Socket Mobile, Inc.
Q1 2009 Earnings Call Transcript

Published: 23 Apr 2009

[Operator:]

Greetings ladies and gentlemen and welcome to the Socket Mobile first quarter 2009 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, [Charles 5

[Charles:]

Thank you, Operator and good afternoon and welcome to Socket's conference call to review financial results for its first quarter and virtually first 2009. Online today are Kevin Mills, President and CEO of Socket and Dave Dunlap, CFO of Socket. Socket distributed its earnings release over the wire service at the closed market today. We will be consulted and 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 completion and a transcript of this call will be posted on Socket’s website within a few days. We have also posted replay numbers in today's press release for those wishing to replay this call by phone. The phone replays will be available for one week. Before we begin, I would like to remind everyone that this conference call may contain forward-looking statements within the meanings of Section 27-A of the Securities Act of 1933, as amended, and Section 21-E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, but are not limited to statements with respect to the distribution, timing and market acceptance of Socket’s products and statements predicting trends, sales or activity, backlog and market opportunity in the markets in which we sell our products. Such statements involve risks and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements as a result of a number of factors including but not limited to the risk that shipments of our products may be delayed or happened as predicted, if ever, due to technological, market, or financial factors, including the availability of necessary working capital, the risks that market acceptance and sales opportunities may not happen as anticipated, the risks that the Company integrator program and current distribution channels may not choose to distribute its product or may not be successful in doing so, the risk that acceptance of the Company’s products in vertical application markets may not happen as anticipated, and other risks described in Socket most recent Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. Socket Mobile does not undertake the obligation to update any forward-looking statements. With that said, I will now turn the call over to Socket's CEO, Kevin Mills. Kevin?

[Kevin Mills:]

Thanks Charles. First, I would like to thank everyone for joining us today. I will begin by providing an overview of our results for Q1 2009 followed by our current outlook on our market and business. Despite the difficult economy, we continue to see increasing adoption of our SoMo handheld computer. In the first quarter, SoMo sales were up slightly over Q4 to remain at record levels. We sold 3,256 units which is almost three times the number sold in the first quarter last year and slightly above the number we sold in the fourth quarter, which is typically the strongest quarter of the year. We are pleased to maintain good SoMo sales momentum into the first quarter, which is also one of the weaker quarters. Overall, our Q1 results reflect the three elements. SoMo sales which have based with the fourth quarter; upcoming revenue which was up $700,000 over Q4 and our OEM results where we saw a $900,000 decline in revenue over Q4 level. I would discuss each of these elements in more details and provide our outlook. Starting with the SoMo. In Q1 that this product line represented 32% of Socket’s total revenue and continues to grow as a component of our overall revenue for our strategic goal. SoMo sales in the first quarter were primarily within healthcare and hospitality, key markets we have strategically targeted. Within the healthcare, opportunities continue to center around medication dispensing, asset control, and process control and we continue to seek further new opportunities in the various. One of our large healthcare customers, Good Samaritan, has deployed over 2,500 SoMo units to date and we are seeing numerous additional opportunities around the world. To give some examples, in Switzerland we have three hospitals about to face orders for SoMo in Q2, one in [10

[David Dunlap:]

