Socket Mobile, Inc.
Q2 2013 Earnings Call Transcript

Published: 24 Jul 2013

[Operator:]

Greetings and welcome to the Socket Mobile, Second Quarter Management Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Jim Byers 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 2013 second quarter and six months ended June 30, 2013. 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 and 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 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 hand held 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 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 second quarter 2013 results and then discuss the business opportunities we see ahead in the second half of the year. We're pleased to report solid Q2 results that include continued sequential growth in revenue and our second consecutive profitable quarter. Revenue for Q2 was 4.4 million consisting of 2.6 million of cordless scanning related products, 1.5 million of SoMo related products and 300,000 of service and legacy related products. Our higher products sales coupled with our lower expense levels enable us to record a profit of $43,000 or $0.01 a share. Last quarter, we reached a major milestone in returning to profitability, and are very focused on maintaining this profitability going forward to position Socket Mobile as a financially stable profitable and growing company. These solid Q2 results were again achieved over the hard work of our employees, many of whom have worked for us earlier in the year and have now returned to fulltime work in Q2, as well as the excellent cooperation we experienced from our suppliers. Let me now review our progress and outlook for both our cordless scanning and SoMo businesses starting with our cordless scanning business. Revenue from our cordless scanning business in the second quarter was up 73% over the second quarter last year, and we were about 7% sequential. While the sequential growth over Q1 may seem modest, if you recall the first quarter includes the benefit of a large sale of 3,200 units, which increased the Q1 number significantly. In Q2, we saw a broader distribution of sales with no one deal being greater than 300 units, and yet sold nearly the same total number of units and grew revenues sequentially. We saw very strong underlying growth in Q2 especially in the Americas, where we experienced almost 80% sequential growth over Q1. It is important to focus on the underlying drivers of the business as we believe they are a better indicator of our long term success. While we're certainly happy to have large deployments that significantly boost our numbers. It is important that we set break these large deals from the underlying run rates business. As the lumpiness of the larger deals tends to add a lot of excitement or disappointment but don't necessarily reflect the underlying health of the business. In analyzing Q2 results. We feel very good about the overall health of our scanning business as reflected in the strong demand we continue to see from a broad base of customers, particularly in the U.S. We achieved our solid Q2 results without benefit on any large deployments in the quarter but we do expect to see that change over the coming quarters that business has complete their valuations and field trials and move into the deployment phase. We continue to see our scanning business driven by the mobile application developers that we have discussed on past calls with mobile point of sale applications in the retail segment continuing to lead the way. More and more, point of sale application providers recognize the need for a mobile cash register version that not only can act as a transaction terminal but can also be used as an integral part of the sales process. With the mobile cash register, sales associates can assist with fine decisions as well as completing transactions from anywhere in the store. The preferred choice of our group continues to be Apple tablet devices but we are also seeing strong demand for Android base solutions. Socket is continuing to benefit from this trend as our Apple certified cordless scanners have proven to be the best, lightest and most portable scanners in this category. In addition, we have excellent software support for both Apple and Android tablets and that are fast becoming the default scanner of choice. We already have industry heavy weights like NCR, Fujitsu, using and deploying our scanners. We are also seeing new entrants like Lightspeed, Shopkeep and others standardizing on our scanners. We have seen lots of trials and many small deployments and while we haven’t seen any significant deployments in the U.S. market yet, we expect to see this start happening over the next few months. As we believe, retailers will need to decide soon if they are going to deploy the technology in their stores in-time for the Christmas selling season. Realistically, we believe that the system would need to be deployed by mid-November as many retailers have a policy that prevents new technology deployments in the latter part of Q4. As a result, we see potential for a strong finish to Q3 and a strong start to Q4. Last year, Apple’s transition of form factor, operating system and connector prevented many from deploying mobile solutions, resulting in the slowdown in our scanning business in the second half of last year. We feel strongly that this is unlikely to occur again this year as Apple have already released iOS 7 development tools, enabling everyone including Socket the opportunity to verify that this operating system updates will not be a source of major problems. In addition, the iOS connector is unlikely to change again, some magnetic stripe readers, which are a mandatory part of our mobile cash register solutions are not going to have the compatibility issues as was the case last year. Thus, like everything with Apple there remains a little uncertainty and a lot of excitement. To-date, Socket has over 100 developers in the mobile point of sale category and we believe we are just the start of a new industry wide trend and we look forward to an exciting Q1 ahead. To-date, we are pleased to also announce a new and very exciting product, the 8Ci scanner. I would like to briefly outlying the potential we see with this product in our