Socket Mobile, Inc. (SCKT) Q2 2019 Earnings Report, Transcript and Summary

[Abrupt Start] We have also seen good sales from Japan, where there are several government incentive programs 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. While the overall percentage of sales from the retail sector fell to 66% in Q2, down from 75% in Q1, the actual sales in dollar terms were flat. In Q2, about 16% of our revenue came from applications associated with commercial services. This is up about 25% over Q1 revenue. 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 over time. In Q2, we saw much better sales in the commercial services category. We believe a substantial part of the increase was driven by lower pricing. We lowered our DuraScan pricing at the beginning of Q2, reducing the price difference between our standard Socket Scan version and our more ruggedized DuraScan equivalent version, to $50. In addition, we introduced new products and solutions to better serve this category of customer, including our DuraCase for iPhones, which was needed by many of our commercial services customers, especially as they already had the iPhone. And we'll continue to support this category with newer iPhones in Q3. Interacting with these customers has also helped us better understand their requirements, and will enable us to continue to optimize our offerings to better serve their need. In Q3, we'll be introducing a vehicle holder charger for our commercial services customers who use our DuraCase family of products. We are adding the vehicle charger to address the many fieldworkers who are in and out of their vehicles or cars as part of their daily routine. While a vehicle charger isn't technically challenging or overly difficult, it is a critical component for these customers, as they need a place to put their devices when traveling. They often use their device for GPS when in transit, and need it charged and ready to operate when they arrive at their destination. By continuing to solve those real world customer issues, we believe we will be able to continue to grow our business. In Q2, we saw revenue contributions of about 11% from healthcare and about 4% from transportation and logistics. We expect both these categories to continue to grow going forward. So from a sales point of view, we are pleased with Q2, 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. So in summary, we have seen a good recovery in the first half of 2019, with revenue up 19% over the same period last year. We feel our revenue will continue to strengthen in the second half of the year, and we expect to increase our market position and profitability as we move forward. With that said, I'll now turn the call over to Lynn Zhao, who became Socket Mobile's CFO during Q2, replacing Dave Dunlap after 24 years of service. Dave is now serving on our Board of Directors. Lynn?

Thank you, Kevin. We have distributed our 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. Our order pace remained strong with more than $5 million in orders received during the second quarter, adding to the $5.4 million we receive in the first quarter. Our gross margins on revenue for both 3- and the 6-month periods ended at June 30, 2019, were 52%, compared to gross margins on revenue of 51% in the corresponding periods in 2018. Our margins have benefited from component price and reductions, to some extent. Our operating expenses for the second quarter, were $2.4 million, compared to the same operating expenses in the preceding quarter and the operating expenses of $2.3 million in the same quarter a year ago. The operating expenses increase is slightly due to moderate increases in personnel costs. Our Q2 net income continues to be shadowed from federal and the state income taxation, by the net operating loss carry forward. Our cash flow has improved slightly as a result of Q1 and the Q2 profitability. Our revolving credit facilities and the profitability will provide the working capital we need to support future growth. Next I would like to report that our Board Director, Nelson Chan, resigned as a member of the board effective today. Mr. Chan's resignation was not because of a disagreement with the company on any matter relating to the company's operations, policies or practices. We have notified the NASDAQ Stock Market, Incorporated, that as a result of Mr. Chan's resignation, Socket is out of compliance with NASDAQ Listing Rule 5605(B)(1), which requires the company's board to consist of a majority of independent directors. Under NASDAQ Listing Rule 5605(B)(1)(a), Socket has 180 days to regain compliance. The board has initiated a search to identify qualified candidates to replace Mr. Chan as the director of the company. We have filed an 8-K, disclosing that the company is not compliant with the NASDAQ rule. Now I'd like to turn the call to the operator for questions.

[Operator Instructions] And you do have a question from [indiscernible]. Your line is open.

Congratulations on an excellent quarter, increased revenue and profitability. Also, I was pleased to hear that the current quarter will be a strong one and the growth will continue, which is great. There's a need for Socket to become better well known on Wall Street; trading is very light. Do you have any plans to address this issue?

Yes. I mean, I think we said we wanted to get a few quarters under our belt, and it is our plan, as I've said to you I think in the past, that we will increase our outreach. I think our story is starting to have some legs under us. It was difficult to justify going out to investors and spending money to, I would say promote the stock, certainly in 2018. But we feel the ingredients are now in place, and that's something that will happen in the second half of the year.

That's great, because you have a terrific story to tell. And I think once the stock gets better well known, the price increase will be substantial. So thank you.

[Operator Instructions] And there are no questions at this time.

Okay. So we'd just like to thank 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.