Thank you, Kevin. Revenues for the first quarter of 2009 were $4.8 million, a decline of $100,000 or 2% from the previous quarter and a decline of $1.4 million or 28% from the first quarter a year ago. Revenue is generated by Socket’s computer and peripherals business and by its OEM business. Our computer peripherals business includes our family of handheld computers, our data collection products, including barcode scanning peripherals, RFID and Magnetic Stripe Readers. Our legacy connectivity plug-in products including modems and Ethernet cards and our service revenues relating to these products. Our OEM business consists of products designed as third party products including Bluetooth and Wireless LAN modems and cards using the technologies that we build into our own products. We also classify our legacy serial products as part of our OEM business. As a way of background, 2008 was a record revenue year for the Company up 10% over the previous year despite a significant slowdown in our business we recorded in the fourth quarter and that we attributed to business cautions among our customers over general economic conditions. For the fourth quarter sales decline, our 2008 results for computer and peripheral products compared to 2007 was essentially flat, a $15.8 million in 2007 versus $15.6 million in 2008. On the positive side, our SoMo product family sales grew by $3.4 million to $4.7 million in 2008, however our barcode scanning sales declined by $2.7 million or 23%, on our legacy connectivity product sales declined by $850,000 or 35%, effectively offsetting the growth in handheld computers. Fourth quarter barcode scanning revenues were also reduced, as Kevin mentioned, by a one time return of $700,000 for products from resellers to our distributors and that further reduced fourth quarter 2008 product revenues to $3.1 million. In the first quarter, computer and peripheral product sales increased to $3.9 million with sales of barcode scanning products holding at fourth quarter sales level asking for one-time return. Year 2008 was also a record revenue year for our OEMs business with revenues of $8.3 million in 2007 increasing to $11.9 million in 2008, $6 million of our 2008 OEM revenues were from the sales of Bluetooth modules that reached their end of life during 2008. The sales of these modules were in the third quarter of last year and these sales completed we experienced to draw [19

[Operator:]

(Operator Instructions) Your first question comes from the line of Brian Swift - Security Research Associates.

[Brian Swift:]

My recollection was of the Good Samaritan order that you got a year ago was going to be very well spread out and coming I think to completion in Q2, can you bring us up to date on that and what maybe you might have lined up to be replacing that because I guess the one silver lining in the quarter was the fact that the SoMo revenues are holding up and hopefully as we kind of regain footing in the economy that we have seen in the growth period or the growth rate that is at hand, what is kind like to see what do you have or what your pipeline is like and what kind of comfort level where you have will be able to see another growth spur in the SoMo handheld? I know you have the RX models coming in to play and I did talk to somebody over in the United Kingdom for that application over there for barcode scanners for patients who are going into the hospitals and so on. Can you give us a little idea how I can hold in and in relation to one of the steady customers that you have?

[Kevin Mills:]

Okay. So, I think that as we said that Good Sam had a roll out of 850 SoMos and right now we have 25 but we expect as they will supply the next 700 units in Q2. We do not know if they will have further deployments or if they will upgrade any of the units to include barcode scanners all the things going forward and obviously when we started Good Sam was a large percent when we started the 500 units at quarter out of our [26

[Brian Swift:]

Okay. Thank you. And that the United Kingdom opportunity that I mentioned, I think the demand date is effective July 1 of this year, when do you anticipate demand that might start impacting your….?

[Kevin Mills:]

Well, we actually asked the large healthcare show in the United Kingdom on the 28th, 29th and 30th of April, if the HIMSS show in Chicago was any indication I think they is budgets in healthcare and people are, I would say are at the latter part of making decisions and generally speaking I think people leave this thing go till the last minute. So, I think a lot of people will make decisions after as they have gone to the healthcare show [29

[Brian Swift:]

About section one that I have talked to, they were quite enthusiastic about the opportunity particularly some on the…

[Kevin Mills:]

One thing that was very evident what we are seeing across the world as well as at the HIMMS Healthcare Show is that the problems are very real and people are genuine. They are looking for solutions. They are finding that is a small handheld like the SoMo is an ideal complement to the nursing staff. Many have tried computer on wheels and even though they have a lot of big improvements the lack of portability has been an inhibitor to both adoption and effectiveness and having a small handheld device allows them to be closer to the patient when they give medication. Their information was always visible to visitors in the hospital and etc and there is a little more discretion and it is easier for the nurses. So, we do see a lot of opportunity because of those and it is pretty universal. As I mentioned we are seeing this in Switzerland, we are seeing this in Germany; we are seeing them at the United Kingdom as well as here. So, as these problems get solved, it will bring a lot of opportunity for us.

