Socket Mobile, Inc. (SCKT) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Socket Mobile Second Quarter 2015 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, today’s conference call is being recorded. I now it’s my pleasure to introduce your host Mr. Jim Byers of MKR. Sir, you may now begin.

Thank you, operator. Good afternoon and welcome to Socket’s conference call today to review financial results for its second quarter ended June 30, 2015. 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 earlier today. The release has also been posted on Socket’s Web site at www.socketmobile.com. In addition, a replay of today’s call will be available at vcall.com shortly after the call’s completion and a transcript of this call will be posted on the Socket Web site 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. Now before we begin, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934 as amended. Such forward-looking statements include, but are not limited to statements regarding mobile computer data collection and handheld computer products, including details on timing, distribution and market acceptance of products, and statements predicting trends of sales and market conditions and opportunities in the markets in which Socket sells its products. Such statements involve risks and uncertainties and actual results could differ materially from the results anticipated in such forward-looking statements, as a result of a number of factors including, but not limited to, the risk that manufacture of Socket’s products may be delayed or not rolled out as predicted due to technological market or financial factors, including the availability of product components and necessary working capital, the risk that market acceptance and sales opportunities may not happen as anticipated, the risk that Socket’s application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so, the risk that acceptance of Socket’s products in vertical application markets may not happen as anticipated, as well as other risks described in Socket’s most recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update 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.

Thanks, Jim. Good afternoon, everybody, and thank you for joining us today. We are pleased to report both sequential and year-over-year revenue growth for Q2 and a substantial increase in operating profit compared to last year. For the second quarter, we achieved net income of just over $400,000 or $0.07 per share. This is a more than four times increase over the net income of $93,000 we reported in Q2 last year or on an earnings per share basis, $0.05 than higher than last year’s second quarter and $0.08 higher than the preceding quarter. These results reflect growing demand for our data collection products from mobile points of sales, other mobile applications marketed by our growing community of application developers. Our primary demand driver continues to be the expanding mobile point of sale markets. During the quarter, our barcode scanning business generated record revenue of more than $3.9 million and represented 88% of our total quarterly revenues. To give a little more color on our revenue, we see our cordless barcode scanning revenue as falling in two broad categories, namely our run rate business and project based business. The primary driver of our scanning run rate revenue continues to be the small retail locations. Sales in this category continue to happen as customers deploy individual applications. With mobile point of sale being the leader has purchased our data collection products as part of this deployment. Typically, we see customers purchasing a single 7 Series scanner via one of our many online retailers. The good news is there are substantial numbers of customers in this category. These customers are most active in Q2 and Q3 and we saw this play out this past quarter and expect to see it continue in Q3 as they make a push to have their mobile point of sale systems in place before the busy holiday season. Amazon continues to be our largest online retailer and is an ideal avenue to service many of these customers. Our record barcode scanning revenue in the second quarter was achieved with a year-over-year underlying growth rate of 27% in this run rate category. And we see continued strong growth going forward. The other category of our scanning revenue is project based. These projects tend to be large, single deployments in excess of 500 units and more complex as our customers are often changing work practices involving a large number of employees. Such projects are an important revenue contributor, but often involve field trials, training and more collaboration, which makes them very difficult to forecast and tends to make revenue lumpy. For example, in Q2, we were pleased to have closed two projects that resulted in revenue of approximately $400,000. However, in Q2 last year, we closed three projects that resulted in approximately $900,000 in revenue. While our project revenue was down this past quarter, we made up the difference with increases in run rate revenue resulting in a year-over-year increase of 7% in cordless scanning revenue and 2% in total revenue for the quarter. So, as we look forward to the second half of the year, we expect to see the following: Our 7 Series cordless scanning will continue to be driven by our run rate business as the mobile point of sale application users finalize their solutions ahead of the year-end holiday season. We expect this run rate demand to follow the same pattern that we experienced last year, the peak demand in late Q3 and early Q4, followed by weaker demand in the remainder of Q4 and in Q1 of 2016. The good news is that while we expect this mobile point of sale trend to repeat this year, we believe it will have less of a negative impact on our overall revenue for the following reasons: Sales of our 8 Series products have been driven primarily by inventory based applications, not our traditional mobile point of sale applications and thus have a difference in complementary sales cycle. Companies typically do year-end inventory counts as part of their year-end fiscal control process. So, demand for such inventory applications are strongest in the fourth quarter and first quarter, which in turn will drive demand for our 8 Series. The 8 Series is designed to be attached to a mobile phone or iPod touch, which has made it ideal for single handheld solutions needed for the mobile -- for single handheld solutions needed for inventory type applications. The 8 Series has been showing continued market traction and steady gains so far this year. And in the second quarter our HCI [ph] was our number two selling product. We expect to see good growth for the 8 Series during the Q4 to Q1 timeframe which will offset the normal slowing we have seen on our mobile point of sale driven 7 Series during this period. In addition, we remain on track to launch our [indiscernible] for the 8 Series product in the fourth quarter, which we believe will further enhance the 8 Series utility by enabling customers to charge, both the scanner and the iPod touch simultaneously, a request we receive from a number of potential customers. So to summarize our cordless scanning business, we remain very comfortable and pleased with the performance of our cordless scanning products and expect to see growth in the second half of the year. We expect great revenue from this business to remain strong and drive further overall revenue growth in Q3, primarily driven by mobile point of sale application. In Q3, we also hope to see a few projects closed and expect to see increasing demand for our 8 Series helping to fuel overall growth. Looking ahead to Q4, we expect mobile point of sale driven run rate business to experience its anticipated slowdown, but as I have noticed, this year we expect our 8 Series business to continue to strengthen in Q4 as customers prepare for their year-end inventory. And we believe that this increase will reduce the client in fourth quarter cordless barcode scanning revenue that we experienced last month. Now turning to our SoMo handheld computer business. Our SoMo revenue represented 9% of our overall revenue in Q2, down from 13% of our revenue in the same quarter a year ago. As expected, this business continued to decline and was down by 25% year-over-year. As I have noted before, while the SoMo is no longer a significant part of our going forward trends, we do have customers who are happy and dependent on the product. We have been working with our customers to ensure that we can deliver sufficient quantities to meet their demand especially as some key components are going end of life. I am pleased to note that while working through these logistics, one of our OEM customers recently placed a $1.6 million last time buy order with us, which we expect to deliver during the fourth quarter and in Q1 2016. This large order will make a nice contribution to our revenue in Q4 and ensure that we have a stronger finish to the year. In conclusion, as we move into the second half, we believe 2015 should be another year of significant growth for Socket Mobile, primarily driven by mobile point of sale in Q3, as well as by an expanding Socket product portfolio and maturing mobile box. We believe we are well positioned in our targeted markets and remain focused on increasing our profitability and building the business for further growth in 2016. With that said, I would now like to turn the call over to Dave for an overview of his financials.

