Q3 2022 Socket Mobile Inc Earnings Call

Welcome to the socket mobile 2022 third quarter financial results Conference call. My name is Daryl 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 20 <unk>.

Seven a of the Securities Act of 1933 as amended and section 21 E of the Securities and Exchange Act of $19 34 as amended such forward. Looking statements include but are not limited to statements regarding mobile data collection and mobile data collection products include.

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 sockets products may be delayed or not rolled out as predicted due to technological market or financial factors, including the availability of product components and nest.

Working capital the risk that market acceptance and sales opportunities may not happen as anticipated the risk that sockets application partners and current distribution channels may choose not to distribute the products or may not be successful doing so the risk that acceptance of sockets products and vertical.

Location markets may not happen as anticipated as well as other risks described in sockets. 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. At this time all participants are in listen.

The mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press zero one on your Touchtone phone. Please note that this conference is being recorded and the call today with me 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, Kevin You may begin.

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

In Q3, our revenue decreased to $3 7 million from $6 3 million for the same period in 2021.

Gross margins were 44, 4% compared to 54, 2% in Q3 2021.

Our expenses were $2 6 million compared to $2 5 million in Q3, 2021 resulting in a net loss of 874000 for the quarter.

Obviously, we are disappointed with these results. However, while you may initially interpret the dramatic drop in revenue as a sign of our business is stagnating a closer look at the details would assure you that that is not the case and that our Q3 results do not fully reflect the underlying.

Demand for our products are the exciting opportunity we have ahead.

In Q3, our results were significantly impacted by inventory reductions in our distribution channel.

Our sales to our distribution channel partners were approximately 30% lower than the sales from our distribution partners to our end customers.

We believe the sales from our distribution partners to the end customers are a truer reflection of the underlying demand.

And that number in Q3 was $4 8 million.

A lower number than expected due to the strong headwinds and market uncertainties, but a number that would have kept us EBITDA positive.

Our distribution partners increased their inventory in the first half of the year as lead times grew and supply was uncertain, especially for printers and cash charts, which are required to deliver.

Mobile point of sale solutions.

In Q3, they rebalance their inventory levels based on demand and current supply conditions.

<unk> and a dramatic decrease in our sales into distribution, which is how we recognize revenue.

We believe this is a onetime adjustment.

And we expect our sales into distribution and out of distribution will be approximately equal in Q4.

As they have been for many years.

As an aside socket mobile has not experienced any supply issues and has maintained a six week lead time. During these difficult times as we took a strategic stock position in 2020 on many critical components.

Our sales continued to be driven by our many application partners with Shopify and square, leading the way and we expect this trend to continue.

During Q3, we made significant progress on delivering our next generation products and services and I'd now like to turn the call over to Dave Holmes, who will discuss these developments in detail Dave.

You, Kevin and good afternoon, everyone.

Today I'd like to highlight a couple of key milestones that we achieved in Q3 as we continue our journey of becoming a more comprehensive data capture company.

We made significant strides with our capture SDK software tools as we continue to provide the best in class development tools for application partners.

We support all the major development environments in the market today and in Q3, we announced that our capture SDK an entire line of barcode scanners in NFC reader writers achieve full compatibility with the iOS 16.

<unk> 16 compatibility.

That's across the entire socket mobile product line ensures that Apple apps and their end users can maximize the performance of both their socket mobile data reader and Bluetooth pairing Apple device.

Socket mobile capture SDK has been integrated into thousands of applications across a variety of industries, helping create easy to use software tools for optimal performance and efficiency. We're very proud of the work the software team has been delivering.

Also capture SDK now includes socket Cam CA 20 are.

Our free camera based scanning software that turns any mobile device into a high performance barcode scanner.

Our App development partners can now begin offering free scanning to their customers.

Capture SDK with CA 20 allows our development partners to serve all of their end users from price sensitive to performance sensitive with one integration.

This approach is really resonating with our key application partners. The addition of the CA 20 will allow our development partners to bring sockets scanning expertise and capabilities to a much wider audience.

With the completion of phase one by adding free camera scanning to capture SDK. The team is now working hard to deliver enhanced camera scanning through the SDK, which will offer which we will offer on a monthly subscription basis in 2023.

We think this is a critical piece of the data capture journey and it will make us a more complete hardware and software data capture company heading into 2023.

Our continuous effort to innovate and advance new opportunities resulted in several new up several new products being announced in Q3.

We announced the launch of our new linear and barcode and QR code readers socket scan F 720 companion scanner.

<unk>, 20th Touchable scanner, <unk>, 'twenty and a dearth sled DSA 'twenty.

These new <unk> barcode scanning models will meet the needs of users within various industries, who want to get ahead of the transition from <unk> to <unk> barcode scanning.

The new models enabled with different level of transparency and versatility.

Users by providing the capabilities to support services like QR code payments and loyalty digital identification verification and real time supply chain tracking.

Also we are seeing positive signs with our NSE business is more developers begin embracing contactless technology.

Initial commercial deployments of our S $5 50, NFC reader writer for mobile ticketing E money and loyalty applications.

<unk> and exceptional customer experiences and follow on projects.

Our new socket scan S $3 70, a universal NFC and QR code mobile wallet reader.

It gives app partners the flexibility to accept multiple formats with one device with the myriad of credential types out there at 370 provides our partners with peace of mind that they can implement one device and not have to worry about choosing the wrong technology.