[David Dunlap:]

And Brian, even security is the motivator to use the product like the SoMo not only do we have CCX capabilities or within a Cisco environment which is probably the largest number of Wireless LAN environments used in healthcare company. But the traditional way of even nurses entering data at a nursing station leaves that data available for people to see the screen and as if potentially comprises the security of that information and if they have to log off many times they are just a step away to come back to taking care of the patients or as using the SoMo you can put it into a cradle. You can still use a keyboard and a mouse, enter the data and then when you pull that SoMo from the cradle the data screen is obviously goes blank and the data has been entered and security is maintained. So, these accept the examples of where the SoMo would become very attractive to use in a hospital environment or where security is an issue.

[Kevin Mills:]

And just very one last thing, I think the fact that we have done the RX version, I would suffice, I must say at the HIMSS Show about how many people came up to our booth and said “Oh, here are the guys with the RX, with the antimicrobial version.” I can really tell that we are interested and focused on the healthcare space and I believe we are the first company that really has focused on the space with the product that is more designed for the nursing staff and the conditions etc and this is much appreciated and we got a lot of very positive feedback at the healthcare show about this.

[Brian Swift:]

Okay. And addition to the hospitality side, it sounds like the indications are that this is like in hotels that they are being used in the restaurant operations on these hotels, can you elaborate a little bit more because there are some handhelds sort of have been in use for quite sometime in the restaurant industry or…?

[Kevin Mills:]

Yes, I quickly elaborate that a little bit on this. We are seeing really three areas for hospitality. Areas like restaurants whether they be stand alone restaurants or in hotels. We are also seeing areas like mini-bars where people are managing what is going into rooms as well as some customer facing at the patient where people are using loyalty cards and they are using a handheld sort people into whether gold, premium, and platinum whatever the various programs are. The restaurants trade there is a real desire to have an electronic device at the table so that orders can be sent wirelessly to the kitchen. Historically, people have used, I would say, a simple device whether that be the MC50 or the 8800 and generally those devices have been in the thousand dollar range, the penetration rate is probably just a few percent, maybe less than 10% and what we are seeing with the SoMo is that unlike many of the old devices which have built in scanners that was never used. The SoMo is much more effectively priced at around $500 range. It does not have a built in scanner but in the restaurant trade they were not using it anyway and applies in portable and the battery life plus it needs all the requirements for Wireless LAN. All of these solutions are application driven and the big application for writers are people like Digital Dining and AACS and many of them have qualified to SoMo and they are now having their franchisees or promoting themselves and the work horse in this area was the MC50 which was a Motorola product and which was recently gone end of life and they have moved up to the MC55 which I think is less applicable to the restaurant trade. It is a little bit bulkier, a little bit heavier, and a little more expensive and it has a keypad on it which is often not used in the restaurant trade. So, it is less applicable and the cost difference between an MC55 and a SoMo now is almost 50%. So, we are seeing a lot of interests. I do not think that the hospitality market is as robust and it could be based in this economy and what we are selling is the best and I think last quarter we did about 20% of our sales into that market. We have not complied with the entire breakdown for numbers this quarter but we will do that but we think it can be a good number of 30% range.

[David Dunlap:]

It is also interesting, Brian to see how sometimes these applications crop industry line one of the applications we understand for that the some of the European hospital purchases was actually being taking up patient orders for meal which then get transmitted down to the kitchen. So, these applications can become somewhat widespread.

[Kevin Mills:]

We have one company in Germany that is in the process of deploying 500 SoMos purely as a hospitality application within healthcare.

[Brian Swift:]

Okay, well, I think it will be best to allow somebody else to ask a question.

[Kevin Mills:]

Well, I think that is correct. Thanks.

[Operator:]

(Operator Instructions) There are no further questions at this time. Gentlemen, do you have any closing comments?

[Kevin Mills:]

I would just like to thank everyone for joining us today and to wish you all a good day. Thank you.

[Operator:]

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