market and the opportunity it brings for increasing our sales. The 8Ci is a very thin, light and portable scanner that offers two modes of operations; it can be attached to a phone using a clip or used standalone like a flat version of our current 7Ci scanner. When attached to a phone and for the sake of simplicity on use of mobile point of sale solution as an example the combination of the scanner and iPhone becomes a single handed solution, which is a very important requirement in many mobile situations, and this is a standard scenario that Apple uses in its own stores. The employee using the system is able to think of our product with one hand and scan it using the other. With the addition of a mobile payment capability like a square credit card reader, the single handed 8Ci iPhone solution becomes a complete mobile cash register solution. This type of single handed scanning scenario that customers require is equally applicable to other positive vertical markets, such as commercial services and healthcare. To-date, we believe 80% of our cordless scanning sales are with iPad type devices, which is a two handed solution as the iPad is too big for single handed operations plus has the benefit of being able to share the screen with the customer. The 8Ci enables us to penetrate the single handed market opportunity, adding a new large market opportunity for Socket that we are currently not competing in. We see little overlap between the two segments due to the different scenarios and the logistical requirement. However, in many cases, the same application is used. The fact that our new 8Ci is 100% software compatible with the current 7Ci, means that applications that already support the 7Ci will automatically support the 8Ci. In addition, we continue to make our product the easiest and most complete for developers. We believe that the 8CI will enable us to further penetrate the retail market and thus accelerate our revenue growth. The 8Ci will be available in both black and white. The 8Ci can also be used as a standalone flat version over our 7Ci scanner. It is very light, very thin making it extremely portable, enable to easily fit into the shirt pocket of ours. We believe it will be very popular in these types of applications. In this scenario it is more competitive with our existing 7Ci products and the final choice will come down to personal preferences. The key point is that by delivering these choices to our target market. We are increasing the market size and believe we will continue to increase our share. Overall we are very proud of the 8Ci and believe it will significantly add to our revenues starting in Q4. The combination of our existing momentum in the mobile scanning markets and the addition of the new products should allow us to achieve significant growth in the business going forward. Now let me update you on our SoMo handheld product. SoMo revenue grew from $1.2 million in Q1 to $1.5 million in Q2, primarily on the back of a new customer who is incorporating the SoMo components into a new medical process. The company, whose name I cannot disclose was responsible for approximately $300,000 of the SoMo related revenue in Q2. The customer is currently using the first batch of SoMo’s to complete field trials and agency approval. Once completed, we believe they should become an excellent long term customer for the SoMo. So while we do not expect any revenue for them in Q3, we are expecting steady and meaningful sales from this customer in Q4 and beyond. The rest of the SoMo business remains stable but still faces some headwinds. The underlying difficult y in the handheld market continues to be the lack of excitement for the windows mobile operating system coupled with the excitement for android. However the reality is that today there are very few smaller form factor android devices without mobile phone capabilities in the market, and customer continues to struggle with deployment and stability issues for android. So the market in general is struggling with these choices. So while windows mobile maybe less popular, we believe customers will find that it continues to be the stable and reliable choice for the markets we are serving. And so SoMo is an excellent choice, should you go through, in those mobile rush. Overall this process is taking its time, what we continue to see slow steady progress and believe the SoMo will show improvement in the coming quarters and return to being a key contributing product. In Q2, we improved the Wi-Fi capabilities of the SoMo with the release of a new and improved software called go Wi-Fi. Going forward we will putting more marketing effort behind the SoMo which today has taken a back day to our scanning business because SoMo marketing efforts would not yet yielded much return during this transitional phase. In conclusion, we have made a lot of progress over the first six months of the year. Our scanning products are becoming as a full solution in the rapidly emerging mobile point of sale segment. We have both enhanced our current product offerings by adding features including colors much to the delight of our customers and also introduced a new family of product the 8Ci, which expanded our market reach to further accelerate growth in the market segments we serve. Our handheld business is also improving and we have added key customers who will be using the SoMo as an integral part of their product. We believe we will be able to get the SoMo back on track in the coming quarters. We expect Q3 to be a challenging quarter, two statistical general market low we experience in July and August which is then followed by a rush in September. However, we do expect to remain profitable in Q3 and expect to see very good revenue growth in the fourth quarter as we see increasing benefits from the new products. The solid improvements we have achieved year-to-date is the result of a great deal of hard work by everyone here at Socket and continued strong support from our suppliers. We are very proud of these achievements but we remain diligently focused on the work ahead, to capitalizing the opportunities we are creating, to grow our revenues and selecting our business with continued profitability. With that said, I would now like to turn this call over to Dave for his comments.

