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Edited Transcript of SCKT earnings conference call or presentation 27-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Socket Mobile Inc Earnings Call

NEWARK May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Socket Mobile Inc earnings conference call or presentation Thursday, April 27, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David W. Dunlap

Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director

* James Lopez

Socket Mobile, Inc. - VP of Sales, Marketing and Business Development

* Jim Byers

MKR Group, Inc. - SVP

* Kevin J. Mills

Socket Mobile, Inc. - CEO, President and Director

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Conference Call Participants

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* Brian G. Swift

Security Research Associates, Inc. - Chairman and CEO

* Tomer Cohen

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Presentation

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Operator [1]

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Hello, and welcome to the webcast entitled Socket Mobile's First Quarter Management Conference Call. (Operator Instructions)

I would now like to turn the call over Jim Byers of MKR Group. Please go ahead, Jim.

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Jim Byers, MKR Group, Inc. - SVP [2]

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Thank you, operator. And good afternoon, and welcome to Socket's conference call today to review financial results for its 2017 first quarter ended March 31, 2017.

On the call today from Socket are Kevin Mills, President and CEO; James Lopez, Socket's Vice President of Marketing, Sales and Developer Programs; and Dave Dunlap, Chief Financial 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 www.socketmobile.com. In addition, a replay of today's call will be available shortly after the call's completion through the company website, socketmobile.com. And a transcript of this call will be posted on the Socket website within a few days.

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 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 a number of factors, including, but not limited to, the risk that manufacture of Socket's products may not -- 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.

And now with that said, I would like to turn the call over to Socket's President and CEO, Kevin Mills.

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Kevin J. Mills, Socket Mobile, Inc. - CEO, President and Director [3]

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Thanks, Jim. Good afternoon, everyone, and thank you for joining us today.

We are pleased to report first quarter results that are a solid start to the year. Our total revenue for the first quarter was $5.6 million, an 11% increase over the same quarter last year. This top line growth somewhat masks the stronger underlying growth of our cordless scanning revenue in Q1, which increased 39% year-over-year to $5.5 million and represented virtually all of our Q1 revenues. This compares to scanning revenue of $4 million in Q1 last year, which represented 79% of our total quarterly revenue, that included contributions from our legacy SoMo product.

We also achieved improved gross margin for the first quarter and net operating income of $668,000, which is an 11% increase over the $600,000 in net operating income for Q1 of last year. While our earnings per share of $0.07 is down from $0.10 in Q1 last year, this is due to the reporting of our deferred tax credits. Dave will cover this in more detail during his review of the financials later in the call.

Our positive results in the first quarter reflect the continuing success of Socket's unique application-driven business model. The growth in sales of our cordless barcode scanning -- scanners continues to be driven by the increase in small businesses deploying mobile applications that require barcode scanning, with mobile point of sale-related applications continuing to lead the way. Mobile point of sale remains a large and underserved market.

In addition, we are also seeing sales increasing in the inventory, merchandising and logistical-type applications, all of which are driving our growth.

I will now hand the call over to James Lopez, our Vice President of Marketing, Sales and Developer programs, to provide further color on our markets and how we see them evolving going forward. James?

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James Lopez, Socket Mobile, Inc. - VP of Sales, Marketing and Business Development [4]

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Thank you, Kevin. Q1 mobile point-of-sale activity continued to show overall strength and lead all markets in demand for our standard cordless handheld scanners.

Our new DuraScan scanners had a strong quarter, led by our 2D D750 in both manufacturing and logistic applications. Sales of our 800 Series attachable scanners continue to grow, and we saw a significant demand, both sequentially and year-over-year, as the movement toward enterprise mobility solutions leveraging smartphones gain momentum across all markets.

Particularly noteworthy for the quarter is the level of interest and positive feedback we've seen with our DuraCase solution as developer uptake, sales and active field trials are rolling out very well. We see more and more demand coming from enterprise-issued smartphone applications. And in line with that demand, we've expanded our DuraCase solution to include Android devices with support for Samsung's J3 and J5 smartphones. We've also added a 6-multi-bay charger for the DuraCase and will soon add support for Samsung's Galaxy S7.

We continue to make progress on our DuraScan D600 Contactless Reader/Writer, which further adds to our DuraScan family and will facilitate the use of NFC and other contactless technology in business applications. With this product, Socket Mobile will be enabling our many developers to expand beyond barcode reading and serve the need for mobile reading of contactless tickets and other contactless systems. While it will take time for developers to build this capability into their applications, we are actively engaged with a number of development partners supporting an ever-growing number of use cases.

The D600 will enable the Socket developer community to easily support existing workflows and create new ones leveraging NFC, fully supported by the same Socket SDK.

Lastly, developer activity in the quarter was strong and continued the 60-40 trend toward international developers that we reported in our last call.

Now I'd like to hand things over to Dave.

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David W. Dunlap, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [5]

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Thank you, James. Our first quarter 2017 revenue of $5.6 million, almost entirely from the sale of cordless barcode scanners, was up 11% year-over-year compared to revenue of $5.0 million in the first quarter of 2016. That included barcode scanning revenue of $4.0 million. The year-over-year increase in cordless barcode scanning revenue was 39%.

