Socket Mobile, Inc. (SCKT) Q1 2019 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2019 Management Conference Call. My name is Adrian, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note, this conference is being recorded. I'll now turn your call over to David Dunlap, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good afternoon, everybody, and welcome to Socket Mobile's conference call today to review financial results for its first quarter ended December – March 31, 2019. On the call with me today from Socket Mobile is Kevin Mills, President and Chief Executive Officer, to answer your questions. Socket Mobile distributed its earnings release over the wire service earlier today. The release has also been posted on Socket's website at 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 this call will be posted on the Socket website within a few days. Before we begin, 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 data collection and mobile data collection products, including details on timing, distribution and market acceptance of products and statements predicting the trends, sales and market conditions and opportunities in the markets in which Socket Mobile sells its products. Such statements involve risks and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements, because 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'd like to turn the call over to Socket's President and Chief Executive Officer, Kevin Mills. Kevin?

Thanks, Dave. Good afternoon, everyone, and thank you for joining us today. Our Q1 revenue was $4.6 million, a 16% increase compared to revenue of $4 million for the same quarter a year ago, and an increase of 12% compared to the previous quarter's revenue of $4.1 million. We reported a small profit in Q1 of $12,000 compared to a net loss of $225,000 in the same quarter a year ago. EBITDA, which is earnings before interest, taxes, depreciation and amortization, was $269,000, a $0.05 per share in the first quarter of 2019, compared to a loss of $82,000 or $0.01 per share in the first quarter a year ago. Q1 was our first profitable quarter in over a year and indicates that we are finally over the hump in our transition to our new family of products. As we outlined previously, even though, the new products are improved and 100% compatible versions of the older products on equivalent or lower prices, customers were slow to move from the older products to the new. In Q1, we shipped 20% more products and achieved 16% increase in revenue over Q1 2019, which enabled us to show a small profits. As you'll notice from our financial results, we did continue to invest in research and development and manage our expenses tightly during this whole transition period, thus enabling us to bring new and improved solutions to the market and to be in a good – very good position to service the market going forward. In Q1, about 75% of our revenue came from point-of-sale related applications where we continue to benefit from the adoption of point-of-sale applications from Shopify, Square and many other popular iPad-based point-of-sale systems. We have also seen good sales from Japan, where there are number of government incentives to encourage small merchants to transition to online based point-of-sale systems, such as an iPad-based solution. We believe the combination of our new products, which provide more scanning options and our approved accessories, such as our charging dock, strengthens our position in these market segments and bodes well for our future sales. In Q1, about 12% of our revenue came from applications associated with commercial services. The commercial services category covers fieldworkers, building inspectors and other out-and-about workers. While we believe this segment of the market is still in its very early stages, we do believe it is a substantial market that will be as big, if not bigger, than retail overtime. In Q1, we saw reasonable sales in commercial services, and we also introduced several new products to better serve this category of customer. Including our DuraCase for iPhones, which is needed by many of commercial services customers, especially as they already have the iPhones. We began shipping to DuraCase for iPhone 6, 7 and 8 in late February and would expect to see it impacting sales in early Q3. In addition, we plan to continue to round our family of products and accessories for these customers during Q2 with support for the iPhone 10R and iPhone 10S class, plus additional accessories like vehicle chargers, which are required by many end-users. Many of the applications in this category are developed by larger companies with their own workforces. The commercial services market has not benefited from venture funding and therefore, has taken longer to develop their apps and are now just coming to the market. This is a very good market for Socket Mobile and represents a good long-term growth opportunity. In Q1, we also saw revenue contributions of about 6% from both transportation and logistics and healthcare. We expect both these categories to continue to grow going forward. So from a sales point of view, we are pleased with Q1 and believe our revenue will continue to strengthen as the year progresses. We expect our retail segment to remain dominant in 2019, especially as the point-of-sale market should benefit from government incentives in Japan to upgrade retail point-of-sale systems. These incentives will expire at the end of Q3. We are also pleased to report that our Capture SDK transition has been successful, and we have moved our new developers over to this new and improved development platform. We continue to see steady growth in the number of applications that are being deployed with their scanning support advantage. So in summary, 2019 is off to a good start. We feel that our revenue will continue to strengthen as the year progresses, and we expect to increase our market position and profitability as we move forward. With that said, I'd now like to turn the call back over to Dave.