[Dave Dunlap:]

Thank you, Kevin. In the second quarter we have accomplished a number of key financial objectives. We achieved the second consecutive profitable quarter making up for and exceeding the approximately $600,000 of first quarter revenue with one customer in Japan. Sales of product in our second quarter were much more widely distributed among many more customers reflecting an underlying growth trend. We achieved sequential growth in revenue over the first quarter in both of our major product families. Our cordless barcode scanning revenue increased 8.7% to $2.6 million and our SoMo handheld computer revenue increased 16.8% to $1.6 million. Our overall revenue which includes OEM products and service revenue increased 4% to $4.435 million. In the second quarter, cordless barcode scanning revenue represented 58% of total revenue. Handheld computer revenue represented 35% of our total revenue. Together these two product families now represent over 93% of our total revenue. We improved our gross margins from 40% of revenue to 40.7% of revenue. We have an ongoing program to continue to improve our margins including product cost reductions and improved manufacturing efficiencies. We have increased the supply of products in the channel, the rapid growth and orders that we began to experience in December of last year and the lead times needed to increase production, lower product inventories in the channel at the end of the first quarter and resulted in some temporary product outages with our distributors. By the end of June, we caught up with distributor orders to ensure the customers could obtain Socket products from our distribution channel partners without unusual delays. Reflecting this catch up, we went into the second quarter with an unusually high backlog of shippable orders totaling 1.9 million. Going into the third quarter, we have reduced our backlog to approximately $600,000. We managed our working capital to generate the cash needed to operate at higher revenue levels. We are very appreciative of the corporation we have continued to receive from our suppliers and service vendors. From our employees that reducing unnecessary costs and from key investors that have provided temporary cash funding in the form of short term loans to fund working capital growth. The total amount of supplemental cash and capital was $550,000 which we drew during the early parts of products production wrap up during the first quarter. We have extended the notes underlying these working capital loans to December 1, 2013. The notes are repayable at the option of the company and we expect to repay the working capital loans over the next several months as our working capital levels further improve. Repayments should also reduce our interest expense. We kept our product development programs on [Audio Gap] tight cash situation and have announced the availability later this quarter of our model 8Ci barcode scanner, a linear barcode scanner that is attachable to smart phone. In the product roadmap, it’s an 8 series 2D barcode scanner as well. Bringing a new product into the market includes lots of additional product cost including prototypes, tooling and certifications which we have covered. We also continue to add features and improve the software supporting our barcode scanners and handheld computers such as a new and improved go Wi-Fi wireless LAN software that was released during the second quarter. We have tightly managed our operating expenses on accomplishing the key objectives to bring our employees, who has been working part-time through the end of Q1 back to full-time status in response to our increasing work load. Our operating expenses in the second quarter were $1,628,000 up 5.3% from our first quarter expenses of a $1,545,000 and lower by 26.6% than our second quarter expenses a year ago of 2.2 billion. Our GAAP profit for the second quarter of 2013 was $43,000 and an $118,000 for the six months, compared to prior year GAAP losses of $755,000 in the second quarter of 2012 and a GAAP loss of $1,627,000 for the first six months of 2012. We have also included in our earnings release EBITDA profitability, earnings before interest, taxes depreciation and amortization which is a traditional measure of operating results. Our EBITDA profitability in the second quarter of 2013 was $294,000 and was $623,000 for the first six months of 2013, compared to EBITDA losses of $444,000 and a $1,006,000 in the second quarter and first six months of 2012 respectively. Our cash flow from operations before working capital changes was positive $400,000 in the first six months of 2013. These positive cash contributions from operations along with additional borrowings from our owner bank line and short term investor support have helped fund our working capital growth requirements. In summary, we are now enjoying the momentum created by our new barcode scanning products designed for the smart phone and tablet markets and our SoMo 655 handheld computer introduced one year ago. Businesses are adopting smart phones and tablets for business use in retail point of sale, commercial services and healthcare and Socket is well positioned to continue the benefit from this trend. Our new SoMo 655 handheld computer addresses the replacement need to the existing classic DDA users who use or plan to use mobile applications in the Windows mobile operating system environment particularly in healthcare and hospitality and with over 500 registered applications developers, the growing strength of the developer program is enabling the use of our products in a wide range of mobile application. With the continued support of our vendors, our employees and our investors we look forward to the opportunities immediately before us to further increase our revenue and to continue to operate profitably. We thank you for your continued support. Now let me turn the call back over to the operator for your questions. Operator.