Quarterly cordless barcode scanning revenue in the first quarter of 2017 was a record high for the company, continuing the consecutive quarterly growth experienced in 2016. Our margins on first quarter sales increased to 51.8% compared to margins of 49.7% in the year ago period, reflecting product component cost reductions as our sales volumes increased.

Our operating expenses grew 18% quarter-over-quarter as we elected to increase funding on product development and incurred other costs associated with growth.

Our net income of $386,000 or $0.07 per primary share and $0.05 per fully diluted share was our eighth consecutive profitable quarter.

The first quarter of 2017 was the first quarter in which we reported income tax expense, a total of $252,000 or $0.04 per primary share, following the restoration of $9.6 million of deferred income tax assets to our balance sheet at the end of last year. Income tax expense is covered primarily by deferred tax assets, primarily net operating loss carryovers, and has no significant impact on cash.

Fully diluted shares consist of outstanding stock options and the assumed conversion of convertible notes plus interest.

We've now reported 9 consecutive quarters of positive cash flow. In addition to $1.6 million of cash on hand, we have an unused receivables-based bank line of credit against which we could draw an additionally $1.8 million at March 31.

Our equity increased by $1.1 million, from $16.2 million at the end of last year to $17.3 million at the end of the first quarter. Additions to equity consisted of quarterly profits of $386,000, stock option exercises of $153,000, stock option expense of $95,000 and the positive effects on our retained deficit of changing our revenue recognition policy on January 1, 2017, for a total of $504,000 increase in equity.

We appreciate the continued interest and support of our customers, our developer community, suppliers, employees and investors. The combination of an increasing number of mobile barcode scanning applications, new products such as the DuraCase and our D600 durable NFC/RFID reader/writer and continued growth in our registered developer community, are expanding the markets we serve and are driving our growth and profitability.

Now let me turn the call back to Kevin.

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Kevin J. Mills, Socket Mobile, Inc. - CEO, President and Director [6]

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Thanks, Dave. So in summary, we are off to a very solid start in 2017 and feel very positive about the year ahead. We believe the strength of our application-driven business model continues to be validated by the strong results we have achieved.

While these results have come mostly in the U.S., we are seeing developer activity increasing internationally. Workforce mobilization around enterprise-issued smart devices running business applications is creating significant worldwide growth opportunities, and we are seeing increasing opportunities to replicate the success of our model internationally.

For example, in the first quarter, our EMEA, and that's Europe, Middle East and Africa, cordless scanning revenue reached more than $1 million for the first time ever as we saw an increasing number of mobile applications deployed to customers. We expect this trend to strengthen during the year. We are also seeing more interest in Japan, an area where we started to invest some months back, which is now beginning to bear fruit. We are also beginning the process in China, a new and currently untapped market for Socket. You may notice that we are now supporting both Japan and China with localized webpages.

In addition, we are also seeing larger companies evaluating mobile-centric applications for their businesses, with a great deal of interest in our recently introduced DuraCase solution. While these evaluations always take time, we believe they will begin to contribute to our deployment-type revenues beginning later in the year.

As we go forward, we remain focused on capitalizing on the substantial opportunity ahead of us that we believe will enable us to steadily increase our revenue and maintain our solid record of profitable growth.

With that, I would now like to turn the call back to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And it looks like we have Brian Swift.

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Brian G. Swift, Security Research Associates, Inc. - Chairman and CEO [2]

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For Dave, on the revenues...

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Kevin J. Mills, Socket Mobile, Inc. - CEO, President and Director [3]

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Sorry, Brian, we missed the beginning of the question. Sorry. Can you just start over?

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Brian G. Swift, Security Research Associates, Inc. - Chairman and CEO [4]

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Sure. A question for Dave. And can you determine if there's an issue -- or an influence on the first quarter revenue number as a result of the change in your accounting policy relative to recognition of distributor revenue? In other words, on sell-in as opposed to sell-out. The deferred revenue number on the balance sheet went down appropriately, but I'd like to try to see what the impact is there.

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David W. Dunlap, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [5]

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Okay. Actually, the numbers were -- are consistent had we reported under either method. The rules for the accounting change, we reduced the reserve by $800,000, and there was net deferred taxes associated with that of $300-plus thousand. So it was a $500,000 credit, but it goes right to retained deficit so did not run through revenue.

And in terms of production, we ship consistently with a 3-week-plus lead time, and we stayed with that in both cases. So I think what you're reflecting -- and typically, the reorders that we get under the sales-out method would reflect what had been selling out of the system. We actually tracked both methods, and they were very close. So at this point, there was really no impact of that change.

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Brian G. Swift, Security Research Associates, Inc. - Chairman and CEO [6]

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Okay. So anything else that would be considered nonrecurring in that first quarter? Just trying to see in my model, whether I should be using that as a starting point going forward since you didn't give any forecasts.

