Brian Swift - Securities Research Associates Bernard Sadel - Private Investor

Greetings and welcome to the Socket Mobile second quarter 2009 management conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Myers of the MKR Group. Thank you. Mr. Myers, you may begin.

Thank you, Operator. Good afternoon and welcome to Socket's conference call to review financial results for its second quarter ended June 30, 2009. Online today are Kevin Mills, President and CEO of Socket and Dave Dunlap, CFO of Socket. Socket distributed its earnings release over the wire service at the close of market today. The release is also been posted on Socket’s website at www.socketmobile.com. In addition, a replay of today's call will be available at vcall.com shortly after the call's completion and a transcript of this call will be posted on Socket’s website within a few days. We also posted replay numbers in today's press release for those wishing to replay this call by phone. The phone replays will be available for one week. Before we begin, I would like to remind everyone that this conference call may contain forward-looking statements within the meanings of Section 27-A of the Securities Act of 1933, as amended, and Section 21-E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, but are not limited to statements with respect to the distribution, timing and market acceptance of Socket’s products and statements predicting trends, sales or activity, backlog and market opportunity in the markets in which Socket sells its products. Such statements involve risks and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements as a result of a number of factors including but not limited to the risks that shipments of our products may be delayed or not happened as predicted, if ever, due to technological, market, or financial factors, including the availability of necessary working capital, the risks of the market acceptance and sales opportunities may not happen as anticipated, the risks that the Company's integrator program and current distribution channels may not choose to distribute its product or may not be successful in doing so, the risk that acceptance of the Company’s products in vertical application markets may not happen as anticipated, and other risks described in Socket’s most recent Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update any forward-looking statements. With that said, I will now turn the call over to Socket's CEO, Kevin Mills.

Thanks Jim. First, I would like to thank everyone for joining us today. I will begin by providing an overview of our results for Q2 2009 followed by our current outlook on our market and business for 2009. Despite the difficult economy, we continue to see increasing adoption of our SoMo handheld computer. In the second quarter, SoMo sales were up slightly over Q1 to remain at record levels. We sold 3,286 units which is over 60% more from the number of units we sold in the second quarter last year. We are pleased with the continued SoMo sales momentum we are generating, particularly during a weak overall market environment and globally weak second quarter. Overall, our Q2 results reflect three elements; SoMo sales which grew 5% over the first quarter, our scanning revenue which was down by $350,000 from Q1 and our OEM businesses which remain in condition and was down by $250,000 from Q1. I will now provide more details and outlook on these elements. Starting with the SoMo. We continue to focus on driving sales of this product line which has continued to grow and represented 39% of Socket's total Q2 revenue. SoMo sales in Q2 reflect market traction in a number of different verticals. With healthcare and hospitality continuing are the two strongest markets where we remain significantly focused. Within healthcare, we continue to build momentum with key partners like Good Samaritan and more recently began deployment in a healthcare related opportunity in Sweden with a government-funded organization that works to improve the quality of life for people with physical handicap. We also saw deployments continue within the government and education markets working jointly with Plasco ID on a mobile ID solution per school and EnvisionWare in the library services market. Overall, we are pleased with…

Thank you, Kevin. Revenues for the second quarter of 2009 were $4.143 million, a decline of $629,000 or 13% from the previous quarter and a decline of $3.2 million or 43% from the second quarter a year ago. Sales of our SoMo handheld computer of $1.6 million continued to grow, up 5% from the previous quarter and 56% from the second quarter a year ago. Handheld computer sales represented 39% of our total revenue for the quarter and as Kevin mentioned, continues to reflect growing adoption of deployments by businesses particularly in our primary market with healthcare and hospitality fueled by an expanding base of productivity and hefting application from our many application partners. Except for the SoMo, our product line sales were flat or down reflecting continuation of the economic slowdown in business spending that continue to impact our economy. As reported by many others in our industry that offer data collection products, customers on the whole are deferring the upgrading or expansion of current system and the introduction of these systems or processes. As a result, our barcode scanning sales declined 21% sequentially or $1.7 million in the first quarter of 2009 to $1.3 million in the second quarter and reflect the lower sales of our plug-in barcode scanners. The orders that are being delayed is also reflected on a growing pipeline of sales opportunities for our plug-in and other barcode scanning products and we expect barcode scanning sales to increase going forward. Our OEM business activity is the other major reason for our revenues declining in the second quarter as the OEM team completed its transition facing our Bluetooth modules that reached their end of life and entering the early stages of a growing Wireless LAN module business that will become the primary product line in our…

