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Edited Transcript of SCKT earnings conference call or presentation 24-Oct-19 9:00pm GMT

Q3 2019 Socket Mobile Inc Earnings Call

NEWARK Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Socket Mobile Inc earnings conference call or presentation Thursday, October 24, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin J. Mills

Socket Mobile, Inc. - President, CEO & Director

* Lynn Zhao

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

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Presentation

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Operator [1]

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Welcome to the Q3 2019 Socket Mobile management conference call. My name is Erin, and I'll be the operator for today's call.

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. (Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to Kevin Mills. Kevin, you may begin.

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [2]

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Thank you, operator. Good afternoon, everyone, and thank you for joining us today.

Our Q3 revenue was $5 million, a 20% increase compared to revenue of $4.1 million for the same quarter a year ago. We reported a profit in Q3 of $94,000 or $0.01 per share compared to a loss of $45,000 or a $0.01 per share loss in the same quarter a year ago.

Q3 was our third consecutive profitable quarter and indicates that our business continues to strengthen in 2019. For the 9 months ending September 30, revenue was $14.7 million, an increase of 19% compared to the $12.3 million in the same period in 2018.

In Q3, about 85% of our revenue came from point-of-sale-related applications, which was driven by strong international sales. Sales in Japan benefited from the government incentive program that provided rebates to small businesses upgrading to an online point-of-sale system. Our strong Japanese sales in September added about $250,000.

We also saw a good point-of-sale-driven sales in Europe, where a large international brand retailer deployed an iPad-based solution to 2 of its smaller brands, resulting in another $250,000 boost.

Our point-of-sale-related sales in North America were down slightly in Q3 with the first 2 weeks of September being unusually weak. While we don't know the exact cause, we speculate that the transition to iOS 13, iPad OS and the fact that Apple changed the dimensions of the iPads are probable causes.

In Q3, we introduced our DuraSled family of products with support for the iPhone X and iPhone 11. Based on our modular approach, we believe we are the first company to have scanning sleds for the iPhone X and iPhone 11 range of phones.

Our ability to quickly support new phones is one of the things that gives us a competitive advantage in the scanning sled/sleeve market. We've rebranded and repositioned our scanning sleds as DuraSleds, and we now include the scanner in the device. So our customers just need to add the iPhone. Previously, we marketed them as cases, which customers found confusing.

We expect the DuraSled portion of our business to be a good contributor moving forward as we are seeing a large number of inspection and audit-type applications coming to market.

In Q3, we also made a lot of progress with our S550 product, which is designed to read and write NFC tags. This product has been in development for about 12 months and is currently only available to developers. It is scheduled to be launched in Q1 2020.

As many people know, Apple Pay has educated the world on the benefits and ease of use of tap-and-go solutions. In iOS 13, Apple expanded the tap-and-go capabilities beyond payments, and going forward, it can be used for loyalty application, transit and student IDs. Such applications are currently being developed, and once developed, there will be a need for a reader/writer to interact with these electronic passes.

The S550 is designed to be a reader/writer. We believe the tap-and-go capabilities will be widely adopted based on the high level of convenience and identity security built into the system. We expect this to be largely complementary to our scanning business, but we will be able to reuse much of our SDK software we have built to transport the captured data from the physical world to the application world. We believe we will see this family of products positively impact our revenue in 2020.

So in summary, we are pleased with Q3, especially with the international contribution to sales. We expect to be able to maintain our 20% quarter-over-quarter raise in Q4, which should enable us to finish up around 20% and very much in line with our expectations when we started the year. We believe 2019 has been the turnaround year we expected, putting our 2018 transitions behind us. We have continued to invest in our products so we can continue to build the business going forward. We look forward to a solid year-end and an exciting 2020.

With that said, I'd now like to turn the call over to our CFO, Lynn Zhao.

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Lynn Zhao, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [3]

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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's website within a few days.

Our gross margin on revenue for the 3- and the 9-month periods ended September 30, 2019, were 52.9% and 52.3%, respectively, compared to the gross margins of 52.6% and 51.8%, respectively, in the corresponding periods in 2018.