Thank you, Kevin. Completing our product transition program in the fourth quarter of 2018 was like a breath of fresh air to our customers. No longer did customers need to agonize over decision to buy more for over products, which they loved and have worked well, or step into our newer products, which were 100% compatible, offered more features, including longer battery life; sophisticated status indicators with colored lights; improved durability; and were priced at or below the products they replaced. Sales volume in the first quarter picked up by 20% over the same period a year ago with revenue increasing 16% year-over-year. Our order pace strong with more than $5 million in orders received during the first quarter. We held our margin steady at 51.8%; held our operating expenses steady at $2.35 million; and allowed our improving revenue to drop through to become a small profit on the bottom line. Our outlook is for continued revenue growth and further margin improvements during the year. Kevin mentioned initiatives, such as in Japan that is expected to support introduction of a new sales tax system subsidized by the government where product identification and visitor exemptions were greatly increased the need for the recapture products. We are part of the solutions being offered to vendors with much of the upgrades expected to happen in 2019. With the completion of our product transitions, we also expect larger deployments, largely absent in 2018 to move forward. These some of our products is being incorporated into increasing numbers of applications running on Apple, Android and Windows smartphones and tablets. And we've seen steady growth in point-of-sale applications with more than 250 applications focused on small businesses in the market at present. We are also seeing growth in other point-of-sale areas, such as in the cannabis industry, where our products are incorporated in the systems offered by Green Bit, one of the largest point-of-sale system providers; by Shopify, which received a major contract to supply cannabis shops in Canada; and by other application providers that are building point-of-sale systems to serve this highly regulated market. Our markets are also expanding beyond point-of-sale, which will add to our revenue growth. These markets, as mentioned by Kevin, are the traditional mobile markets needing Data Capture and collecting data on smartphones and tablets. Many of these applications are being networked in the corporate databases and include commercial services, transportation and logistics and healthcare. New products are also expected to have a positive impact on our revenues. We released in the first quarter a DuraCase one-handed barcode scanning system for Apple 6, 7 and 8 phone models. An Apple DuraCase product has been one of our most highly requested products. And we continue to upgrade our accessory products, such as new chargers stands, which approved the overall user experience. We've also recently upgraded our SocketCare warranty, repair and replacement programs to extend the warranty periods for our products for up to five years. Key to sustaining our growth are the application developer decisions to incorporate the use of the advanced features of our barcode scanning and Near Field Communication products into their applications. One installation supports all of our products, giving customers a wide range of product alternatives. Sophisticated developer tools, including Xamarin and Java support, speed up the process of writing or reporting applications into Apple and Android environments with more tools coming and should continue to make us very attractive to the developer community. We believe our balance sheet is up to the task of funding anticipated growth using our revolving credit facilities and our working capital, supported by growing profitability. Profitability in combination with our net operating loss carry-forwards remains an excellent generator of cash. Our products are readily available online and through distribution channels, such as Amazon, around the world. And our component suppliers and we have the capacity to respond quickly to growing product demand and to evolving market opportunities. Now, let me turn the call over to the operator for your questions. Operator?

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And we do have an unnamed line that’s queued up. Can you say your name and company please? Hello, your line is open.

Hello.

Yeah. We hear you. Who is this?

Okay. Good. Congratulations on an excellent quarter and increased revenues and optimistic guidance going forward. My question is, as a public company, Socket is not very viable or visible. And really some days, the trading is completely lackluster. So I was wondering, how you want to present yourselves to investors as a public company? What do you plan to do?

So first -- I presume this is Ralph?

Yes.

Okay, okay. So, well, as we said in the past, I think, the first thing we want to do is get back to the profitable, which I think we've just achieved. I think we need to grow to build on this. And, yes, we need to go out and tell our story a little bit better that we have in the past. That's the plan and the intention. I do think we'd have a little bit of uphill battle in this. None of the companies we service really are focused on point-of-sale as public companies. And therefore, I mean, the bigger story is that people are switching over to iPad-based point-of-sale systems, but it's very difficult for us to explain that to investors. But we're hoping as some of the other companies that we work with, whether they be Green Bits, or Vend, or ShopKeep, or one of these others would actually become public and therefore, we'd able to better explain the market potential that we see. So we will be doing more in the Investor related activities going forward, but we didn't feel it was appropriate until we had this transition in our rearview mirror.