370 can read credentials.

Following the ISO <unk> five standard as well.

This is being adopted for mobile drivers license or M. D. L. In most states and countries.

Seeing positive signs all around we continue to invest in digital I'd and the NPL space.

We feel that our camera scanning and digital I'd products create a new and big opportunity for socket mobile.

We can reach a larger and more diverse set of application providers and their end users.

With that I'll turn it over to Lynn for more details on our financial results.

Lynn.

Thanks, Steve. Thank you everyone for joining today's call in Q3, our revenue decreased to 41% to $3 7 million compared to $6 3 million.

In the prior year quarter, and a decrease of 38% sequentially compared to $6 $1 million in Q2 2022.

Yes, we could.

End user demand combined with the reduction of inventory in our distribution channel.

Our reported the revenue, even though the sales from our distribution partners and the users.

$8 million compared to our reported revenue.

Okay $7 million.

Third quarter gross margin was 44% compared to 54% for the prior year's culinary and 50% in the preceding quarter.

The decrease in gross margin was driven by persistent higher component and the freight costs.

As well as set allocation of manufacturing overhead costs across the lower production volumes.

Q3, operating expenses were $2 $6 million increased 5% over the prior year quarter.

Decrease of 9% sequentially over the preceding coronary.

We managed expenses tightly while continuing to invest in clinical projects.

In Q3, we recorded a net loss of $874000 or <unk> 11 per share.

And net income of $644000 or <unk> <unk> per share in the prior year quarter and a net income of $104000 in the preceding quarter.

The cash balance at the end of Q3 was <unk> two.

$10 million.

We invested $350000 in capital expenditure repurchase 90000 shares or Chinese $76000 and they repay the Wyoming <unk>.

This alone Dallas <unk>.

Company will continue executing a share buyback program and the purchase of 125% of outstanding shares during the ultimately now.

As of September 30th our inventory level net also reserve was at $6 $2 million.

Compared to $205 $9 million on June 30th.

$5 $2 million at the end of 2021.

A sufficient inventory enables us to navigate the supply chain disruptions.

Better serve our customers.

We continue managing their inventory and expect a lower inventory level at the end of year.

We believe our balance sheet and liquidity continue to be in a healthy position to meet the current enactment.

This wraps up our prepared remarks, now I will hand, the call over to the operator for questions.

If anyone.

If anyone has a question it's zero one on your Touchtone phone. Once again, if you have a question it's zero one on your Touchtone phone.

And we do have a question from Chris Sakai from singular Research go ahead, Chris.

Yes.

Hi, I just had a question on the.

The gross margin decline what were the main drivers there.

Not quite get that.

Hi, Chris Yeah, there compared to Q2 that preceding quarter. The main driver is the lower volumes.

Our.

<unk> overhead is around 600, K level, and then with the allocated across it over.

The lower volume.

Okay, and then as far as your inventory levels are a concern.

Are you concerned about any of your inventory.

Going obsolete.

No no. We are we go through there.

Absolutely.

No.

Excess and obsolete analysis every quarter.

And then just quota and there and that that part of it reviewed by our auditors and we have sufficiently reserved for there for any components.

Considered obsolete.

Okay.

So that and then.

Any sort of idea on.

Future future revenue future margins, how should we be thinking of this environment.

Hi, Chris This is Kevin.

We view that for Ace as they run race.

And we don't expect to see a substantial change in distribution at levels. So the and in the out should be equal.

We believe that will be a little bit stronger in Q4, even though the market is still I would.

I'd say struggling and I would say that we're comfortable we will be back guests EBIT positive levels in Q4.

Okay. Thanks for that.

And our next question comes from John Harrington from Wells Fargo Go ahead John .

Question is how much money left.

The buyback fund.

And what does the company feel that.

What level.

I don't.

Don't have any shareholder friendly.

<unk>.

Even know about the buyback.

You reiterate exactly what the fun.

Mike.

One more one.

Third quarter.

Okay wonderful.

Paul.

Now looking at the fourth quarter.

No.

For 2021.

What where volume will come on that.

We'll be posting cobalt level.

Mike Good question.

Oh.

Our board approved a share buyback program.

Back in Q1 this year.

We entered it can be five one plan.

So we the board approved one $8 million.

Uh huh.

Spread out across the four corners, and one 5% of all our Spanish.

Announcing <unk> two 5% of our outstanding shares.

We had purchased in April may timeframe, and again in July August timeframe, and the board has decided.

To continue executing the buyback program.

So we resume the buyback in the open window.

And maybe just to add a buyback program is set to expire it was.

One year program. So the authorization was to buy.

Up to a maximum of $1 $8 million over four quarters not to exceed 125% in any given quarter and it expires at the end of March 2023.

The board may decide to extend or put in a new program, but the current program will expire.

And <unk>.

March 31 'twenty.

23.

Okay. Thank you.

If anyone else has a question is zero one on your Touchtone phone.

Standing by for questions.

And we have no more questions at this time I will turn it back to the speakers for final comments.

Thank you operator, so we'd just like to thank everyone.

Participating in today's call for their interest in socket mobile and we wish you all a good afternoon. Thank you.

This concludes today's presentation. Thank you for participating you may now exit the web cast.

Yes.