Our operating expenses for the third quarter were $2.5 million compared to $2.4 million in the preceding quarter and $2.2 million in the same quarter a year ago. Increases in operating expenses were primarily due to higher personnel costs, reflecting headcount additions to facilitate the product development and the increases in consulting and professional fees.

Our Q3 net income continues to be sheltered from federal and the state income taxation by net operating loss carryforwards. Our cash flow has improved as a result of the profitable growth. Our revolving credit facilities and their profitability will provide the working capital we need to support future growth.

Next, I'm pleased to report that our Board has appointed Mr. Ivan Lazarev as a new member effective yesterday. Mr. Lazarev has served in the event registration services and lead management software industry for the past 33 years. In 1999, Mr. Lazarev cofounded ITN International, which was acquired by Aventri in 2018.

We believe that we'll benefit greatly from Mr. Lazarev's experiences in NFC and the tap-and-go market. His insight into the tradeshow and exposition market will provide a valuable perspective that will help our efforts in becoming a significant contributor in the emerging NFC market ecosystem.

With the appointment of Mr. Lazarev, our Board of Directors, composed of 4 independent directors and 3 management directors, enabled us to regain their compliance with NASDAQ Listing Rule 5605(b)(1), which requires that the company's Board to consist of a majority of independent directors.

We will file an 8-K disclosing that the company has regained compliance with the NASDAQ rule.

Now I'd like to turn the call back to the operator for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from [Colin Meyer].

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Unidentified Analyst, [2]

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Kevin, it seems like, looking at the numbers and with your international increase, which seems like a pretty high percentage compared to the past, what -- it seems to me that your domestic sales were under what you were hoping for, is that a fair statement?

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

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That's a fair statement. Yes, I think we had a very solid July and August and much -- we had, like I said, a very unusual September. This was unexpected. Obviously, Apple announced on September 6, the new operating system, and we knew this. I think the new iPad's changes, but they also moved people to iPad OS. And I just think that was maybe a higher level of uncertainty.

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Unidentified Analyst, [4]

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What about your enterprise sales in the quarter?

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [5]

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Yes. Again, I mean the enterprise sales were okay. They weren't dramatically different. I guess I've said in the past, we're 70% in Q2 point-of-sale-dependent. So if the point of sale is down, it's hard for the rest to make it up in this time frame. Now we do expect that to change over time, but that's the way it is currently.

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Unidentified Analyst, [6]

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Right. So I know you don't do much marketing, but do you see an increased level needed to expand sales more than they've shown so far? Because I know originally, you thought that you had a shot to do close to what you did in 2017 based on your Annual Meeting presentation, but that seems you're going to be substantially off of that. Part of that you explaining the Apple situation, but I'm just trying to understand because the fourth quarter sounds like you're talking about getting close to $5 million, again, which will leave you quite a bit short. So I'm just trying to get a feel because I expected earnings to be moving up quicker than they are.

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [7]

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Yes. So I think that -- 2 things. We would have said that Japan would have been stronger, and it actually was because the Japanese changed the rules in early September to allow the deliveries of hardware all the way to December 16. Previously, you had to have all hardware delivered in September -- by September 30. So we don't know how much that pushed into Q4, right?

I think on the overall, yes, I would say we are seeing the markets, particularly in North America kind of point of sale struggling a little bit much more than we expected. Now the commercial services and the inspection stuff, I actually don't think, is struggling. We are seeing a lot of applications being completed. So we do expect that to continue to strengthen going forward. But the point of sale, I think, there's a lot of small shops struggling in America, is probably the best way to describe it. So we saw more international. International was 34% of the business in Q3, which typically it's been 25% of the business.

So I think your observation is correct, and North America, particularly point of sale, was weaker than we expected in Q3.

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Operator [8]

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And your next question comes from [Steve Watson].

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Unidentified Analyst, [9]

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Kevin, did you say that Japan moved the third quarter deadline back from the end of September to now the end of December?

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [10]

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Well, I nearly said that. I said some of that, right? What they said was that previously, you had to order and have the hardware delivered by September 30. On the 6th of September, they said you have to order but you can get your hardware delivery up until December 16. So they didn't move the deadline, but they moved the availability of when you can deliver the hardware, which, in our opinion, moved some of the orders that we would have scrambled to fill in September into the fourth quarter.