(Operator's instruction) Your first question comes from the line of Brian Swift - Security Research Associates.

Could you give a better idea of what your anticipated or breakeven cash level will be or should anticipate for Q3 as your margins were lower than what you have been historically which I assumed gross, partially about what you were talking about with the lower margin products but also from just the fact of utilization as well?

Brian, with the $4.5 million revenue level, we would expect to be breakeven on cash for both operation and I think our working capital with those levels will also be probably slightly positive. So, I would look at our $4.5 million revenue level is being the approximate cash breakeven level.

And does that assume further reduction from the $2.6 million operating expense number that we saw for Q2?

Yes, I think you will see our expenses in the third quarter dropping by about the same amount we dropped between the first and second. So, I would look for expenses to be somewhere in the $2.4 million range, perhaps even a little bit lower.

Okay and can you give us an idea of just your OEM number you think now as far as the Bluetooth portion of it is going to be kind of flattish going forward and what do you see as far as your pipeline, you may have a handful of customers here? Visibility is going to be very reasonable on.

Yes, we would have like rough 25% Q1, I mean Q2 over Q1. I think it will be about the same on the Wireless LAN portion and again, we believe we have passed off among the Bluetooth and we are now in a flat section and Wireless LAN improved 25% last quarter. We would expect that trend to continue and then I think as we get into Q4, some acceleration.

Well, that is roughly about $100,000 so the SoMo handheld, what do you, you said you got a new distribution agreement for the US I think with ScanSource and…

But we would not expect a lot to come out of that on the SoMo side. I mean on the SoMo, we already have a very healthy pipeline and we have a number of customers that have completed both trial and pilot program and are raising fund, are delaying deployment probably waiting for the economic situation to improve. As the sales cycle for SoMo is approximately I would say a year, the distribution we add with ScanSource will not impact SoMo so quickly. Yes, we will get more units out in terms of new customers and new trials beginning, etc, but we already have a pretty healthy pipeline thus, if any of these should close, we would see that picking up. We think ScanSource will help a lot more on the scanning side as the sales cycle is substantially shorter and they have a tremendous reach on the scanning side but as I mentioned, we are introducing a more aggressively priced laser base scanner which we feel we will do very long.

Yes, one of the observations, Brian, the SoMo began shipping, yes at the end of September two years ago and you typically see in the third year after you have established these products that you see some acceleration umbrella. We are believing that we will see that because of the number of applications that are now maturing, that are being established in the market and because we continue to be a good replacement for Dell, a good replacement for the Siemens computer systems deluxe that has been pulled off the market and I think we are being favorably looked at even by a number of new attracted customers. One factor that will moderate that growth in Q3, although we still expect growth, will be that Good Samaritan which has been our units from each quarter for the past year is ramping out now. It is called deployment with over 3,000 units deployed. So, they will be at a lower level in Q3 but again, with the other momentum, we are expecting to see continued growth.

Okay. Just doing the math right here, we are seeing the, in your opening remarks, the amount of two other businesses were down. One was 250, or it was like 350 and then the scanners were up. It seems like that your overall revenues were lower sequential to the math. So, what am I missing?