Right. I agree with you, but now you have a great story to tell, and I think it's important to be out there and letting everybody know what's going on and how great the future looks.

Okay. We will take that advice and follow it.

Okay. Thank you.

And next question comes from Brian Swift with Sutter Securities. Your line is open.

Hi. Thanks.

Hi, Brian.

I happen to be out walking in downtown San Francisco, so you might hear a little noise in the background.

We live in the mobile world.

Yes. On my way to the ferry boat. I -- as you've noted, you've been in this transition period for the past year. And I wanted you to give us a little bit more color on where you are in transition with your customer base? Meaning, who you were doing business with before? What percentages have now gone through the whole evaluation certification, whatever we want to call it, process that is now results in orders in the first quarter? I mean, are you halfway there or quarter of a way there or what? Because your revenues, well, they have increased year-over-year, there is still low $4 million and we've thought that you would be at least $1 million more than that where you're at right now?

Okay. All right. So, I would say, we're more than 80% there, right. And so -- but let me add a little bit of color to that. First of all, if I take a typical point-of-sale provider, and I just pick one at random right, and just pick shopkeeper as an example, their customers go to their sites to get the recommendation for the scanners they need to buy. And in the case, we had to get that to change the recommendation from 7Ci with S700, okay. So I would say, were 80% to 90% we have done this. We still have some large customers who haven't changed or haven't updated their websites so that the customers are confused, okay. I think the good news for us is that none of the customers that we had before the transition, we've lost none of them. But I do think there has been general confusion in the marketplace and I would say, we're 80% through that confusion. And people now know what products to buy, and we've seen the pickup in sales as a result. But we're not 100% service.

We're also in a more traditional lower point, Brian, than first quarter. As you recall, the point-of-sale activity starts picking up in the latter part of the first quarter, and it stays -- very typically, it stays very strong through the middle of the fourth quarter. So we do expect that, that phenomenon in addition to what we've described with our newer products and general growth will continue to pick up the pace.

We're on that point, how was your April? Or how is it going so far?

Yes, Q1 I mean, Q2 started quite solidly, so we're quite pleased. We feel that we're continuing to build a positive momentum now and we're not fighting this confusion. We're fighting less and less end of this confusion in the market that these product transition cost.

And one last one on this, 80% there, have you gotten any orders out of those 80%? Is that -- it's a little more than what I was expecting, if I'm going to see some fairly significant revenue ramps? Or am I missing something here?

Yes, well, I think that you -- no, I mean, the orders are ongoing, Brian. And obviously, we have orders every day from many, many small merchants who have deployed a particular point-of-sale software. I think what product transition was they disrupted that flow because people were unsure what to order. But now that it's clear that they should order the S700 or S740, we're seeing a pickup in sales. But these sales are on a daily, weekly, monthly basis. They're not one-time sales. As you know, most of our sales come through Amazon and CDW. And we reckon probably -- our average deployment size is probably under two because most customers buy one scanners, but they're told to buy that scanner by their application, whether that be Shopkeepers, Square or Shopify. And it was the confusion at the recommendation level that slowed the sales. We're eliminating that confusion, which will cause sales to pick back up again.

Okay, I guess one last one on balance sheet side. So where are you with the debt situation? And do continue to pay that down? Or you're able to see the…

Yes. So I believe we're down to about $750,000 at the end of the quarter.

Yes, we are in good terms with the bank. As you know, the term loan was brought down to $1 million shortly after the dust settled, and it was set up for straight-line repayment over a two-year period. So that's going smoothly. We have our credit lines available to us as well as our own cash.

Dave thanks.

Thanks Brian.

And our next question comes from Will Hamilton. Your line is open.

Hi Will.

Dave, I was wondering if you provide us the actual scanner unit number? I know you mentioned this to up 20%. Was there around 20,000 or so?

Yes. In the ballpark, if you just told just a second, I'll get you actual number.

Okay. And so than the ASPs were down a little bit and that just a mix to the newer models?

Well, it's combination of -- we made up conscious effort to meet the 2D scanners less expensive. So the 2D scanners, the ASP on those is down to 1D scanners prices didn't move, so -- but yes, you're correct the overall ASPs are down.

