Socket Mobile, Inc. Q4 FY2021 Earnings Call

Welcome to the Q4 2021 Annual Financial Results Management Conference Call. My name is Adrian and I'll 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 products. Such statements involve risks and uncertainties and actual results could differ materially from the results anticipated in such forward-looking statements because of factors including, but not limited to, the risk that the manufacture of Socket 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, and the risks 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 of 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 doesn't take any obligation to update any forward-looking statements. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. On the phone with me, I have Kevin Mills, President and CEO, David Holmes, Chief Business Officer, and Lynn Zhao, Chief Financial Officer. I'll now turn the call over to Kevin Mills. Kevin, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. I want to start with a quick review of 2021 and our Q4 results, and I will hand the call over to Dave Holmes, who will outline the product adjustments and improvements in our go-to-market strategy. We believe these improvements will enable Socket Mobile to maintain its track record of growth for the next few years. 2021 was a very good year for Socket Mobile. We grew our revenue by 48% to $23.1 million. We maintained our gross margin in the 53% range and reported operating income of $2.7 million. Lynn Zhao will provide a more detailed breakdown of our financial results in a few minutes. Our 2021 results show the progress we have made as a company over the past 12 months. We achieved these results in a very difficult environment by maintaining our focus on the data capture markets, and a great deal of hard work by our amazing team here at Socket Mobile. The improvements also highlight the benefit of our application-driven business model and the leverage it brings over time, as we continue to benefit from the success of our application partners. Switching to our Q4 results. In Q4, we grew our revenue by 31% to $6.1 million. Our gross margins were slightly lower at 52.1%, primarily due to increased costs associated with supply chain difficulties, resulting in an operating income of $700,000 for the quarter. These are very good results for Q4, which is a seasonally weak quarter for retail-related deployments. So, we enter 2022 as a significantly stronger and better company than we entered 2021. In addition to the financial progress we made in 2021, we also learned a great deal from our application partners and feel we are much better positioned to serve them going forward with their data capture needs. I'd now like to turn the call over to Dave Holmes, who will outline how we will better serve this market moving forward. Dave.

Thank you, Kevin. Good afternoon, everyone. When I joined Socket in the middle of last year, we began our mission to enhance our strategy to become a more comprehensive data capture company. We have made significant progress in the NFC market, which has been discussed in our earlier calls, and today I want to emphasize another crucial aspect of that strategy. Earlier this week, we announced the SocketCam C820. This is the first product in the new Socket Cam software family that transforms any mobile device into a high-performance barcode scanner. We believe this is an essential component of the data capture journey. Currently, Socket Mobile scanners are mainly utilized in the performance-sensitive segment of the data capture market, where we hold a strong market share. However, our application partners serve end-users with varying data capture requirements, often with limited expertise in data capture. They typically only incorporate our Capture SDK to support Socket scanners when their customers encounter performance challenges. Our research indicates that data capture is a progressive process, and the needs of our end customers change over time. Customer feedback reveals that around 70% of our end-users initially relied on keyboard or camera-based scanning before switching to a Socket scanner. While free scanning is effective in low-volume, well-lit environments, it tends to falter as volumes rise or conditions become more challenging. The introduction of the C820 will enable our development partners to extend Socket's scanning expertise and capabilities to a broader audience, allowing our app partners to cater to all their end-users, from budget-conscious to performance-driven, through a single integration. This approach empowers developers to reach a larger customer base, streamlines the onboarding process, and helps end customers choose the most suitable tool for their specific needs. We plan to keep investing in the SocketCam family to provide data capture solutions that benefit both our developer community and end-users. We will have an advanced version available on a subscription basis later this year, which represents a significant step forward in how Socket supports the complete data capture journey. Now, I will hand it over to Lynn for more details on our financial results. Lynn?

