Socket Mobile, Inc. (NASDAQ:SCKT) Q1 2024 Earnings Call Transcript

Socket Mobile, Inc. (NASDAQ:SCKT) Q1 2024 Earnings Call Transcript May 1, 2024

Socket Mobile, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Socket Mobile, Inc.’s Q1 2024 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 market 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. On this call with me today are Kevin Mills, Chief Executive Officer; Dave Holmes, Chief Business Officer; and Lynn Zhao, Chief Financial Officer. I will now turn the call over to Kevin Mills. Mr. Mills, you may begin, sir.

Kevin Mills: Thank you, Paul. Good afternoon, everyone, and thank you for joining us today. Our Q1 revenue was $5 million, a 15% increase compared to $4.3 million from Q1 2023. We had an operating loss of $0.5 million in Q1, an improvement compared to the $1 million operating loss we reported in Q1 2023. In Q1 2024, we were EBITDA positive. Overall, Q1 was in line with our expectations, and we were pleased with our operational performance during the quarter as we maintained our focus on promoting and demonstrating our newer products. Most of these newer products were launched in late 2023 and early 2024, and initial deliveries were made in Q1. As you know, after we make initial deliveries, our products are then subjected to a series of end user evaluations before a deployment decision is reached.

Initial feedback has been positive, and we expect to see the first deployments in the second half of the year and expect these deployments to make a meaningful contribution to our revenue. I would now like to turn the call over to Dave Holmes, who will provide a more detailed update on our progress. Dave?

David Holmes: Thank you, Kevin, and good afternoon, everyone. As Kevin said, today I’d like to talk about the progress we are making with our newer products and strategic initiatives and highlight a few of the significant milestones that we achieved in Q1. Our investments in innovation are helping transform Socket Mobile into a more comprehensive data capture company. We’ve made significant progress in promoting our camera-based scanning technology. Our early adopter app partners have integrated SocketCam into their platforms, enabling their customers to scan barcodes directly into their apps using the mobile device camera. Now, that we have fully released the pro version of SocketCam on all development platforms, we are advocating for the adoption of the advanced SocketCam C860.

The free and subscription versions of SocketCam enable our app partners to serve all of their diverse end users’ needs, from the most cost-conscious with our free SocketCam C820 to a more feature-rich data capture requirements with our subscription-based SocketCam C860. And the most intense users can still use our array of handhold hardware scanners. All of these are made available to our app partners’ ecosystem with a simple, single free integration of our Capture SDK. As adoption builds and end users upgrade to our SocketCam C860, this will generate recurring revenue streams for us each month. We also see traction with our XtremeScan military-grade industrial scanners as well as our DuraScan wearable products. These products were built for the industrial barcode scanning market, facilitating the use of iPhones and iOS applications in rugged work environments.

These product families represent a significant milestone in our commitment to delivering high-quality data capture solutions for our customers in industrial, manufacturing, warehousing, energy and airports. XtremeScan is designed to enable iPhones to withstand harsh industrial conditions and offer robust scanning capabilities with the ultimate durability. It opens the door into new customer segments in the massive ruggedized computing space that demand the ultimate performance in the most difficult environments. In Q1, our initial customers were putting these products through rigorous testing and reports back have been extremely encouraging. We passed some of the most intense testing with Flying Colors and expect to move into deployments, which will begin to contribute to our revenue in Q3 and beyond.

Our new Xtreme products will extend our reach and diversify our customer base. SocketCam will provides Socket Mobile with a recurring revenue stream each month, and ultimately, these initiatives will make us a more diversified, sustainable and less dependent on retail. We’re becoming a more complete hardware and software data capture company. And with that, I’ll turn it over to Lynn for more details on our financial results. Lynn?

Lynn Zhao: Thank you, Dave, and thank you, everyone, for joining today’s call. During Q1, our revenue increased by 15% to $5 million from $4.3 million in the prior year’s quarter, and it also increased by 13% sequentially from $4.4 million for the preceding quarter. Alongside the growth in our run rate business, we also observed an increase in deployment business. In Q1, our gross margin reached 50.3%, up from 48.1% in the prior year’s quarter, but down from 52.8% in the preceding quarter. The increase was primarily due to the allocation of manufacturing overhead costs across higher production volumes. While the decrease was attributed to fewer direct sales from our Socket store compared to Q4 2023, which yielded a higher gross margin.

Operating expenses for Q1 totaled $3 million, unchanged from prior year’s quarter, but increased from $2.8 million in the preceding quarter. Our annual financial audit expenses typically occur in the first half of the year. During Q1, we recorded a net loss of $72,000 or $0.07 per share compared to a net loss of $993,000 or $0.12 per share in Q1 2023. Q1 EBITDA is $40,000, an improvement from the negative $459,000 in Q1 2023. Total noncash expenses, including depreciation, amortization, and equity expenses are $525,000 in Q1 2024. Our cash balance at the end of Q1 was similar to the balance on December 31, 2023, at around $2.8 million. We have maintained our inventory at a similar level at the end of the year at $5.4 million. Our Board has approved extending the maturity date of the secured subordinated convertible note initially issued in 2020 from August 30, 2024 to August 30, 2025.

Our annual shareholder meeting will take place on May 15, 2024, in a virtual format. We encourage all eligible shareholders to cast their votes and participate in the meeting. This wraps up our prepared remarks. Now I will hand the call over to the operator for questions. Paul?