And the unit number for Q1 is 20,708, and that compares to about 20%, 21% less a quarter a year ago.

Right. Okay. That's helpful. And was there any lumpier orders in that, like a enterprise-type orders? Or was it your normal…

No, nothing significant. I mean, we do get some orders, but we had no order over 1,000 units. So it was all run rate business. Probably the largest deployment and that might have been 200.

And when does the pipeline for enterprises look like?

It actually looks reasonably good. Our difficulty with this is that the timing of these things is not under our control. So yes, we've been working more with enterprises and particularly when it comes to some of the commercial services related activities were at their workforce and their numbers tend to be larger. So the pipeline is pretty good.

Okay. And then on the Japan opportunity, did you say, just to confirm that the tax incentives in the third quarter?

I did. So I think there's two things. The requirement doesn't end, but the government has put in some incentives to encourage people to be there when it starts on the 1st of October. And as currently outlined, those incentives are currently set up to expire on September 30th. Now they may get extended, they may not, we don't know, but that's the current situation.

So what's -- could you frame the opportunity? I mean, would it be largely captured in the next two quarters in your view?

Yeah, I mean, we feel that, yes, a good portion. I think it's -- human nature is one of these global things. People tend to wait till the last minute, if they can. So we have seen a good pickup already in Japan in the first quarter, which was a bit of a surprise. We were not expecting to see this picking up so far. Their fiscal year begins on the 1st of April. We will have a better reading I think by the time we get to mid-May. They're doing a double golden week this year because they're changing emperor. So it's kind of quiet time currently in Japan. But we would expect a good portion of people to avail of these incentives, particularly in the August-September timeframe.

Okay. I go back to the last time you were doing $5 million, say, of revenue, margins were speaking towards, I guess EBITDA margins that were north of 10%.

Correct, yes.

So is that the reality or possibility again? Or should we temper our thinking in terms of outside the markets?

No, no. I think that we're quite efficient when we have more volume, more falls to the bottom line. A lot of our cost are fixed, and we can do more with the fix costs. So I think as we get back about $5 million, those 10% plus EBITDA percentages are very realistic.

All right. Thanks, guys.

Okay. Thanks, Will.

[Operator Instructions] And we have a question from the Steve Swanson [ph]. Your line is open.

Dave, how much cash was generated by operations and what did we do with it in the quarter?

Well, as you know, we wound up with just under $1 million in cash. Operations itself, let me just grab the details. A lot of first quarter was investing in the working capital. So our receivables went up by almost $600,000. Inventory was up by about $200,000 as we were preparing for the growth that we've been chatting about. On the other hand -- and we round up with an accounting change that we picked up operating leases in both the asset and the liability side. So, not a big deal that kind of washes. And -- so in general, we actually used about $160,000 of cash to adjust the working capital investment working capital, and we had about another $100,000 invested in property and equipment, primarily in tooling. We want to finish up the tooling for some of our product, so it’s about $0.25 million use of cash, which we then made up from our own credit resources. What we do expect as we go forward and we see -- we will expect to see profitability growing with higher revenues. And in that point in time, we expect cash flow to return to growth and profitability -- through profitability.

Okay, I guess secondly, I -- my understanding is, we didn't really have any enterprise sales over the last year because of our turnover from the old products to the new products. We didn't have any large enterprises taking advantage of our equipment. I guess I'm trying to better understand this pipeline that's there. And is it two to five enterprises looking for this year 2019? Or is it a dozen or is it two dozen? I mean, how many enterprise deployments are actually looking at potentially?

Well, I would say the number is well -- at the high level as probably in the 20 plus, but I want to add some caution to this. The process is that depending on what the customer has historically been doing. There may be at current Zebra, Honeywell They're logic customer that is using a handheld device for their workers and they may write an application and do a field trial with a Android or Apple-based device. And they might run that for two or three months and decide that it's either suitable or not suitable to change, right. We're involved in these type of trials and then they decide to move forward with us or not. I would say we definitely have somewhere in the region of 20 enterprise type opportunities on the go. Our difficulty has been determining the timing, but we'll be happy to report those as they happen going forward.