Now, let me just clarify that point. Our cordless scanning was up. Plug-in scanning was basically down by $500,000. So, the plug-in scanning is obviously where we are plugging a SD or CompactFlash scanner into a third party and we saw that fall. The cordless scanning is actually driven more by tablets and smart phones, etc. We see that rising but even within that, we saw the lower priced versions of our scanners rising much quicker at 30% which indicates that people are, I think, being very cautious with their dollars. What is nice about that is that our new 7EL is actually moving the price point of our laser scanners down by another $150 in units where we think that there is even a better suite spot and therefore, I think that we are expecting some up tick in that area.

Quickly, data collection, Brian, is very key to our overall results. It was probably the biggest driver of our lower margins because of this product mix shift to more of our entry-level products and if you look into the pipeline, a number of the larger deals that are staged out there are actually data collection product deal that seems to be where we are seeing more of a slowdown obviously than we are seeing in our other products. So, that could become a very pleasant upside rise for this. Yes, how we deal is very well determined ultimately how well we do in the third quarter.

Are you, I mean, is it your goal to at least to achieve breakeven cash flow for Q3?

Clearly, yes.

Yes.

And ideally substantially better than that.

Your next question comes from the line of Bernard Sadel - Private Investor.

Even though we did not as well as we really expected to for this quarter, I am very, I think the SoMo that you people introduced two years ago was becoming quite, say accept the thing in the market in particular, I understand that is a government multi-billion dollar stimulus program for medical technology which should be coming in in the next several months. How will that affect us? Have you thought about how that would affect us as far as the SoMo in regard to the medical use?

I think a lot of that stimulus goes to stimulus plugs now and there are a lot of pieces that are going in a number of directions but for healthcare, a lot of it is focused on electronic health record and the encouraging medical organizations to put electronic health record fully into operation and of course, once you have that including the networking structure, normally in a hospital or clinical building or the like the Wireless LAN is typically used, from their you need access and the SoMo itself creates an excellent access vehicle to electronic records. We know from the many years since Palm introduced its pilot a decade or so ago that the devices in the format with the SoMo are highly preferred by professional doctors and others because they fit well with their TUNIX and they are bright screen and easy to use and so, we would expect that the increase in the use of electronic health records in the healthcare industry would certainly have an extremely positive effect on the sale of the products that integrate into that including our SoMo.

Okay and in the last conference, you people mentioned about large orders from Sweden, Germany and I think it was Switzerland for the SoMo. Are those been completed or is that something that is an ongoing thing?

It is something that is an ongoing thing and I think, I mentioned today that the deployments in Sweden have started. We have seen the deployment in Germany starts and the ones in Switzerland have been deferred but we are expecting some of them this quarter. I think generally speaking, things could proceed at a slower rate because as it was a little more cautious. We do not know the full extent of the deployment in Sweden but I believe that we did something in the region of 250 units of an expected thousand unit deployments in Sweden and we saw some units go into the German hospitals but we believe there is a lot more. The Switzerland deployment we had fully expected to come in in the May timeframe. They basically said they are behind in their budgeting and now they are talking about doing it in early August. I think this kind of reflects the general slowdown. None of the deals have gone away but they are not coming in at the pace that people originally said. Things seem to drag on an extra few weeks or few months and then it will not seems to be spreading their dollars out over a greater period of time.

Right and I understand the Siemens, I was wondering if your large competitors in Europe went out of the so called handheld computer.

Yes, we continue to see that companies like Fujitsu Siemens left the market. Their products were used in this area and as people are looking to upgrade or replace. They are now looking to the SoMo and we are seeing it is not just from Fujitsu Siemens but obviously from Dell customers as well as in some cases from the HP customers. So, I will say that our plan as we outlined them continue to come through but at a slower pace than we originally anticipated.

Okay. Now, I know it is pretty early in the third quarter. It is only about three weeks. Have you seen any, or shall we say improvements..?

