Socket Mobile Q2 2023 Earnings Call Transcript

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August 2, 2023

There are 5 speakers on the call.

Operator

Welcome to Socket Mobile Inc. Q2 2023 Earnings Call. My name is Paul, and I will be your 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.

Operator

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 ks and 10 Q reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update Any such forward looking statements. On the call with me today are Kevin Mills, Chief Executive Officer Dave Holmes, Chief Business Officer and Lin Zhao, Chief Financial Officer.

Operator

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

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Our Q2 revenue was $5,100,000 a 19% decrease compared to the $6,000,000 in Q2 2022. Our gross margins were $51,800,000 compared to $50,200,000 and we recorded an operating loss up $292,000 compared to an operating income of $189,000 in Q2 2022. Our Q2 revenues were impacted by the global weakness of the retail point of sale market, which remains our large source of revenue.

Speaker 1

We saw a general malaise and uncertainty in the retail industry in North America The economic uncertainty in various regions has resulted in delayed investments and deployment decisions, Which is the concern and outside our immediate control. However, we do continue to guess The majority of the available business associated with iPad based point of sale solutions and believe we will benefit During Q2, we made significant progress on our product development plans And we'll get many new products into the market in Q3. Our new products are designed for both commercial services and industrial markets, Which are currently more robust than retail and areas where we feel our technology could have a long And meaningful impact over time. In addition, they will reduce our dependency on the challenging retail sector. Dave will provide more details on the products and potential impact in a few moments.

Speaker 1

Q3 is going to be another challenging quarter. As we expect retail to remain weak And our new products will not have time to make a meaningful impact. We do however believe the new products We'll be able to contribute to our Q4 revenue and enable us to return to profitable operations. With that said, I'd now like to turn the call over to Dave Holmes. Dave?

Speaker 2

Thank you, Kevin, and good afternoon, everyone. Today, I'd like to highlight a few of the significant milestones that we achieved in Q2 and talk a little bit more about some of the new products we have coming up as we continue our journey of becoming a more comprehensive day capture company. The engineering team We'll be introducing our new ExtremeScan product line later this month. These products are targeted for harsh environments, such as manufacturing, construction, oil and gas and airports. ExtremeScan will open new markets for Socket Mobile And also extend our reach within some of our current app partner base.

Speaker 2

Ultimately, this will also make us a more diversified It's sustainable and less dependent on retail. In Q2, we continued to make significant Progress promoting our free camera based scanning as well. Our app partners are updating their apps with the latest version of our Capture SDK software We enable Canvas scanning with SocketCam. Building out in its style base of users of our free version of SocketCam is critical, And thousands of app end users can now use SocketCam to capture data in their apps. The early adopter app partners have been extremely positive about the ease of implementation and the instant value it brings to the end users of their apps.

Speaker 2

The next step expected to go live next month is to enable these app end users We need to need damaged or more complex barcodes to upgrade from the free version to a more advanced version. SocketCam C860 on a monthly subscription basis through Apple's App Store and Google's Play Store. This upgrade will allow our app partners to support both cost sensitive and advanced feature data capture requirements with the same application, enabling end users to select the best option for their unique needs. The customers upgrade as customers upgrade to Socket Sense 8 60, This will provide Socket Mobile with a recurring revenue stream each month. Socket Kin is being adopted in apps Supporting a wide variety of industries and market sectors, delivery services, field over entry And inventory apps, just to name a few examples.

Speaker 2

Our camera scanning continues to move forward And we believe this is a critical step in the data capture journey. It makes us a more complete hardware and software data capture company. We feel that our camera scanning and industrial products create new opportunities for Socket Mobile. We can reach a larger and more diverse set of application providers and our end users. Capture SDK was also updated to include support for SocketScan S370, Our combo NFC and QR code reader, the SocketScan S550, our NFC mobile wallet reader writer As well, this will ensure that our development partners can incorporate some of the new features expected in iOS 17 Associated with personal identification.

Speaker 2

Our advances in NFC portfolio position Socket Mobile at the forefront of emerging digital ID and mobile driver's license markets. This will enable new apps, new markets and new end users For Socket Mobile. Also SocketScan S550 has been awarded Celica certification. Teleka is a contactless RFID smart card technology developed by Sony in Japan, widely used for convenient payment, Loyalty, transit, digital ID and other quick contactless transactions. This certification makes Socket ScanS-five fifty is compatible with the Cellica system used in multiple regions and countries around the world, including Japan, Bangladesh, Hong Kong, India, Indonesia, Vietnam and many others.

