Socket Mobile, Inc. (SCKT) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the Socket Mobile Second Quarter Management Conference Call. My name is Jason. I will be your operator for today's call. Please note this conference is being recorded. [Operator Instructions] I will now turn the call over to David Dunlap. Dave, you may begin.

Thank you, Jason. Good afternoon, everyone, and welcome to Socket's Mobile's Management Conference Call to review financial results for its second quarter and first half ended June 30, 2017. Joining me on the call today from Socket are Kevin Mills, President and CEO; and James Lopez, Socket's Vice President of Marketing, Sales and Developer Programs. Socket Mobile distributed its earnings release over the wire service before market opening this morning. The release has also been posted on Socket's website at www.socketmobile.com. In addition, a replay of today's call will be available shortly after the call's completion through the company's website, socketmobile.com, and a transcript of the call will be posted on the Socket website within a few days as is customary because we may include forward-looking statements in our remarks. I'd 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 the 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 the 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 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. With that introduction, I'd like to turn the call over to Socket's President and CEO, Kevin Mills.

Thanks, Dave. Good afternoon, everyone, and thank you for joining us today. We are pleased to report another solid revenue quarter. Our Q2 revenue was $5.8 million, an 11% increase over the $5.2 million we reported in Q2 of 2016. Our Q2 cordless scanning revenue was $5.6 million, an impressive 41% higher than the $4 million we reported for these products in Q2 of 2016. Our earnings before interest, tax, depreciation and amortization, or EBITDA was $1.1 million compared to EBITDA of $734,000 for the same quarter a year ago which is an increase of almost 50%. We included the EBITDA numbers in our press release as they clearly show the improvements we have made over the past 12 months. Our earnings per share of $0.06 in Q2 2017 versus $0.07 in Q2 2016 would imply that we have not improved. The relatively flat earnings per share numbers are largely due to differences in tax treatment in 2017 and '16. Dave will provide more detailed information later in the call. Our positive results in Q2 reflects the continuing success of our application-driven business model. The increasing number of smaller businesses deploying mobile applications continue to drive our cordless scanning sales with mobile point-of-sale related applications continuing to lead the way. We are also seeing sales increasing in inventory, merchandising and logistic-type applications, all of which are driving our growth. I will now hand the call over to James Lopez, our Vice President of Sales, Marketing and Developers, to provide a bit more color on the markets and how we see them evolving going forward.

Thank you, Kevin. Much like last quarter, mobile point-of-sale activity in Q2 continued to show overall strength and lead all markets in demand for our standard cordless handheld scanners. Noteworthy for the quarter was a strong performance of our 800 Series attachable scanners, many leveraging our new DuraCase sleeve as we see the movement toward enterprise mobility solutions leveraging smartphones gain momentum across all markets. To continue to support this momentum, in Q2, we added a new solution for the Samsung Galaxy S7 to our DuraCase family where we already have support for Apple's iPod touch, Samsung J3 and J5 smartphones. Toward the end of this quarter, we will be releasing our DuraScan D600 Contactless RFID/NFC Reader/Writer. The D600 is our first handheld capable of reading data from RFID tags or from smartphones leveraging near-field communication capabilities. We've had great early engagement and assistance from our developer community as we finalized the D600, and we see many new and exciting data capture opportunities around RFID/NFC emerging throughout 2018. The D600 represents a whole new data capture platform for Socket and benefits from not only our prior RFID experience but our years of traditional barcode scanner expertise and the benefits of our extensive and well-regarded SDK. Now I would like to hand things over to Dave.