I would say it is too early to say. I think things at the moment are stable and not much better but not much worse but we did see the, I would say situation is being worst probably in April was probably our lowest month and things have gradually got better but much slower than we expect it. We think that July will be, I think okay. I think the bigger test will be August because with vacations. It tends to be a quiet month but based on this economic climate, we are expecting a lot of people not to take vacation. So, I would say right now, we are kind of on track. Q3 has always been a difficult quarter because of the summer period and a lot of things happen in the later part of Q3, but right now I think we remain cautiously optimistic.

We are also in a pretty steady contact with the number of our most active partners and others who have expressed an interest in deploying. We do have for not only to ensure that they are getting through their evaluations and that everybody is being responsive and because of that, we get a pretty good visibility of what people's intentions are and so as long as those intentions are filled, those are the basis under which we are expecting moderate growth in this quarter.

So would you say it is fair to say that in the third quarter, you do see some growth as compared to the second?

Yes. Kevin mentioned and I did as well that we are expecting moderate growth and it is based on a lot of feedback from the pipeline. The pipeline is actually have been growing. You indicate where the activity is, the activity is certainly in the pipeline and we do track that customers move down their evaluation and that process is actually continuing. It is the last step which is placing the order where things tend to be closely evaluated by companies in terms of the priorities for the use of their funds.

Okay, just two more things and I will let somebody get up. The one thing that what I wish you people would be working on is getting out the word in regard to this Company. This is most likely sleeping giant where the potential is absolutely tremendous. I figured out that in the event, in the third quarter of last year, you people have sales of $8 million and this is, and I know there was some various things in it and this is with SoMo was even anywhere where it is right now. I figured out with your new structure, with low cost, if you have the $8 million again, we are talking about close to about $0.30 a quarter and by $0.30 a quarter in profit. And that would be like, so it is likely a phenomenal and if you have true growth and if you ever went to something like $10 million or $11 million, you will have something like a profits of a couple of dollars this year for the year.

Yes, we frequently pointed out that Socket's dividend structure is highly leveraged and because we work with contract manufacturers in Asia for the major components, we can produce more without increasing our needs for capital equipment, just plenty of capacity and on the sales side because we use general distribution channel, we can certainly increase the volumes without needing to substantially increase the support that is required to move those sales forward. So, it also gives us a chance to step up and move a lot of those extra dollars through the bottom line. We are looking forward to the opportunity. We have reduced our expenditures in a number of discretionary areas as we noted and one of those areas is in our marketing, not so much to marketing to our customers. We have been very careful not to diminish that area as an example of the second quarter, we have a significant booth at the HIMSS Show which is the large healthcare management show that we attended in early April and that now reaches paid off in terms of number of new contacts and certainly increasing the awareness of the Company to our customers. In terms of the awareness to our investors, we will put that back and to play much more actively as we see things moving back up again. So hopefully that is not too far off.

Well, I am very encouraged particularly since management board the spot and you guys know exactly what opportunities are transpiring. One last thing and then I will get off. At what level would we be profitable?

I think we will be profitable about by 5.3 or 5.4 and so, and that will have…

You think we can be profitable this year?

Yes, as I said on my remark. I mean our dilemma here is that we certainly have deals that could come in and accelerate our growth quite substantially. The difficulty in this environment is to determine the timing. Even people that you believe will pull the trigger. What we have been finding over the last six months is that either the controller or CFO or the board has cautioned them to say, "Can you wait another months? Can you wait another quarter?" and we have not seen people loosen up their heartstrings to actually phase the order. We are going through the avow. We are getting very high marks. People are very happy with illusion but ultimately, you have to spend the money and the environment request that so rate of spending is not great. As people loosen up the heartstring, we would expect to catch up and we do not know when that would happen but I think when it does happen, it will cause us to have some accelerated growth.

Okay, that is good. Okay, good luck and keep working on it.

Thank you. Gentlemen, at this time, there are no further questions. Do you have any closing comments?

Yes, I would just like to thank everyone for participating in today's call and we look forward to the next report in October. Thank you.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.