[Operator:]

(Operator Instructions). Our first question comes from the line of Brian Swift with Security Research Associates. Please proceed with your question.

[Brian Swift:]

Could you give us a little bit more color on the SoMo from the standpoint of maybe some of the macro things that are going on, we've talked in the past about some regulatory issues that might be helpful in the medical area. And then maybe more specifically what’s your pipeline of potential new customers might look like that can give us some comfort that you know that this whole product line can get some legs from here.

[Kevin Mills:]

Well I think, let me just start by saying I mean that the hand held market is still in our opinion struggling in terms of there isn't a lot of support for Windows Mobile and certainly Microsoft didn't make the transition from Windows 6.5 to 8 very smooth and left uncertainty in the table for quite some time which they now have rectified. And I see what's driving the general markets without getting into specifics is the requirements are a small long lifecycle device be used in applications like healthcare with nursing as well as restaurants, hospitality and those type of application. Certainly we've seen a number of laws changed across the world where actually people have to be bar coded with a wrist band and then some time later that wrist band has to be read. If I take for example the UK market, they mandated I think in 2011 that every patient in the UK had to be given a wrist band with their names, bar code as well as date of birth, however they didn't mandate that you had to electronically read those, the law to read to read those actually I believe comes in the middle of this year and I think it's mandatory from next year, so there's still a lot of inquiries relative to scanning into and using the hand held computer. I think that one of the things that have complicated our lives is many people have tried to switch over to an iTouch or an iPhone or an Android based phone, and even those I think the initial price may seem cheaper, they're much more challenging in terms of deployments, so I still think we're fighting that headwind and personally I think and I certainly speak for myself got still a strong belief that the SoMo pad will basically continue to improve and develop into a market, but it’s certainly driven by the application and it' s the application developers who have to I would say fall in love again or at least commit to Windows Mobile, we're seeing more of this, but I wouldn't describe it as strong yes. So I know that gives you a lot of comfort we have a new customer who's including the SoMo into their medical device and I think that will kind of anchor the business for us and that will be a good solid customer, as it is in the medical space, if their field trials go well then I believe there'll be significant numbers behind us, so I mean that's where we are with the SoMo, I still think it's too early to make a final determination but I think we're still quite optimistic that this could be a good solid product but it'll take a little bit of time.

[Brian Swift:]

You mentioned that you had 50 developers in the SoMo area and what is that relative to say a year ago is that growing?

[Kevin Mills:]

Well we did, that's one of the things as we didn't have a developer program for SoMo a year ago and we only start the developer program in October of this year, historically we had customers coming from HP and we kind of made the SoMo look like a HP (iPad) device, to some degree the problem we have is that as the world moves on people do need to upgrade their application for new web browsers and other things, we made the SDK available in October and we've seen good interest and people downloading us and we have customers now interacting with us and now we believe those customers will turn into more dependable reliable customers going forward but we haven't seen that yet, but we're good with now up to 50 developers right now on the SDK and that number continues to grow.

[Brian Swift:]

Okay. And switching to the scanners the new products that you introduced, do you think the demand will come from applications where people are using the smart phones and they want to have a more robust, faster scan from using your product versus the ones that come in the smart phones or do you think it’s going to be more of just another of the ability to scan in one hand well?

[Kevin Mills:]

Okay I think there is both. I don’t think we can ever compete with the barcode capability of a mobile phone which essentially is free. I think it’s free but it’s awkward it’s probably the best way to describe this. So if you’re doing a few scans we would describe a few fact scans let’s say less than 10 scans a day. Then you’re probably better off to put off with the awkwardness of using your mobile phone as the scanning device. And we’ve done some internal tests we believe it takes about six seconds an average, right. If you go to this scan with a mobile phone most of our customers who are using our scanners today are scanning a 100 barcodes and not every day but when they scan they are doing a batch of items and they need 50 or 80 et cetera. So, the six seconds time saving becomes five minutes so you end up in a different type of area and then people get annoyed and they want to have a tool for the job. And I think the other thing is what we’ve seen with the 7Ci and the 7 Series scanners is that I think that we have a very dominant position in the iPad and iPad Mini segment of the markets. However, we don’t have a lot of our customers currently using the 7 Series scanners with iPhone’s iTouch’s particularly in the retail markets. Because as was said back by our customers you have a two handed solution you have a iPhone in one hand and a scanner in the other. That difference with the iPad what we see people doing with the iPad is when they are interacting with the customer they often stands the iPad’s on a shelf or on a surface that’s nearby. So they really have the scanner in one hand and they still have their other hand free. It’s not possible to do that with a smaller device like an iTouch or iPhone. And therefore when you go to a Nordstrom or you go to the Apple store they are not using our products they are using a competitor’s product. We believe that these KCI will allow us to compete very, very well with those other competitive product in this phase and I would say today we have a zero market share in that phase and I believe we’ll be able to grab 30% to 40% of that market over the next 12 months. We also give the developer a lot of leverage because now they can develop the app once and have a solution for the iPod iTouch using the 8 Series scanners and also still have the solution for the iPad or iPad Mini using the 7 Series and so there is an enormous amount of leverage. And we’ve been I would say waiting a while to do this product we could have probably done it two years ago. I think one of the things that we were kind of out of money it’s not out of ideas so we would have basically had we been better financed brought this product to market I would say two years ago and would now enjoy a bigger share in that iPhone iTouch segment of the market but we feel we can catch up pretty quickly here.