Thank you, Dave. And good afternoon to everyone. We are very pleased with our 2021 results, as we continue to grow our business and strengthen our financial position. We drove strong double-digit year-over-year revenue growth, gross margin improvement, and a record of operating profitability, while continuing to invest in our product roadmap. Year-over-year, Q4 revenue was up 31% to $6.1 million and annual revenue was up 48% to $23.2 million, driven by strong demand for our products as we benefited from the economic recovery and the flywheel effects of our application-driven business model. Q4 gross margin was 1% lower than a year ago due to the rising component costs. For the year, however, our gross margin is 1.5% higher, which is a benefit of the increase in revenue. Although we are confident that our focus on navigating the supply constraints will enable us to continue to meet our customers' needs, the ongoing industry-wide electronic component shortages could result in future higher component production costs. Operating expenses in Q4 were $2.5 million, increased 28% over the prior year quarter. Spend on engineering and product investments as well as our strategic investment area increased 46%. Increases in general and administrative, as well as sales, marketing, and customer support are 28% and 19% respectively. Our full-year operating expenses increased 18% compared with the prior year, excluding the non-cash goodwill impairment charge of $4.4 million in 2020. The increase in 2021 reflects the cost associated with a higher headcount investment in technology, consulting, and external professional services, as well as the increase in compensation related to improved company performance. We believe a continued commitment to invest in talent and technology is essential to provide new product offerings and better service our development partners. In Q4, we had a net income of $1.1 million, including a deferred tax benefit of $20,099, compared to $1.9 million in the comparable prior year quarter, which included a gain of $1 million on the forgiveness of the PPP loan. Net income for the year was $4.5 million, including a deferred tax benefit of $1.9 million, compared to a loss of $3.3 million in 2020, which included a $3.3 million goodwill impairment charge, netting off the gain on PPP loan forgiveness. The deferred tax benefits recorded in 2021 are due to the recognition of tax deductions resulting from disqualified disposition of incentive stock options, disposition of non-qualified stock options, and the vesting of employee restricted stock awards. Adjusted EBITDA in 2021 increased to $4.2 million compared to $1.2 million in 2020. Adjusted EBITDA margin in 2021 was 18% compared to 8% in 2020. Q4 adjusted EBITDA was $1.1 million versus $0.8 million a year ago. Turning to our balance sheet, we continue to focus on driving strong cash flow. In 2021, we generated a record of $2.1 million in cash from operations, compared to $2.8 million generated in 2020. We ended the year with a cash balance of $6.1 million compared to $2.1 million a year ago. As of December 31st, 2021, our inventory level, net of reserve, was at $5.2 million compared to $3.2 million a year ago. Their increased inventory enables us to service our customers' full demand, while navigating these supply constraints. Our balance sheet has further strengthened with a current ratio of 2.7 to 1, as of December 31st, compared to 1.9 to 1 a year ago. Now, I will talk about the share buyback program approved by our Board of Directors. After evaluating the company's financial statements for the year, as well as the recent developments of the company, the board determined that the company has sufficient supply as concluded in accordance with Section 154 of the General Corporation Law of the State of Delaware for the stock repurchase program. The use of the funds will not impair the company's capital, but rather, the company will continue to have sufficient resources to operate for the foreseeable future. And currently, under the following repurchase program, the company's total existing debt will not exceed the present value of the company's assets, even if the stock repurchase program is completed in full. The Board hereby determines that the stock repurchase program is in the best interest of the company and its shareholders, and the Board approved the program. Our repurchases will be conducted in accordance with SEC rule 10b18, and we'll enter a 10b5-1 plan during the open window, and our broker will execute the trades. This wraps up our prepared remarks. Now, I will hand the call over to the operator for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Frank Petronas from Wells Fargo. Your line is open.

Congratulations on your rate of growth considering the COVID situation and again, the other variant that came about. I think you've done a great job with the stock repurchase program. I have a question as far as in 2016, you entered the NASDAQ. Now, I posed a question to you, I guess about six months ago regarding you going a different path with the Board, possibly getting more institutional type investors to build from the New York Stock Exchange where I think that these up and down gyrations have been horrible. I mean, the average investor, I'm a former retail broker. So, what I'm saying is people that I spoke with and have bought the company, it's been like a nightmare when they see what your account is next day; it flops right back down. I think you can get a lot more stability if you can get listed on the New York Stock Exchange and stop all this flipping. I think with the interest rate rise and so forth, it should soon be over. So, my question is, have you guys considered a listing on the New York Stock Exchange?