Thank you, Kevin. As Kevin noted, our second quarter reflected continued improvements in our operating results, including a profit of $401,000, or $0.07 per share, and continued the strengthening of our balance sheet. We generated positive cash flow from operations during the quarter and used the cash to improve our working capital. Our second quarter revenue was $4.5 million, up 12% from the first quarter, driven by higher cordless barcode scanner sales. The second and third quarters are the primary selling season for mobile point of sale developers, most of whom have integrated our barcode scanning capabilities into their applications and who recommend the use of our barcode scanners for their customers who need barcode scanning. Sales by mobile-point-of-sale application developers continues to be the largest contributor to our revenue growth. But we also have many developers developing applications for other mobile areas, including manufacturing, transportation, hospitality and healthcare. Our second quarter barcode scanning revenue was up only 7% from the same quarter a year ago, and overall revenue was up 2%, partially offset by reductions in our handheld computer sales. As Kevin explained, the underlying growth between the two quarters of what we call run rate or the ongoing sales of smaller quantities of cordless barcode scanners customers needing only a few scanners such as small retail businesses was masked by larger project deployments in the second quarter 2014 of approximately $900,000 compared to $400,000 to such deployments in the second quarter of 2015. When we factor out these larger project deployments, the underlying growth rate in cordless barcode scanning revenue run rates compared to a year ago is 27%. Project deployments vary from quarter-to-quarter. We have a number of project deployments in our pipeline that we expect will be contributing to our future revenue growth and adding to our run rate growth. Our second quarter bottom line benefited from increased margins on sales. Our gross margin on sales increased from 43.3% in the second quarter a year ago to 45.1% in the first quarter of 2015 to 47.2% in the second quarter of 2015. Factors contributing to these improvements included our sales mix, component cost reductions received from our component suppliers due in part to our higher sales volumes, upwards pricing adjustments for euro sales at the beginning of the quarter to adjust for the changes in the exchange rate between the euro and the dollar, and the higher percentage of run rate business in the second quarter. We also held level our manufacturing overhead costs. A further contributor to our bottom line growth was our operating costs. Our second quarter operating costs dropped 10% from the prior quarter, as the first quarter included certain seasonal expenses, primarily the cost of our annual audit and a one-time charge in the first quarter associated with the reduction of our executive team from six to five executives, and the associated cost savings. Our operating costs were flat compared to operating costs in the second quarter a year ago, allowing improved contributions from sales pass-through to the bottom line. Also contributing to our second quarter profit measured year-over-year was lower interest expense. A year ago, we incurred a one-time charge for restructuring and lowering interest rates on certain outstanding notes. Interest in the second quarter of 2015 was approximately $100,000 lower than the combination of higher interest and restructuring charge we incurred in the second quarter a year ago. The net effect with second quarter net income of $401,000 or $0.07 per share compared to net income in the second quarter a year ago of $93,000 or $0.02 per share and compared to a net loss of $72,000 or $0.01 per share loss in the preceding quarter. As we continue to build the business, our goal is to continue to encourage and enable our registered developers to support our products; the benefit from their growth with increased revenues and to take advantage of the leverage in our business models to increase the profitability of our business. We haven’t placed the experienced staff we need to manage higher volumes with both our suppliers and our distributors and can increase the volume of our sales with only limited increases in research and expenses. Our second quarter profits generated positive cash flow from operations of over $500,000. And our cash flow also benefited from inventory reductions of approximately $200,000. Approximately $300,000 of our cash, funded receivables growth, $400,000 reduced outstanding accounts payable and we retained approximately $100,000 to grow our cash balances which increased as of the end of the quarter to $830,000. Our total capital increased from $350,000 at June 30, 2014 to $1 million at December 31, 2015 and $1.6 million at June 30, 2015 from a combination of cash flow positive operating results and in the first quarter of 2015, the exercise of $160,000 of warrants and options. We did not experience any significant exercise in warrants and options during the second quarter as our common stock price fluctuated in small ranges between $1.90 and $2.30 per share and did not motivate our warrant and option holders to continue to exercise. At June 30, 2015, we had outstanding invested options in warrants of over $3 million and their exercise over time should become a major source of future capital for the company. As Kevin noted, we expect our third quarter to reflect growing mobile point of sale run rate sales. There are also project deployments in the pipeline that can add to that revenue total. In the third and fourth, we also expect barcode scanner sales in our Series 8 barcode scanners and inventory management applications to increase. And finally we expect our handheld computer revenue in the fourth quarter to include at least half of the $1.6 million order for SoMo’s that are scheduled to be shipped in the fourth and first quarters which will add to ongoing sales to current customers. These additional revenues are expected to mitigate the fourth quarter seasonal revenue decline pattern that we experienced in the fourth and first quarters of last year and to allow us to continue to build capital through profitable operations. Now let me turn the call back to the operator for your questions.

