David Dunlap - Chief Financial Officer and Secretary Kevin Mills - President and Chief Executive Officer James Lopez - Vice President of Marketing, Sales, and Developer Programs

Welcome to the Q3 2018 Socket Mobile Management Conference Call. My name is Rebecca, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. Please note this conference is being recorded. I will now turn the call over to David Dunlap. You may begin, sir..

Thank you, operator. Good afternoon, everybody, and welcome to Socket Mobile’s conference call today to review financial results for its third quarter and nine months ended September 30, 2018. On the call today from Socket Mobile are Kevin Mills, President and CEO; James Lopez, Socket’s Vice President of Marketing, Sales and Developer Programs; and Dave Dunlap, Chief Financial Officer, to answer your questions. Socket Mobile distributed its earnings release over the wire service earlier today. The release has also been posted on Socket’s website at socketmobile.com. In addition, a replay of today’s call will be available shortly after the call’s completion through the company’s website, and the transcript of this call will be posted on the Socket website within a few days. Before we begin, I would 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 of sales and market conditions and opportunities 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. Because of a number of factors including, but not limited to; the risks 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 at market acceptance and sales opportunities may not happen as anticipated; 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 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 as filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update any such forward-looking statements. Now with that said, I’d like to turn the call over to Socket’s President and CEO, Kevin Mills. Kevin?

Thanks, Dave. Good afternoon, everyone, and thank you for joining us today. We reported Q3 revenue of $4.1 million, a 24% decrease from revenue in Q3 2017 and flat with Q2 revenue of 2018. Our lower revenue resulted in a loss for the quarter of $45,000, or $0.01 per share. Q3 revenue was impacted by ongoing transition. I’ll start by saying transitions are difficult and we don’t do them very often every four to five years, but in the end, it – they are worthless. The new products are better in every way, have been fully available since May, feedback from customers who have switched is extremely positive. The new products are at the same price and are 100% software compatible. Despite all this, 70% of our new bookings in Q3 were for the older versions. This is because most of our partners are just now in the process of updating their own web pages with the new product information. These updates are key to guiding their customers to use the new and improved products. The good news is that the transition will become a much higher priority for our partners in Q4, as the supply of our older products diminish. In addition, we will relaunch our outreach campaign that makes it extremely easy for them to move to the new products in a quick and trouble-free way. We expect to complete the transition in Q4 and to be fully over to the new products by 2018. There were a number of positives in the quarter that suggests things will be much better once this transition is behind us, which I’d also like to share. The first is sales of our 2D companion scanners reached all-time record levels in Q3. Sales of our 2D companion scanners were 50% higher than…

Thank you, Kevin. In Q3, we saw an increase in overall data capture unit demand of 9% over Q2, led by our 2D scanners. Our newly released SocketScan S740, along with our previously released DuraScan D740, created new price points for universal 2D scanners and helped drive a 61% increase in demand over Q2 for our 2D solution. Customers are attracted to the S740 and D740 for their overall value and ability to serve as a universal reads everything scanner for any application across markets. Q3 also continued our recent pattern of steady demand coming from retail application partners in mobile point-of-sale. Unfortunately, while our partners have qualified our new SocketScan solution, switching demand is taking longer than anticipated, as we still see in-customers ordering our Classic 7Ci, 7Mi and 7Qi scanners based on deep and years long recommendations from application partners. We expect to complete transition of application-based customer recommendations and orders by the end of the quarter. As reported in our last call, I’d also like to note growth starting to emerge and gain momentum in commercial services applications for pest control, utility monitoring and safety equipment management. These applications started to grow for Socket with the introduction of our DuraScan series of IP54-rated scanners last year and have further gravitated to our 800 series attachable scanners with and without our DuraCase sleeve option. In support of this growth, we recently released our S840 lower-cost 2D solution in Q3. The S840 is our most affordable 2D attachable scanner yet at an MSRP of $349, and we expect it to further boost our future 2D scanner sales. I’d like to also report two additional performance 2D scanner solutions for passport reading that were introduced in Q3. Our D760 and S860, both solutions are enabled with machine readable zone support, MRZ for short, that enables passport reading. The D760 is a new complimentary solution to our DuraScan family and the S860 will replaced our S850 solution as a performance 2D attachable scanner. Passport reading demand is something we’ve seen emerge from opportunities in Japan, as the market prepares for the 2020 Olympics. Finally, I’d like to mention our overall efforts with our Capture SDK. In Q3, we finalized our initial roll out of our new Capture SDK across iOS, Android and Windows. Our Capture SDK is our next-generation SDK for data capture device integration and is now available through common software repositories providing developers a new approach to dependency management and allowing push notifications and call updates much more easily than ever before. By leveraging software repositories, developers can easily test drive our SDK prior to joining our developer program, resulting in an even more meaning engagements with our team when they’re ready to join our program and launch their applications into the market. Now I’d like to hand things over to Dave.

