Socket Mobile, Inc. Q2 FY2023 Earnings Call

Welcome to the 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. Such statements include 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 the 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 and 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 the 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.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. Our Q2 revenue was $5.1 million, a 19% decrease compared to the $6 million in Q2 2022. Our gross margins were 51.8% compared to 50.2%, and we recorded an operating loss of $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 largest source of revenue. We saw a general malaise and uncertainty in the retail industry in North America during Q1, and we saw it continue in Q2 and spread to other regions of the world. The economic uncertainty in various regions has resulted in delayed investments and deployment decisions, which is a concern and outside our immediate control. However, we do continue to get the majority of the available business associated with iPad-based point-of-sale solutions and believe we will benefit as the retail markets recover and strengthen based on our market-leading product portfolio. 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. Q3 is going to be another challenging quarter. 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 will be able to contribute to our Q4 revenue and enable us to return to profitable operations.

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 data capture company. The engineering team has been working hard to develop a new line of ultra-rugged industrial products that work in conjunction with Apple products. We'll be introducing our new Extreme Scan product line later this month. These products are targeted for harsh environments, such as manufacturing, construction, oil and gas, and airports. Extreme Scan will open new markets for Socket Mobile and also extend our reach within some of our current app partner base. Ultimately, this will also make us more diversified and 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 CaptureSDK software to enable camera scanning with SocketCam, building out an installed base of users of our free version of SocketCam was critical. 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. The next step expected to go live next month is to enable these app end users who need to read 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 Play Store. This upgrade will allow our app partners to support both cost-sensitive and advanced future data capture requirements with the same application, enabling end users to select the best option for their unique needs. As customers upgrade to SocketCam C860, this will provide Socket Mobile with a recurring revenue stream each month. SocketCam is being adopted in apps supporting a wide variety of industries and market sectors, including delivery services, field order entry, and inventory apps, just to name a few examples. Our camera scanning continues to move forward, and we believe this is a critical step in our 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 their end users. CaptureSDK was also updated to include support for SocketScan S370, our combo NFC and QR code reader, as well as SocketScan S550, our NFC mobile wallet reader writer. This will ensure that our development partners can incorporate some of the new features expected in iOS 17 associated with personal identification. Our advances in our 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. Additionally, SocketScan SF50 has been awarded FeliCa certification. FeliCa 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 S550 compatible with the FeliCa system, used in multiple regions and countries around the world, including Japan, Bangladesh, Hong Kong, India, Indonesia, Vietnam, and many others. Our NFC portfolio is well-positioned in this space as it starts gaining traction. We foresee the need for digital ID, mobile driver's licenses, and other contactless reader infrastructure having an impact on our revenue in 2024 and beyond. With that, I'll turn it over to Lynn for more details on our financial results.

Thank you, Dave, and thank you, everyone, for joining today's call. In Q2, our revenue was $5.1 million, representing a 19% decrease compared to the same quarter in the previous year. The decline was primarily attributable to the weakness in the retail sector, which has served as our primary source of revenue. Nevertheless, when compared to Q1, revenue displayed a 15% increase, as Q1 was 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 was mainly attributed to a more efficient allocation of overhead costs across a higher number of units sold. 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 socket store. In Q2, our operating expenses were $2.9 million, 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 the previous year, but an improvement from a negative $460,000 in the prior quarter. The total non-cash expenses in Q2, which included depreciation, amortization, equity-based compensation expenses, and income tax, amounted to $690,000. As of June 30, our cash balance was $3.4 million, which is $200,000 lower compared to December 31, 2022. Over the six-month period, we completed $1.6 million in convertible note financing, and the stock option exercises contributed an additional $200,000 to our cash position. Primary expenditures during this period included $1.1 million in capital expenditures, $500,000 for operating activities, $200,000 for share buyback, and loan repayment of $125,000. In terms of inventory, we ended the quarter with $5.5 million, a slight decrease from $5.6 million at the end of 2022. This wraps up our prepared remarks. Now, I will hand the call over to the operator for questions.

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 third quarter and the fourth quarter?

So Lynn, would you like to answer that?

Yes. The improvement in gross margin compared to Q1 was mainly driven by the higher sales in Q2 compared to Q1. So the overhead allocation has been over a higher number of units. Compared to Q2 last year, our direct sales through our online shopping store have doubled. Last year, we had around 7% of our revenue from the online store, and this year that increased to 16%. Our online store sales are at MSRP, which helped the margin in Q2 compared to Q2 last year. We expect the sales increase from our online store will continue to rise.

Okay. Thanks for that. I also 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 and DW930. What sort of demand are you seeing for this? And how can we anticipate this affecting revenue going forward? What is the market here?

Our business model relies on applications created by third parties, so we do not anticipate an immediate revenue impact from these products. However, we are observing that users are incorporating them into their applications, and as they become more widely used, we expect a rise in revenue. There is considerable interest in the retail and industrial sectors, and we already have several applications ready to support the products we plan to launch in the third quarter. In Q3, our focus will be on verifying that these products fulfill customer needs and perform effectively in real-world scenarios through pilot tests with larger clients. We expect initial deployments towards the end of Q4, with more substantial activity occurring in 2024. We believe the industrial market is largely underserved for Apple-based products, and our offerings will enable users to utilize Apple products in more challenging environments, potentially leading to significant revenue growth. However, we want to ensure everything is functioning as anticipated before we set explicit quarterly expectations.

Okay. Great. Thanks for all your answers.

Thanks, Chris.

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

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

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