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from William Carroll, a private investor. Your line is open.

William Carroll: Yes. Thank you. So I’m just trying to understand the business [Technical Difficulty]

Kevin Mills: Sorry, you just want to understand?

William Carroll: I want to understand these new products. How does that displace previous revenue? So, I’m trying to get what’s the revenue you saw with these new products? And how does that help grow your business?

Kevin Mills: All right. So none of the new products or the newer products displays any of our current business. So our current business is primarily, and we provide scanning solutions to iPad-based retail point-of-sale systems, and you’ll see a lot of our scanners in higher-end specialty retail stores using Shopify, Square, et cetera. What we have done over the last two years is using the same technology to expand into newer markets by, A, supporting people who want to use the camera-based scanning, which we believe will primarily be in the commercial services area and making the products more ruggedized and suitable for the industrial market. So, the newer products are complementary to the existing products, and we don’t see a lot of cannibalization or downside. It’s more an expansion of the capabilities into parallel markets.

William Carroll: Okay. Another question is, your market cap right now is about $8 million. What are your — are you able to share your projected 12-month revenue [Technical Difficulty]

Kevin Mills: We don’t provide forecasts because small differences in whether you receive an order change it greatly. As you know, last year we did around $19 million, and we would expect to be north of $20 million this year. So that’s the current plan.

William Carroll: Does the Board of Directors share repurchase program in place right now?

Kevin Mills: There is no repurchase plan in place right now. We did have one in 2021, 2022. Our cash position isn’t strong enough to have a repurchase plan. So at the moment, there is none.

William Carroll: And then if for some reason, you need to raise more cash, would you do debt or would you do equity offering?

Kevin Mills: We have available bank lines that we’re currently not using. So as the business grows, we believe we can self-fund our fund with debt, our short-term debt. We have a $2.5 million revolving credit line that we currently don’t use. So we feel we have enough avenues to continue to grow without any more equity.

William Carroll: Are you able to share any possible quarter in the future or you’re cash flow even?

Kevin Mills: Well, we were cash positive. We were EBITDA positive in Q1. We would expect to basically stay around that level in Q2. And then we would expect in the second half of the year to move towards profitable operating levels, which would generate something in the region of $700 million of cash each quarter.

William Carroll: Okay. Very good. Thanks for answering my questions. Thank you.

Kevin Mills: [indiscernible]

Operator: Our next question comes from Richard Greulich of REG Capital Advisors. Your line is open.

Richard Greulich: Thank you for taking my questions. What was the percent of revenue derived from the online store in Q1?

Kevin Mills: Approximately — in the U.S., approximately, I would say, 17%, 1-7.

Richard Greulich: Okay. Thank you. I’m still learning about the company so this is kind of a basic question. Where do you provide added value? Is it in the actual physical scanning device or is the scanning capability inherent in that device?

Kevin Mills: No, where we provide the core value, if you boil us down to our essence, if you will, but we do better than anyone else is we capture data in the physical world and transport it to the application world, right? So we provide a lot of software that allows an app developer to, I would say, have automated data collection without caring a great deal about it. So from an application development point of view, they just get the data delivered. And we look after all of the software required to get it through the various layers that you have to do. We talk to the physical device and then our scanner actually then collects the data. So really focused on data capture from the physical to the application layer. So somebody like Square or Shopify don’t have to worry about pairing the scanner.

They don’t have to worry about formatting the data or any of those things. They just get a delivery service that’s basically the end result arrives at their doorstep, if you will, and they’re able to focus on using the data. So we collect our revenue because we deliver a physical scanner, but most of our value-add is actually on the software side.

Richard Greulich: Okay. So when you provide with some of your newer camera scan products, how do you earn revenue from that if you’re providing the stream to the app developer?

David Holmes: Yes. What we found over the years of selling hardware scanners is, many of our app developer partners and their end users try out free camera scanning first. And when they try that out, oftentimes there’s a fairly large percentage of them that find out that the capabilities in the free camera scanning aren’t good enough for at least some percentage of their end users’ needs. Those end users end up upgrading to an enhanced camera scanner, which provides more in-depth data decoding or they end up buying a hardware scanner. That’s where most of our customers have come to us ultimately to buy our hardware. And so, the way that we would make money in this is inserting ourselves further up the value chain. So we provide the free scanners, and we’re willing to provide those for free because we know that there’s going to be some percentage of those that need to upgrade to the subscription-based version.

And then ultimately, some of those customers will upgrade to a hardware scanner. So we make money when people do those upgrades to either the subscription-based or to a hardware scanner.

Richard Greulich: And the process by which you bill, invoice or however you want to call it, with the subscription upgrade, is that directly to Socket or how does that work?

David Holmes: Yes. It’s — we use the mechanisms that are already in place in the market, which are basically through the app stores, the App Store and the Play Store, but the revenue does come directly to Socket.

Richard Greulich: Okay. And that’s very small, I’m assuming, right now. Is there any timeframe in which you might think it could become at least moderately significant?

David Holmes: Yes. We’re just getting started with it now. We are seeing pretty positive signs, and we expect it to start contributing to our revenue in the second half of this year.

Richard Greulich: Okay. Expanding into the industrial world, how are you making the market participants there aware of what you’re doing and offering?