Thanks, James. Our second quarter of 2017 revenue was $5.8 million, with 98% from the sale of cordless barcode scanners. The quarter followed an equally strong first quarter of $5.6 million. Compared to last year, the quarter's barcode scanning portion of our revenue was up 40% from the first six months of 2016. Overall revenue year-over-year for the second quarter and for the 6 months was up 11% as the first half of 2016 included almost $2 million of handheld computer revenue. Handheld computer sales were discontinued midyear last year. Thus our quarterly growth rates going forward will become the year-over-year growth rate of cordless barcode scanning revenue. By June, a year ago, we have sold nearly 35,000 barcode scanners worldwide. By this June, our six month sales have increased to 54,000 units reflecting unit growth of more than 50%. As Kevin and James point out, our growth is driven by a growing base of application developers, who have incorporate our advanced barcode scanning features into their applications in combination with the wide range of products that we offer to serve the needs of the developer's customers. Our margins on the second quarter sales increased to 53.6% compared to margins of 49.5% in the year ago period. Our cordless barcode scanning margins have benefited from product component cost reductions on our barcode scanning products this year. In addition, last year's margins were blending of the cordless barcode scanning and handheld computer margins with nearly 20% of prior year second quarter revenue coming from the sale of mobile computer products. Our operating expenses of $2.2 million in the second quarter grew 10% from the same quarter a year ago, as we elected to increase funding on product development and incurred additional costs associated with growth. We have funded three major product development programs over the past two years: our family of IP54-rated durable products last year; the growing number of DuraCase single-handed, attachable scanning combinations for both Apple and our Android smartphones; and our soon-to-be released RFID/NFC reader/writer, D600. We have other projects in the works. We have kept our expense growth in line with our revenue growth. Net operating income before interest and income tax expense was $908,000 in the second quarter of 2017 compared to $580,000 in the second quarter a year ago, an increase of 56% year-over-year. This year, we're tax affecting our operating income although income tax expense is covered by net operating loss carryforwards and does not require to use of cash beyond a small, minimum tax. A year ago, we accounted for income taxes for the full valuation allowance, so income taxes did not appear on our income statement. So far this year, the comparison of net income year-over-year includes income taxes for 2017 and does not include income taxes for 2016. Net income for the second quarter of 2017 was $490,000, or $0.06 per fully diluted share, compared to net income of $517,000 or $0.07 per fully diluted share a year ago. The second quarter of 2017 was our ninth consecutive quarter of profitability and our 10th consecutive quarter of growing positive cash flow. One additional measure of our operating results is EBITDA, earnings before interest, taxes, depreciation and amortization. EBITDA in the second quarter this year was $1.1 million compared to EBITDA in the second quarter a year ago of $726,000, an increase of 52% year-over-year. Profitable operations over the past 3.5 years, has had a very positive effect on our balance sheet as well. Shareholders' equity at June 30, 2017 was nearly $18 million compared to $16.2 million at December 31, 2016. Our cash balance at June 30, 2017 of $2.1 million continues to grow, and we have in reserve a revolving bank line of credit with available draw out capacity of better than $1.5 million. The next major improvement on our balance sheet will happen on September 4, 2017, the maturity date for our convertible subordinated notes when $1.2 million in convertible subordinated notes and accrued interest is expected to be converted by the holders into approximately 972,000 shares of common stock. The notes were issued four to five years ago to address a liquidity crunch and they did their job well. We will not receive any proceeds from the conversion, but the conversion eliminates the notes payable liability by converting it into equity, which continues to strengthen our balance sheet. We do not expect any increases in the volumes of common stock sales to result from this conversion. The holders already have existing price to convert to common stock at any time. The holders are current and former officers and directors of the company, many of whom are subject to our insider trading policies which restricts equity sales in September and October. And many already hold equity or that rights to obtain equity through stock option exercises. Although revenues and income can fluctuate quarter-to-quarter, the underlying positive revenue growth trends created by our mobile application developers in selecting and incorporating the advanced scanning features of our data capture products is positive. We appreciate the continued interest and support of our customers, our developer community, suppliers, employers - employees and investors. New products such as the DuraCase and our D600 Durable NFC/RFID Reader/Writer, which broadens the markets we are able to serve and continued growth in our registered developer community, are all key factors driving growth and profitability. Now let me turn the call back to Kevin.

Thank you, Dave. In summary, our cordless scanning revenue growth continues to be strong, and we feel very positive about the year ahead. Our application-driven business model continues to be validated by the strong results in the US, and we have seen very solid increases from online resellers like Amazon and CDW. We're also seeing stronger run rate business in Europe and Japan, and we expect these trends to strengthen during the second half of the year. Our products are now available in China and we expect their availability to allow our developer partners servicing the local market to design our scanners into their applications. This will take some time, but product availability is the first major milestone in a design win process and that now has been achieved. We are excited about the availability of our RFID/NFC contactless reader/writer, the D600, in Q3. Over time, we expect this will add an additional revenue stream as development add RFID-enabled applications. The recent announcement by Apple that they will allow developers to use the NFC reader in iOS 11, that is expected to be released in September, should significantly increase developer activity and application utilizing this technology. So as we look forward, we continue to see a big opportunity ahead of us that will enable us to steadily increase our revenue and maintain our solid record of profitable growth. With that said, I would now like to turn the call back to the operator for your questions. Operator?