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Unidentified Analyst, [11]

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So that was -- one of the questions I have then is how big of a backlog do we have from Japan for orders received in September expecting delivery to be in the fourth quarter? Is that a 125,000, 250,000? What backlog of orders do we have -- kind of will put in to meet this government deadline?

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [12]

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We're working on that. Well, our distribution model -- I mean our distributors could have a lot more orders. But they were selling scanners out at a tremendous rate in the last 2 weeks of September. It's the end of their fiscal year. We're working on what they didn't ship, but I don't honestly know.

I would expect that it would be -- I mean originally, we expected a bump of maybe 400,000. We got 2.5 -- 250,000. I think that we -- if we had got the 400,000, now we'd be explaining that Japan is going to be as dry as a board for all of Q4. So we believe that what we lost in Q3, we will catch up in Q4, but I don't have an exact number for you right now.

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Unidentified Analyst, [13]

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Okay. Yes, I was kind of wondering, I would assume that with Japan deadline, if there would be a period of dryness, as you pointed out, for the fourth quarter if everyone scrambled to get their order in by the end of September 30 to get this rebate or kickback from the government on...

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [14]

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Yes, because it was substantial. It was 75%, right? So it wasn't a small rebate. So -- and again, I think the Japanese tend to be very conformists. So we'll work out what that number is as soon as we can.

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Unidentified Analyst, [15]

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Okay. Another question I had is now that we've named another independent Board director, what's the sense of how long it will take before the NASDAQ clears Socket from its deficient list? Is that going to be a 2-day process? Or is that an 8-week process?

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Lynn Zhao, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [16]

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[Steve], we're going to file the 8-K on Monday, and I will follow up with the NASDAQ. Normally, they have at least a week to 10 days to send us a letter to inform us that we have been -- we have regained the compliance.

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [17]

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So yes, we would say 8 to 10 days.

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Unidentified Analyst, [18]

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Okay. So maybe mid- to late November for that to happen and us to see it and kind of promulgate it through different financial websites and stuff?

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [19]

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Yes. And also, when we do our 10-Q, obviously, then it should be cleared by then.

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Lynn Zhao, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [20]

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Yes.

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [21]

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Which I think is what a lot of people are waiting for.

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Unidentified Analyst, [22]

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Okay. So we're hoping to have the language in the 10-Q that NASDAQ has taken us off of the deficiency as part of our 10-Q filing.

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [23]

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Yes. That will be grammar.

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Unidentified Analyst, [24]

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Okay. Great. Lynn, how many more months do we have on the bank loan left to pay off?

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Lynn Zhao, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [25]

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We have another -- we are paying like $125,000 a quarter, so we have another like 3 quarters.

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Unidentified Analyst, [26]

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Okay. And then can you give me a sense for how much cash we generated in the third quarter, free cash flow?

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Lynn Zhao, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [27]

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The free cash flow is...

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [28]

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So our EBITDA, it was $350,000-something, right?

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Lynn Zhao, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [29]

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Yes. It was $380,000 -- the EBITDA was $380,000, and the...

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Unidentified Analyst, [30]

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I'm sorry, so EBITDA was $380,000?

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Lynn Zhao, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [31]

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$380,000, yes.

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Unidentified Analyst, [32]

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Okay. But you don't have the free cash flow handy?

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [33]

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Yes. We'll -- she's looking for it. We have a bulky financial package.

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Unidentified Analyst, [34]

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No worries.

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Lynn Zhao, Socket Mobile, Inc. - CFO, VP of Finance & Administration, Secretary and Director [35]

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Yes, okay. Sorry, I'll have to get back to you on that.

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [36]

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So we'll get back to you on that, if that's okay.

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Operator [37]

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(Operator Instructions) And it looks like there are no questions at this time.

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Kevin J. Mills, Socket Mobile, Inc. - President, CEO & Director [38]

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All right. So just to answer [Steve's] question, our free cash flow was $395,000 for the quarter.

So as there are no more questions, I'd just like to thank everyone for participating in today's call, and I wish you all a good afternoon. Thank you very much.

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Operator [39]

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