[Brian Swift:]

So realistically what kind of lead time do you think that we will need to be able to see some significant revenues from that new product in terms of design?

[Kevin Mills:]

Yeah I would typically say for a new product in the barcode scanning industry six months but I would actually say with the 8Ci because it’s a 100% software compatible and that we will see I would say the early sign of success in November December so I would say you’re talking more like three to four months as opposed to typical six to nine months and that’s because we are really making it very easy for the developer community they can reuse all the work they have done with the 7Ci and it will just work with the 8Ci. So we really made it as convenient as it’s practically possible so I think we will have a faster ramp and would be normal.

[Brian Swift:]

Just one last question before I will let the next caller ask questions can you give us a little idea on momentum now quite often you talk about how the first month of the quarter is going relative to the previous quarter Can you give us any flavor as to how we’re doing there?

[Kevin Mills:]

I would give you some flavor but it’s not very robust, I would describe July is been typical. I think we’ll have a typically weak July, I think Q3 comes down to September. Even if I look at last year and our Q3 wasn’t very, very that bad. July was quite fine and so July is no different this year than it was last year but that’s really doesn’t tell you a lot and I think that our typical pattern is that in Q3 and this is one of the reasons why I dislike Q3 and more than 40% then up to 45% of the entire quarters business is done in September. So, usually we’re well behind by the time where we get to the first of September as then we catch up against the plan. Last year second half and it was exactly the year before I believe that sales in September were 44% the entire quarter. So, yes we can give you some color but it’s not very meaningful at the moment. There is nothing greatly positive or greatly alarming but we’re not expecting that until we get into the latter part of the quarter.

[Operator:]

Thank you. (Operator Instructions). Our next question comes from the line of Bernard (inaudible) private investor. Please proceed with your question.

[Unidentified Analyst:]

You mentioned something that there was some funding or big deals in Europe or United States or Japan or what?

[Kevin Mills:]

I think we have a lot of pending large deals, I think you might be referring to the deal we did in Q1 with the Japanese company. So, I guess, we said on the last call that they were going to do their trial in August and September and we would hear after that and we believe that’s still on track. I was in Japan in late May or early June, we confirmed all of that and we don’t know of any issues and should the trial be successful the follow on order could be significant in terms of units and as this is a very large company with 30,000 plus of their own stores plus another 70,000 options. So, there hasn’t been a lot of progress on that but we do expect to hear in this quarter if that’s going to be goal and we remain quite hopeful.

[Unidentified Analyst:]

Okay. What about anything in Europe versus…

[Kevin Mills:]

Yes. We have many deals but I think part of it is that the, we have lot of trials going along. We have trial going on with the larger retailer in the UK as they currently are testing, they probably have 45 units deployed in a trial and they started a month ago, as expected to end the trial by the end of August and they have 250 stores and they would use anything up to 10 to 15 scanners per store. We have trials going on, I mean last quarter we sold, I forgot what the exact number is but approximately 12,000 scanners. We didn’t sell more than 300 to any one customer. So, believe me there is a lot of trialing going on right now and across many, many different areas. So, there was no significant deployment in Q2, we’re expecting a few in Q3 but the timing of these are not really under our control.

[Unidentified Analyst:]

Okay. What about Germany, that’s always a big market.