But we also talked about some other revenue opportunities that such as the government-sponsored kind of project to upgrade retail systems in Japan. And that's a significant number of retailers that should be participating in that program and we are being sponsored by a number of folks that are offering solutions. So, -- that along with new products, I mentioned that the DuraCase for the Apple 6, 7 and 8 -- Apple was one of our most popular DuraCase models when we first introduced the iPod. And with the Apple 6, 7 and 8, it's been our very highly requested. So, we expect a number of opportunities that will all should have a positive direction with our revenue.

Okay, great. One last question we added about five employees in the organization over the course of last year. What's your viewpoint on 2019 for employee adds?

I would guess that we'll continue to add a few additional employees. You got some of these for additional production folks with the volume increases. And then we're going to continue to add and fill in quality control areas and some engineering. So, but I -- again, this -- we don't -- I don't expect operating expenses even with those increases to be much greater than about 10% over the previous year and if we can hold it down from there, we will certainly do that.

And do we expect to increase the sales organization at all?

Well, not in our traditional sense. As we pointed out, the applications actually do most of the selling and the customers go to shopkeepers via Shopify to get their information about what to buy and then thereby us. A lot of the time from the actual sites, but if not more from an Amazon, et cetera. So, we don't really have the ability to interact with those potential customers. We have strengthened our logistics and support mechanisms to better service those and there will be some additional people involved in that. But what people think about the traditional selling, it doesn't really apply because it's application-driven.

Yes, I guess I was thinking more along the lines say support to the developers who are the real salesmen of your products. I agree with understanding that process. I was just wondering if you're going of for the sales organization to continue or to expand on your support to developers who clearly or potentially need questions answered and things helped out with as they go along with the business.

Yes, but that will actually end up in our engineering section. So, yes, we will add developer support as well as we've continued to add and invested in STK. We'll be in expanding in areas like Java where we are better on web-centric apps, et cetera. So, there's a lot of work there that is classified as engineering, but as you correctly point out, is really a sales effort.

Okay. Appreciate the help and the info. Thanks.

Thanks.

Thanks Steve.

[Operator Instructions] And we have no further questions at this time.

Okay, operator.

Brian Swift just queued up again. I apologize. Brian your line is open.

All right yes, I just want follow-up question about your enterprise pipeline. So …

Yeah.

… what would you consider to be was they're most interested in terms of you're transitioning. You have some new product. Is there something in particular that you've done that would be particularly more attractive to them and maybe where your were position before, because to have funny people looking at us, it seems to be a lot more than what you had when and so on?

Well, okay. So, I think on the enterprise side, their number one question I think is, can they use a off-the-shelf device, whether it be an Apple or Android device to run the business. That's their primary objective. And to make this possible, they need some sort of application developed to control that process. To me, we're a supporting member in that decision. First, they must believe they can do it on an Apple device and then they must need scanning. Once they've made the decision that they're going to use an Apple based device or an Android based device, then they're interested in what we have and how we're going to support them increases dramatically. So, I don't know that we've done -- well, I know that on the SDK side, we've done a lot of things to better support their efforts as they go to market. Whether it be making it easy to develop to integrate our stuff it to be more robust, et cetera. So that really is the effort. Also, our new products are much more deployable, predicting the android world because of some changes Google made in android 8, which put a lot of burden on people deploying our older products with pairing and maintaining Bluetooth connectivity. All of that is now behind us.

Okay. So, there's nothing -- I mean, you had all those issues before, so there's nothing really earth shattering about something that you've introduced that certainly turned the rifle down for you guys?

Well, I think that we've addressed a number of concerns for some of them. I think that when people deploy new system, it's the little stuff that causes it not to be successful. And we certainly have addressed a number of concerns that people had to make their deployments much more robust than they would've been had we not address those concerns.

Okay. So, I assume your innovation, those types of things is much more compatible now?

Yeah, I mean -- yeah, I mean, compatible is -- we've always been compatible. But I think what we have improved on is things like making it easy for them to deploy. We've added the Companion App so they can get the scanner in the right mode. Users don't get confused. We're adding a lot on the support side, because once things are deployed and for whatever reason you drop the scanner, you stand on as it broken, how to get a replacement. All of those things are being addressed so that we are more deployable than we've been previously.

Okay. Thanks.

Thanks, Brian.

And we have no further questions at this time. I'll turn the call back over to Kevin Mills, President and CEO.

Thank you, operator. I just like to finish by thanking everyone for participating in 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.