Speaker 2

Our NFC portfolio is well positioned in the space and it starts picking up steam. We foresee the need for Visual I. V, local driver's license and other contactless reader infrastructure, having an impact on our revenue mix 2024 and beyond. With that, I'll turn it over to Lynn for more details on our financial results. Lynn?

Speaker 3

Thank you, Dave, and thank you, everyone, for joining today's call. In Q2, our revenue was 5,100,000 representing a 19% decrease compared to the same quarter in the previous year. The decline was primarily Nevertheless, when compared to Q1, Q2 revenue displayed a 15% increase as the Q1 revenue has been impacted by Inventory balancing activities conducted by our distribution partners. Our Q2 gross margin showed an improvement, Reaching 51.8%, which represents a 1.6% increase compared to the same period last year And a 3.7% increase compared to Q1. The improvement in Q2 over Q1 was mainly attributed to a more efficient allocation of overhead costs across a higher number of units sold.

Speaker 3

In comparison to the same period in the previous year, the improvement in Q2 is attributed to a higher margin Achieved through direct sales from our online shopping store. In Q2, our operating expenses or $2,900,000 reflecting a 3% increase compared to the same quarter in the previous year, But a 3% decrease from the prior quarter. During this period, the company monitored and controlled expenses, while continuing to invest in critical projects that drive the long term growth of the company. During Q2, we recorded a net loss of $513,000 or $0.06 per share compared to a net income of $100,000 or $0.01 per share in the same period last year. In Q2, our EBITDA was $230,000 a decrease compared to $630,000 In the same quarter of previous year, but an improvement from a negative $460,000 in the prior quarter.

Speaker 3

The total non cash expenses in Q2, which include depreciation, amortization, Asset based compensation expenses and income tax amounted to $695 As of June 30, our cash balance was $3,400,000 which is $200,000 lower compared To December 31, 2022, over the 6 month period, we completed the 1 point $6,000,000 convertible note financing and the stock option exercises contributed an additional $200,000 to our cash position. Primary expenditures during this period included $1,100,000 in capital expenditures, $500,000 for operating activities, dollars 200,000 for share buyback and the loan repayment Of $125,000 In terms of inventory, we ended the quarter with $5,500,000 A slight decrease from $5,600,000 at the end of 2022. This wraps up our prepared remarks. Now, I will hand the call over to the operator for questions.

Operator

And our first question comes from Chris Sakai from Singular Research. Your line is open.

Speaker 4

Yes, hi. Good afternoon. I had a question on the gross margin improvement. What were the main drivers there? And what can we expect for the Q3 and the 4th quarter?

Speaker 1

So Lynn, would you like to answer that?

Speaker 3

Yes. For the improvement in compared to Q1 was mainly driven by Like the higher sales in Q2 compared to Q1, so their overhead allocation Has

Speaker 2

been

Speaker 3

over like a higher number of units. Like compared to Q2 last year, we our direct sales is through our online shopping store Has been increased has been doubled. Like last year, we had like 7% of our revenue from online store and this Yes. That increased to 16%. And our online store, the sales is at MSRP, That helps the margin in Q2 compared to Q2 last year.

Speaker 3

And we expect that the sales increase From our online store, we will continue to increase.

Speaker 4

Okay. Thanks for that. And then I wanted to get some idea on what you guys are seeing in the industrial sector as far as With your new products like the DuraScan Wear, EW930, what sort of demand are you seeing for this? And how can we anticipate this affecting revenue going forward? What is the market here?

Speaker 1

Well, okay. Let me say that our business model is that We are dependent on apps developed by 3rd parties. So we don't expect these products to have instant Revenue impact, what we do see is people adopting them into their applications And then as they get deployed, we do see that increased revenue. We're entering into the retail into the industrial space And we have a lot of interest and we already have a number of apps that will instantly support the products we bring to market in Q3. I think Q3 will primarily be understanding that the products meet the needs They perform well in the real world and going through a series of pilots with larger customers and then seeing deployments Starting maybe towards the end of Q4, but primarily in 2024.

Speaker 1

We believe that the industrial market is very Underserved for Apple based products and some of the products we bring will allow people to use Apple products in these More ruggedized environments, and we think it will have a significant impact in our revenue going forward. But We'd like to get those trials under our belt and make sure everything is operating as we expect before we actually put out What I think would be our expectations on a quarterly basis.

Speaker 4

Okay, great. Thanks for your answers.

Speaker 1

Thanks, Chris.

Operator

And seeing no further questions, I'll turn the call back over to our host.

Speaker 1

Thank you, operator. I'd like to thank everyone for participating in today's call and wish you all a good afternoon. Thank you.

Operator

The meeting has now concluded. Thank you for joining and have a

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Socket Mobile Q2 2023
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