[Kevin Mills:]

Yes. I mean we’ve lot going on in Germany. We have a deal that we spoke about before. We have the orchids supply prevalent orchids by high (inaudible) and deployed 200 scanners in Q1 and they’re looking to deploy another 200 to 300 but they haven’t. So, again I mean I think we’re still focused on the getting the software out there, I still think it’s very early in the market but the times are good.

[Unidentified Analyst:]

Okay. Now last time we were discussing about the band line with (inaudible).

[Kevin Mills:]

Yes, absolutely.

[Unidentified Analyst:]

I understand they have about 7,000 trucks. Now, what’s happening with deployment?

[Kevin Mills:]

So, they have told us as we have told you that they would like to deploy and have the solution by the end of the year and to date we have seen very seen very few units deployed. We have seen the (inaudible) and they still believe they are on track and it's a franchised business. So they can mandate that they can mandate these when they want the system in place so they can forfeit the franchisees to buyers. So I think as we get closer to days we expect to see a pickup in sales. And we're on track with that but we don't expect t we'll be able to accelerate it. It will happen as the franchisees operate. But our understanding is t from January all the franchisees will need this new system in place and then use this to improve.

[Unidentified Analyst:]

Okay, so that's deploying in couple of months I guess?

[Kevin Mills:]

We're hoping.

[Unidentified Analyst:]

And the third quarter you mentioned you mentioned you said that it will be profitable, correct?

[Dave Dunlap:]

Yeah, I think Q3 is always difficult, because of the way the business happens generally weak in July and August and then September is kind of Q3, but we expect to stay profitable and then we expect to see good growth in Q4.

[Unidentified Analyst:]

Yeah what about sales for the third quarter? Should that be any growth as compared to the second quarter?

[Dave Dunlap:]

Yeah I think it will continue to be marginally up but I don't think it will be our breakup quarter, I think Q4 you will see a difference. I mean I think that our, we have number of things to fix, we're systematically fixing them, getting employees back to work this quarter, Q2 was very important and got everyone back to full pay and staying profitable was very important. So there are other things that we need to continue to move forward. But I don't think there will be a huge growth in the top line in Q3 and our sales; as long as we stay profitable and we're in position for Q4 I think people will be happy with the year.

[Unidentified Analyst:]

What about expenses for the third quarter? Should it be similar?

[Dave Dunlap:]

Usually we have a little bit of relief because people take vacations. So that basically is a cost savings, because if you were accruing their vacation and then you are giving it back to them. So Q3 is typically not a terribly expensive quarter for us. We do have the additional expense of launching the 8 series product, so we have to include that. So I think the expenses will be reasonably the same.

[Unidentified Analyst:]

Okay. Then with the new scanner that you announced today what is the potential and I understand that it will be available around August 1, right?

[Kevin Mills:]

Around September, and third month of the quarter.

[Unidentified Analyst:]

What is the potential of that in sales is there any number on that?

[Kevin Mills:]

Yeah well I think that t has potential to be equivalent to sales to the 7 series because it serves a parallel for different markets. So as I mentioned to Brian what we're seeing was a product more people are using it with iPads and iPad mini, so it's a bigger form factor. We don't have a lot of customers in the retail space that are using our scanners with their iPhone. And therefore we're missing out on that segment of the market, this addresses that. And we believe the numbers are equally if not better in that segment of that market than the iPad section of the markets. And the other thing is I could easily see the 8Ci outselling the 7Ci, it's just a bit too early. One of the things the products does is it drags you into conversation with your customer, because they want variations of it, they want to make sure it is available, we have not had those conversations, with this product we will be in a better position to service those customers going forward.

[Unidentified Analyst:]

Okay, just two more questions. You mentioned 15 distributed or the SoMo 15 plus. What about on the scanners? How are we doing there?

[Kevin Mills:]

We're over 500, we have more than enough to cope with.

[Unidentified Analyst:]

Okay, and one last thing getting back to this listing, the band we have 700 trunks, how many scanners do you anticipate for each trunk? How does this work?

[Kevin Mills:]

There are 700 franchisees not 700 trucks.

[Unidentified Analyst:]

There are 700 trucks?

[Kevin Mills:]

700 franchisees, so they basically have 700. I don’t know how many trucks they have, I know they have 700 franchisee. So a franchise guy could have one truck, he could have three, I don’t know. But the potential would be somewhere in the 5,000 unit range if they all got scanners is what we next believed.

[Operator:]

(Operator Instructions). There are no further questions at this time. I’d like to turn the floor back to management for any closing comments.

[Kevin Mills:]

Okay, thank you very much. I just like to thank everyone for participating in today’s call and to wish you all a good afternoon. 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.