We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Brian Swift from Security Research Association. Please go ahead with your question.

The first question would be your gross margins, is that 47% sustainable and have a non-recurring type of things that benefited? And then the second part of that would be, what will the influence in Q4 from the SoMo order have on margins, was that a higher or lower margin than your standards?

Most of the margin increases are sustainable. The cost reductions we’ve received and components will benefit us going forward and which is net volume and the changes we made in our price list in our European sales will remain, in fact we’ll obviously adjust it if the euro start to strengthen. We do have maybe 0.5% of things that happened in the quarter that we benefitted from, but you see some of that almost every quarter. And we’ve really got the manufacturing folks operating very efficiently. So, I anticipate that you’ll see a recurrence of these higher gross margin levels as we move forward. Now for the fourth quarter because we do provide volume discounts for larger orders, so you will see some reduction in our margins in the fourth quarter, but probably not more than maybe 2%.

And so it sounds like, I mean last year you had kind of spike in the September quarter, between June and September kind of having to do with the timing of when Apple does there their introductions. Would it be reasonable to assume that September top-line should be fairly close to what you just had in June and then we’d have half of that 1.6 million in the December quarter?

Yes, I think that what’s logical is we expect September, October to be strong as we’ve seen, primarily driven by lower point of sale. And I think if Apple don’t do anything too dramatic, we can count on that pattern repeating itself. So, we do expect Q3 to be stronger quarter than Q2. And yes with the portion of the SoMo order being delivered in Q4, we would expect to be able to maintain growth in Q4 also.