Thank you, James. Revenue for the third quarter was $4,137,000 similar to Q2 revenue of $4,192,000, as our transitioning into our new SocketScan family of products continues. Third quarter margins improved to 52.6% from 50.9% in the second quarter, as we had absorbed some higher initial production costs for our new products in the second quarter. Operating expenses in Q3 were $2,208,000, slightly lower than our Q2 operating expenses of $2,276,000, as we continue to tightly manage our costs without cutting back on essential services. Both margin improvements and expense reductions benefited the bottom line, which improved in the third quarter from a Q2 loss of $138,000 to a small net loss of $45,000, or $0.01 per share. EBITDA or earnings before interest, taxes, depreciation and amortization was a positive $215,000 for the quarter. Over 98% of our third quarter revenue was from the sale of cordless barcode scanners and related data capture products, including accessories. And most of the revenue from the more than 17,000 units we sold in the quarter was from a smaller unit purchases through our distributors and resellers, whereas in 2017, our revenue benefited from several larger enterprise deployments. We recognize that enterprise deployments take longer to materialize, as enterprise deployments are typically more complex and require extra testing and training. As the transition to our new family of SocketScan products is completed by our distributors, resellers and application partners during the fourth quarter, we expect revenue growth to pick up, our margins to continue to improve, while we continue to manage our operating expenses and to return to profitable growth. Our balance sheet ratios continue to be positive, with the current ratio of 1.44 at September 30, 2018 and moderate increases in free cash and working capital during the third quarter. Our base of registered application partners continues to grow at a healthy annual pace. And the mobile applications created by our application partners for use with smartphones and tablets will continue to benefit us as those applications are completed and released. Our development partners are responding well to our new development tools under the quality of our DuraScan, SocketScan and attachable families of barcode scanners. Our financial goals remain to grow our revenue, manage our costs and to operate profitably. Now let me turn the call back to the operator for your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question is from [Christian Rider from Green Capital ] [ph]. Your line is open.

With this transition, when did you stop shipping the older classic model?

We have not stopped shipping the older classic models. So they…

Yes, go ahead.

So I think that they – what has happened is, we have both created some confusion with our customers and I think we’ve been not seeing the marketing programs and other things that our customers would normally do as they’re waiting to get over to the other side. So those are the type of things. So we basically, in some ways, created a slowdown as people are waiting to get over to the other side. But the old products are still available, yes.

Okay, okay. So how will everybody run out of inventory in the next few months if you’re still shipping old?

Well, we probably have, I would say, three to four weeks of inventory in the channel. And we will, in November, be unable to fulfill any new orders for the channel and then they’ll disappear.

Okay, okay. So that’s when you stop shipping them. Okay, okay.

Yes. So again, with the benefit of hindsight, we probably should have tried to be a bit more aggressive with the transition. And I think what we have discovered is everybody’s busy and they’ll get to it when it’s a number one or number two priority. But we’ve been languishing at their number three or four priority and they just don’t get to us. So they will get to it in Q4, we’re pretty convinced.

Right. Yes, okay, okay. They won’t have a choice, yes.

They won’t have a choice.

Okay. And I understand and I get that you are investing for the future and for the long-term through your R&D, sales and marketing and even G&A as a percentage of revenues are much higher than in any of the past five years. Are you going to need to cut them, or you expect that revenues go back to where they were in 2016, 2017, so that you can maintain R&D as it is at the 1 [ph] percentage levels, or are you going to just have a permanently higher expense base as a percentage of revenue?

They are investments that we believe will cause our revenue to rise. And therefore, as a percentage, they will fall, but not in real dollar terms. So that would be the expectation.

Okay, okay, good luck with that.

Okay.

I’d see one that work as well.

Okay.

Okay. So those are my questions. Thank you.

Thank you very much, Christian.

We have no further questions at this time.

Okay. We just like to thank everyone for participating in today’s call, and wish you all a good afternoon. Thank you.

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