iOS6. So everyone has to check. I think that checking has taken place and generally speaking we don’t have many technical issues. It’s just that everyone gets in this deer in the headlight mode while they don’t have the hardware and for all of September no one had the hardware.

Brian Swift - Security Research Associates

Okay. All right, I’ll let somebody else ask a question.

Kevin Mills

All right, thank you very much Brian.


Thank you. There are no further questions as this time. I will turn the floor back over to Mr. Mills for closing comments.

Kevin Mills

Okay, I would like just to thank everyone for participating today and we look forward to our next conference call with hopefully with much improved results. Thank you very much.


This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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