Socket Mobile, Inc. (NASDAQ:SCKT) Q3 2022 Earnings Conference Call October 27, 2022 5:00 PM ET
Corporate Participants
Kevin Mills – President and Chief Executive Officer
Lynn Zhao – Chief Financial Officer
David Holmes – Chief Business Officer
Conference Call Participants
Chris Sakai – Singular Research
John Harrington – Wells Fargo
Operator
Welcome to the Socket Mobile 2022 Third Quarter Financial Results Conference Call. My name is Darrell, 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 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 manufacturer 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 necessary 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 in vertical application 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-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. Please note that this conference is being recorded. On 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.
Kevin Mills
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. Our 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 874,000 for the quarter. Obviously, we are disappointed with these results. However, while you may initially interpret the dramatic drop in revenue as a sign our business is stagnating, a closer look at the details will assure you that is not the case. And that our Q3 results do not fully reflect the underlying demand for our products or 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 true 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 drawers, which are required to deliver mobile point of sale solutions. In Q3, they rebalanced their inventory levels based on demand and current supply conditions, resulting in a dramatic decrease in our sales into distribution, which is how we recognize revenue. We believe this is a one-time 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 continue 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?
David Holmes
Thank 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, and entire line of barcode scanners and NFC reader writers achieved full compatibility with the iOS 16. iOS 16 compatibility. 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 paired Apple device. Socket Mobile Capture SDK has been integrated into 1000s 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 CA20, our free camera base 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 CA20 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 CA20 will allow our development partners to bring Socket 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 we will offer on a monthly subscription basis in 2023. We think this is a critical piece in the data capture journey, and it will make us a more complete hardware and software data capture company heading into 2023.
Our continuous efforts to innovate and advance new opportunities resulted in several new products being announced in Q3. We announced the launch of our new linear barcode and QR code readers SocketScan S720 companion scanner, S820 attachable scanner, DuraScan D820 and a DURASLED DS820. These new 1d, 2d barcode scanning models will meet the needs of users within various industries who want to get ahead of the transition from 1d to 2d barcode scanning.
The new models enable a different level of transparency and versatility for 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’re seeing positive signs with our NFC business as more developers begin embracing contactless technology, initial commercial deployments of our S550 NFC reader writer for mobile ticketing emoney and loyalty applications are resulting in exceptional customer experiences and follow-on projects.
Our new SocketScan S370, a universal NFC and QR code mobile wallet reader gives app partners the flexibility to accept multiple formats with one device. With the myriad of credential types out there. S370 provides our partners with peace of mind that they can implement one device and not have to worry about choosing the wrong technology. The S370 can read credentials following the ISO 18013-5 standard as well. This is being adopted for mobile driver’s license or MDL in most states and countries. We’re seeing positive signs all around. We continue to invest in digital ID and the MDL space. We feel that our cameras scanning and digital ID 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?
Lynn Zhao
Thanks, Dave. 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 the decrease is 38% sequentially compared to $6.1 million in Q2 2022. The weaker end user demand combined with the reduction of inventory in our distribution channel affected our reported revenue, even though the sales from our distribution partners to end users are $4.8 million, compared to our reported revenue of $3.7 million. This third quarter gross margin was 44% compared to 54% for the prior year’s quarter, and 50% in the preceding quarter. The decreasing gross margin was driven by persistent higher component and freight costs, as well as the allocation of manufacturing overhead cost across a lower production volume.
Q3 operating expenses are $2.6 million, increased to 5% over the prior year quarter, but decreased to 9% sequentially over the preceding quarter. We managed the expensive tightly while continuing to invest in critical projects. In Q3, we recorded a net loss of $874,000 or $0.11 per share, versus a net income of $644,000 or $0.07 per share in the prior year quarter, and the net income of $104,000 in the preceding quarter. The cash balance at the end of Q3 was $4.2 million. In Q3, we invested $350,000 in capital expenditure, repurchased 90,000 shares for $276,000 and repaid $125,000 loan balance.
The company will continue executing the share buyback program and the purchase of 1.25% of outstanding shares during the open window. As of September 30, our inventory level net off reserve was at $6.2 million, compared to $5.9 million on June 30, and $5.2 million at the end of 2021. A sufficient inventory enables us to navigate the supply chain disruptions and better serve our customers. We continue managing the inventory and expect a lower inventory level at the end of year. We believe our balance sheet and the liquidity continue to be in a healthy position to meet the current environment.
This wraps up our prepared remarks. Now I’ll hand the call over to the operator for questions.
Question-and-Answer Session
Operator
[Operator Instructions] And we do have a question from Chris Sakai from Singular Research. Go ahead, Chris.
Chris Sakai
Hi, yes. Hi, I just had a question on the gross margin decline. What were the main drivers there? I didn’t quite get that.
Lynn Zhao
Hi, Chris. Yes, compared to Q2, the preceding quarter the main driver is the loan volumes. Our manufacturing overhead is around the 600k level and that was the allocated across — over the loan volume.
Chris Sakai
Okay. And then, as far as your inventory levels are concerned, are you concerned about any of your inventory going obsolete?
Lynn Zhao
No, no. We go through excess and obsolete analysis every quarter at the end of each quarter and that part is reviewed by our auditors and do we have sufficient reserve for any components if considered obsolete.
Chris Sakai
Okay. Thanks for that. And then, any sort of idea on future revenue, future margins, how should we be thinking of This environment?
Kevin Mills
Hi, Chris. This is Kevin. I think that, we view the 4.8 as the run rate. And we don’t expect to see a substantial change in distribution levels. So the ins and the outs should be equal. We believe that we’ll be a little bit stronger in Q4, even though the market is still I would say struggling. And I would say that we’re comfortable, we will be back at EBITDA positive levels in Q4.
Chris Sakai
Okay. Thanks for that.
Operator
And our next question comes from John Harrington from Wells Fargo. Go ahead, John.
John Harrington
Question is how much money is left in the buyback fund? And what does the company feel? That is a good level? And I again, don’t have any shareholders friends that even know about the buyback. Could you reiterate exactly what the funds like your reserved for 1.8 million and the third quarter also we understand what has happened? But now looking at the fourth quarter versus Q4 of 2021? Is that what we’re going to compare to and that will be posted to those levels? Those are my three questions.
LynnZhao
Our Board approved the share buyback program, back in Q1 this year. And we entered a 10b5-1 plan. And so the way the Board approved $1.8 million as a spread out across four quarters 1.5% of our outstanding shares, and those 1.25% was the outstanding shares. And we have purchased in April, May timeframe and again in July, August timeframe. And the Board has decided to continue executing their buyback program. So we’ve resumed the buyback during the open window.
Kevin Mills
And maybe just to add a buyback program is set to expire it was a one-year program. So the authorization was to buy up to a maximum of 1.8 million over four quarters not to exceed 1.25% in any given quarter. And it expires at the end of March 2023. The Board may decide to extend our — put in the new program, but the current program will expire in March 31, 2023.
John Harrington
Okay. Thank you.
Operator
[Operator Instructions] And we have no more questions at this time. I’ll turn it back to the speakers for final comments.
Kevin Mills
Thank you, operator. So we just like to thank everyone for participating in today’s call for their interest in Socket Mobile and we wish you all a good afternoon. Thank you.
Operator
This concludes today’s presentation. Thank you for participating You may now exit the webcast.
Be the first to comment