Thank you. We will now conduct a question-and-answer session [Operator Instructions]. And it looks like we do have a question coming in from Tomer Cohen. Tomer, your line is open. Please go ahead.

Good afternoon.

Good afternoon, Tomer.

My first set of questions has to do with the international business. I'm curious if you could tell me roughly what percent of your revenues for the quarter came from international sales?

I've think about it for a second. Approximately $1.1 million, so you can work out the percentage, it's about 20%.

I see. And which geo - can you give me some breakout of the geographies? How much is U.K, how much is Continental Europe and Japan, and so on?

It's hard for us to break it up by country, but it's approximately 850k in Europe and 200-and-something k, 300k in Asia Pac. So because of the way we sell, particularly going through online resellers like Amazon or CDW like, it's people buy across border. So it's hard for us to know exactly. So we don't try and break that out. Obviously, going forward, we will be able to break out the U.K. separately for Brexit sometime in the future.

Tomer, our international sales have been fairly consistent quarter-over-quarter, and I know you track those through our details in our 10-K and 10-Q. 20% is a pretty good indicator and as I said, 5% or 6% of that typically comes out of Asia. So we're seeing consistency, which means they're growing as the rest of the business is growing and that's a positive.

The other thing maybe I will add is even though the numbers aren't changing that much at the moment, the underlying business model is, and we are seeing more, what we call, run rate business driven by the mobile applications. Historically, the international business tended to be a bit more deal driven, right, and we're seeing that trend that we've seen in the US now starts to happen in different places around the world, which is quite encouraging.

That's helpful. And I'm curious about the U.K. You mentioned you might be breaking that out soon -

That's because of Brexit. That was a bit tongue-in-cheek. That was Brexit-related.

I see. Oh, I see. All right. And next question has to do with enterprise deployments. In the past, you've broken out how much enterprise deployment you had each quarter. I'm curious if you could share that for this quarter?

Our enterprise, as you know, we still sell - all of our sales go through our distributor channels, but we've became aware of larger deployments. You're looking at around 600,000-plus for the quarter. As Kevin said, most of our business is a run rate business and, right, we've been seeing some good growth in the our run rate activity.

Yes. If that's right, that means you had about 500 or $5 million in run rate, which was a very significant growth over Q2 of last year. Is that right?

That's correct, right.

Okay, I'll hop back in the line and let some other people ask questions and then I'll get back afterwards.

Thanks, Tomer.

And at this time, we actually have no further questions in the queue.

Okay. So we will just like to thank everybody -

I'm sorry, we just had two more pop up.

Alright, okay.

We have Al Troy with a question who just came in. Al, go ahead. Your line is open.

Congratulations on an excellent quarter. My problem is that, the company is doing so well and at such a low valuation considering nine quarters of - consecutive quarters of profitability, et cetera, and growing revenues. I think there's a lack of communication with the investment community. I feel you can do more going out meeting with funds and big investors and communicating more with the general public. I think that will help the price of the stock quite a bit.

Okay. I don't know if there's a question there. But we are doing some more outreach. We are working now with Sidoti, and we will - you can expect to see an analyst report being published probably in the next 45 days, and we will be at their conference in New York in September.

Okay. I think that's what's needed because I feel the stock is very undervalued at these levels and should be selling at a much higher price. So hopefully, there will be better communications and people realize what a great company you have.

We appreciate your support.

Thank you.

And we do have Tomer queued up with another question. Tomer, go ahead. Your line is open.

Glad that I didn't have to wait long, so on your Q1 call, you mentioned that you were expecting to see DuraCase sale pick up in the second half of 2017. Curious if you're still expecting that?

Yes. This is James, Tomer. Yes, we are. We are seeing DuraCase pick up. It was somewhat of staggered release. We started with our 2D product and only introduced the 1D -

DuraCase.