So, you think you will have some growth in September versus June with the phenomenon? I mean volumes…

Last year as an example, if I look at the September, October period, we did 30% of what we identify as mobile point of sale driven business and we expect to see something similar. It becomes impossible for people to deploy new solutions. I think once you get into November it’s just too technically risky to be introducing new technology into your business without having that 20, 30 days of testing that you often need to - repeating problems prior to the busy Christmas season. So, we do see a big slowdown. But like many deadlines, a lot of people wait till the last minute, so we do see a bit of a rush in September, October. And again depending on what Apple do, it may move down around a little bit but we’re kind of expecting a very strong September, early October and then a slower period for the rest of Q4. And that’s on the mobile point of sale driven portion of the business which we reckon accounts for 60%. We also this year will have the benefit of the 8 Series which is very much driven by inventory based applications. And that should offset in Q4 much of the decline that we expect in mobile point of sale. It’s still a smaller percent and at a growing route, so we think we’ll have a good second half to the year.

And our next question comes from Al Choi. [Ph] Please go ahead with your question.

I am very pleased to hear the positive guidance going forward. My concern is the lack of interest by investors in the company. And I think it’s extremely important for Socket to get back on NASDAQ. What are your plans in this area?

The first thing we have to do is meet the relisting qualification. And I think the one that -- the two that we really -- that our financial, one is we have to have capital of $4 million on the balance sheet and that would -- the target would be end of the year because you need to have audited numbers for NASDAQ and the other is the share price of $3 per share. If the trends continue as we’re going, I think your price earnings ratio for example, if you just take today’s pricing and apply the new ratios on earnings, it would take us down to around 14 or 15. So, we think if we can continue those trends, we’ll look like attractive pricing and we could see the pricing certainly move up. And then, we are increasing our capital from operations. We’re at $1.6 billion. If you go back a year, we were $350,000. So, the key for us now is continue our profitable operations and then if the stock price and the direction we’re going becomes attractive to our option and warrant holders, we could see enough capital coming in to be able to take us to those levels. We’re monitoring it and we hope that we’ll start to see that moving in that direction. But the key for us is in part just the ability to get options and warrants being exercised and adding to profitable operating results.

I think that if you announce some sort of plans to get back on NASDAQ, I think investors would become more interested. Is there any plans like to a secondary to raise the capital requirements which would qualify you to NASDAQ?

We don’t have any plans to do that at this time. We are generating sufficient cash to run the business but there is nothing that says we couldn’t do that. But there are no plans currently.

How about road shows or something to publicize the company where you can create some excitement? The company is doing very well but it doesn’t seem to be drawing a lot of interest based on the stock price and the volume in the stock trading?

Well, one of the important things is that people are clear that the trending is moving in the right direction. I think the results that we’ve published with the second quarter will certainly help with that perspective. We have been more active in terms of attending financial conferences. We were at the LD Micro Conference, for example, in June and we’ll continue to pick up the pace. But the judgment at the moment continues to be the best way to -- if you will distribute the story and get people interested without too badly jeopardizing the bottom line by picking up expenses too soon. So we’re very sensitive to making sure that investors are worthy opportunity and we are continuing to expand our efforts in that area.

[Operator Instructions] We do have a follow-up question from Brian Swift from Security Research. Please go ahead with your follow-up.

On the operating expenses, do you see much change going forward in the second half from the levels that you were at in the June quarter?

Well, we always expect some increases. We find that if we can hold back expenses, we’ll do that. But following up Al’s comments, we do expect that we’ll see some pick up in our, particularly in our sales and marketing activities. We are looking to add a key program management person for our developer program. So, we are expecting some moderate increase expenses, but I stress the moderate. We’re not trying to jeopardize our growth; we’re looking to fund some level of increases from revenue growth while we continue to pass through parts of this to the bottom-line. So much of the timing of many of these activities are variable and we can adjust based on what we see coming into the top-line. But I expect to see some increases in the third and fourth quarter, but as I said it will be relatively small, just a few percentage points.

[Operator Instructions] And at this time showing no additional questions, I would like to turn the floor back over to management for any closing comments.

Just like to thank everyone for participating in today’s call and to wish you all a pleasant day. Thanks very much.

Ladies and gentlemen that does conclude today’s teleconference. You may now disconnect your telephone lines. We thank you for your participation.