There are many questions regarding technology, Frank. Let me address a few. I believe there is significant instability in the markets, and with our lower price and the presence of platforms like Robinhood, emotions often drive stock prices instead of fundamentals. As we look toward 2022, we intend to make a stronger effort to attend conferences to share our narrative, which we now believe is robust enough. We're participating in the Singular Research Conference and the Capital Research Conference soon. We’ll also reach out more. I agree that attracting more institutional investors could bring greater stability to the markets and stock prices. This is part of the reason we are initiating a buyback program, as the market price does not accurately reflect the company's value. Given our surplus cash, it seems prudent to demonstrate our commitment to the long-term future through this repurchase program. We do not have immediate plans to get listed on a second exchange and have been present in this market for many years. As you noted, we recently re-entered the NASDAQ market, where we had been for several years before becoming out of compliance. We regained compliance in 2016. We hope to see increased stability in the stock price this year, especially as we bring in more institutional investors. In the short term, there isn’t much we can do about the impact of platforms like Reddit or Robinhood. I hope that answers your question.

Yes, partially. Regarding the Robinhood platform, it seems they have faced some challenges, as indicated by their stock performance. I believe your qualifications for the exchange are strong. In my previous experience with Prudential and other major firms, we often encountered difficulties with smaller companies that required unsought assistance. If increased transparency is possible, that's great. While a buyback could help to some degree, it can't completely address the volatility—your stock jumped to around $5.68 in after-hours trading, only to return to about $5. However, I think the company should aim for more stability. Your growth is impressive, showing a strong upward trend, and I commend your efforts. Thank you for addressing my question.

You presented the question right. Thank you very much.

We have Frank Petronas from Wells Fargo. Your line is open.

I have about 15 to 20 of my former clients who come to me seeking various recommendations. The challenge is that I'm not very tech-savvy myself, while these clients are much more advanced. However, if you could present the information in simple terms to enhance transparency regarding the emergence of these products and their implications for the future, that would be helpful. The previous explanations you provided for past products and the new one were good, but I’ve received two calls, and there seems to be a lack of understanding. Perhaps the younger generation and tech experts can grasp it better than someone like me.

So let me try and explain a little bit. We are dependent on our developers to enable our software so that people can use our scanners. Our research has shown that many of the people who buy our scanners have transitioned from keyboard or camera-based scanners to our scanners. What we're trying to do is ensure that we service those customers earlier, to smooth out the onboarding process. So that as they need more functionality out of their scanner, they can use the current application they have. Today, it often takes us an extra year to even two years when customers need to use the more performance-centric scanners, but their application doesn't support it. So there's a development cycle, and we're trying to minimize that development cycle to make it easier for people who need performance-based scanners. It's a little bit complicated, I would agree. Our business model is a little bit complicated because we sell through our application partners, and they enable their customers to buy our products. So, this is why we referred to it as an application-driven business model, because the application comes first. We're trying to improve and will likely have improved the information on our webpage to better inform people about our story. And I think as we reach out to investors, that scenario will continue to work on simplifying the story, even though it is a bit complicated.

Okay. Great. The thing I do want to reemphasize again, you guys have not stumbled in the last two years that I've really been invested in the company; I have not seen any step backwards. A lot of companies have really fallen back and then trying to recover; it's been a tough road. You guys are not there and that's what I commend you again on that. I think I will give up the floor to anybody else's questions, but thank you again.

Thank you, Frank.

And our next question comes from William Carroll from EMPOWER; your line is open.

Just a question about the share repurchase program. Will that just be at the company's discretion from time to time or do you have a planned purchase activity?

We're going to enter a 10b5 plan next week. There will be a 45-day waiting period, as this is following the SEC rules. After that, the plan will be in our brokers' hands to execute.

Great. Thank you.

You're welcome.

And currently we have no further questions.

Okay. So let me just finish by saying we clearly have made significant progress in 2021 and feel we've established a solid foundation that will enable us to grow our revenue and importance in the data capture market in the next few years. And I'd like to thank everyone for your time and interest in Socket Mobile, and wish you all a good afternoon. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating, and you may now disconnect.