By the DuraCase product, the DuraCase. I'm sorry, I'm thinking DuraScan. Yes - no, DuraCase is doing well. Actually, as I mentioned in my comments, we are seeing significant uptake in our 800 Series attachables and part of that is they're being accompanied by DuraCase. We have the iPod DuraCase first and that is our big seller right now. We added in the quarter J3 and J5. And only recently, we just added the Samsung Galaxy S7. So we're seeing a lot of pick up from those products. The S7 is very new, so very small sales there, but we certainly expect that to pick up in the coming quarters.

And do you think that the sales - or even sales on the DuraScans will be more weighted to enterprise deployments versus run rate?

I think so because what we're seeing here are use cases that are more deployable. So things like inventory management, although I wouldn't discount the small businessman who's doing inventory in a single store. We do see a lot more trending toward deployments for these kind of solutions. But it's still emerging. We're seeing a lot of traditional use cases that used to look at built-to-purpose solutions evaluating our DuraCase.

Yeah, that makes sense. And then my next question just has to do with mobile point-of-sale and long-term demand. I'm curious, how long you think the growth in mobile point-of-sale sale has left to run.

It's a great question. In fact, we were analyzing that just this quarter. And I think the shorter answer is we see a lot of legs left in mobile point-of-sale because the movement toward mobile point-of-sale is gaining traction. We see it starting with tablets. Tablets kind of were the replacement for registers, and you saw it a lot at the point-of-sale. But now as people are comfortable with mobile devices being used, we're seeing it go deeper. And we're starting to see the inventory applications that we've been talking about emerge and then we also started seeing a lot of attention and activity toward assisted selling, merchandising. So we think that it's going to go deeper into retail applications beyond just the mobile point-of-sale counter. And we think that that's going to lend itself more towards smartphone applications moving forward because those applications are heavy-mobile and they are more - they're better use cases for where you need a hand-free.

Yeah, that makes a lot of sense.

Yeah. The other thing maybe to add is that within the mobile point-of-sale category, you have a lot of bars and restaurants where there is no barcode scanning requirement at the transaction or at the sale point. As James pointed out, when you add inventory or stock balancing or other types of secondary applications, those customers come back to us because you do need a scanner for those types of activities. Even in a bar, we'll say, if you are doing your inventory monthly or a cycle count, all of a sudden, that scanner becomes very useful to that process. So even though it's unlikely there'll ever be barcodes on pints of beer, the requirement for scanning in bars can happen based on an inventory, and that actually will grow the market for us even though you can grow the market for what we're now calling mobile point-of-sale, right.

Yes, that makes sense. And it will be great to see you, you get that additional increase in your addressable market. Another quick question on run rate, so if my quick math is right, you had about 50% growth in your run rate business. And in the past, you've talked about 15% or - 1-5, or 20% growth in run rate. So I suspect the 50%, the five zero percent, growth in run rate is not sustainable. I mean, I'm just curious if given where it was you think the new normal is north of 20%.

Yes. I guess it's a fair question. I think that yes, I think we started the year and we set the would probably be in the 15% to 18% and certainly, after the first six months, we would consider that to be probably a little bit on the low side. I think one other thing you have to factor in is that we don't have any control over the short-term revenue because its application driven. I would like to see another one or two quarters before I would change the trend and because we're not privy to what activities have driven the stronger first six months. And it could be that it will taper, but we don't think that, but I think that give it another quarter or two before I think we'd up the trends to a little bit stronger, right. But I think the - our long-term growth prospects, if anything, continues to strengthen.

And we are hearing a lot that consumers are very comfortable with scanning as a component of their mobile point-of-sale solution. And so that certainly bodes well for higher connectivity rates in the future.

Yeah, I agree. Okay. The last thing I have to say is just a comment, not a question. If you think about where this company was two years ago compared to today, you've done a lot of fantastic work. The balance sheet is in a much, much better shape. And now that you're doing much better, I would hate to see all your hard work go to waste on bad expenditures, in using cash inappropriately and bad growth initiative. When times are good, you need to spend cash, so I would just encourage you to be selective in how you use all those - use your balance and how you finish year end?

Well, I think based on our bad experience, we have maybe a little bit of a lift through the depression mentality. So I don't think we'll spend the money too aggressively.

In fact, it's really - what you're asking for is really built into our DNA at this stage of the game.

Good, that's good to hear.

Okay, I appreciate your questions. Thank you, Tomer.

And at this time, no further questions.

Okay. I would just like to thank people for participating on today's call, and wish you all a good afternoon. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.