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David W. Dunlap, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [7]

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Well, we track and use trending in our analysis work, and we generally look at 2 categories. One is what we call run rate, which are the smaller sales, but with mobile point of sale, much of it. And that's been a constantly growing trend, in the -- better than 20%, going to 25% type of growth.

The other thing that affects us quarter-to-quarter was what we call larger deployments. And we do recognize a few because we talk with customers when they have -- and distributors when they have larger needs. And we had about $1.1 million of deployments in the first quarter of 2017. If you compare it, though, to the previous quarter sequentially, it was almost $1 million in deployments. But if you go back a year, the first quarter of 2016 had about $300-plus thousand of deployments. So both are trending upwards, both deployments and our run rate, and we're the beneficiary of both of those.

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Brian G. Swift, Security Research Associates, Inc. - Chairman and CEO [8]

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Okay. Yes, I remember that first quarter was kind of an unusual quarter for -- no -- lack of large deals in it. So nice to see the trend moving forward.

And on the gross margin, is that sustainable in your view? Was there anything nonrecurring in nature that would have spiked that? Because it was better than what you had been forecasting.

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David W. Dunlap, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [9]

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No, that's sustainable. As I -- and a lot of it is just with our volume growth, we have obtained some cost reductions on components from some of our manufacturers, and those are long-term changes. So we'll be able to sustain it going forward, it's our belief.

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Operator [10]

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Okay, next up, we have Tomer Cohen.

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Tomer Cohen, [11]

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My first question is on the non-DuraScan line of durables, so I guess that's for legacy durables. I'm just curious if you've seen any cannibalization there now that the DuraScan is out in the market.

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James Lopez, Socket Mobile, Inc. - VP of Sales, Marketing and Business Development [12]

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No. The way that the older durables is priced, they're at a discount to the DuraScan. So there's still a market for that. We don't see them going into the markets the DuraScan is supporting. We see them supporting a little heavier use cases in the non-durable segments like mobile point of sale. But we really haven't seen any cannibalization happening there. If anything, it's the other way around where the DuraScan sales are going to people who truly had a durability need. And so that's a small portion of the old durable customer.

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Tomer Cohen, [13]

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Okay. And you don't have any plans to discontinue the legacy durables then, right?

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James Lopez, Socket Mobile, Inc. - VP of Sales, Marketing and Business Development [14]

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At some point in the future, we may. We're certainly looking at the numbers to see if it makes sense. We'd love customers to benefit from the DuraScan because it'll service the slightly durable to the heavy durable need. But we're making sure that we have all the cost efficiencies there before we make any moves and make any decisions on end of life-ing anything. So no plans yet, but stay tuned.

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Tomer Cohen, [15]

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Okay. And if that happens, is that a year out? Is that 5 years out? I mean, how long term would a move like that be?

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James Lopez, Socket Mobile, Inc. - VP of Sales, Marketing and Business Development [16]

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I mean, if we did something, we would definitely give our customers something like a 6-month runway to (inaudible). So I couldn't see anything happening short of a year.

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Tomer Cohen, [17]

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Okay. And then my next question is on operating expenses. So they were up a bit this quarter. I'm curious, first of all, what that went into and what caused the higher expenses. And then do you expect that going forward, this new number, $2.25 million per quarter, is going be the run-rate OpEx?

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David W. Dunlap, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [18]

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Well, the first quarter is always a little more expensive for us anyway because of things like the annual audit. But on a comparative basis with a year ago, yes, we were up 18%. We're doing a couple of things with growth, and we're taking advantage of our higher revenues to fund it from operations without negatively impacting our bottom line. But we're -- so we've got more engineering activity going on and some additional personnel involved with that process. And then you just have other costs associated with growth. We're shipping more. And so we will likely in Q2 -- as you look back at our history, Q2 is typically about the same level as Q1, I'd expect we'll be in that range again.

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Tomer Cohen, [19]

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Okay, that's helpful. And then I'm curious if you can talk a little bit about use cases for the NFC reader, if it's -- if you're in a point now where you can give us a sense of what are the biggest industries where you're seeing developers work for that product.

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James Lopez, Socket Mobile, Inc. - VP of Sales, Marketing and Business Development [20]

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So I wouldn't want to get ahead of any of our developers, but you may have seen today that one of our partners, Thinfilms (sic) [Thinfilm] did a press release on some activity that they are doing with their sort of Internet of Everything smart tags. And they're doing some really interesting use cases. They developed their own NFC tags for specialty purposes. And I would point you more in that direction for kind of where it's going. But these certainly represent new use cases than we've seen before, so new opportunities, new problems to solve as new technology is available. And those are really the use cases we're focusing on with our development partners. So I would just point you to some of the news that will be coming out over time as our development partners mature their solutions.

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Operator [21]

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(Operator Instructions) Okay. And at this time, we have no further questions on the line.

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Kevin J. Mills, Socket Mobile, Inc. - CEO, President and Director [22]

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Okay. So we would like to just thank everyone for participating in today's call and wish you all a good afternoon. Thank you.

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Operator [23]

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Thank you very much for joining today, ladies and gentlemen. This concludes our webcast for today. You may now disconnect.