SCKT: Analysis of 2Q results
I've owned and have researched this company for the last 3 years. It's been frustrating beyond imagination waiting for them to finally execute their business plan---which is a solid business model if they can bring it together. I can finally say, after all this time, they may FINALLY have a business and a future.
Positives for the company:
1. Two years ago they created a software development kit that developers can use to easily integrate into their software applications for tablets and smartphones that allow Socket's barcode scanner to send data to the hardware in various forms, allows for easy changes to that data, and allows tablets to use a barcode scanner and the keyboard option without having to disconnect the scanner (this was unique at the time). In 2 years they have had 1000 developers now purchase the SDK. They now have several hundred applications (part commercial apps & part internal business apps) that can use their scanner. As the CEO said on the cc call "the money they are making now is based on applications that were started 12-18 months ago." As more and more of these applications come to market and mature and grow, Socket just rides their coattails and let's them sell the barcode scanners for them.
Scanner sales: 4th Q 2013: $2.4M
1rst Q 2014: $2.75M (record amount--no big deals)
2nd Q 2014: $3.6M total (record amount---$400K or so from big deals)
Sequential quarterly "day-to-day" sales growth is finally starting to occur. The big deals they have talked about all the way from last summer are starting to occur. In the cc call, the CEO was hesitant to make predictions for 3rd Q due to the fact they've had issues with Apple IOS upgrades affecting software sales. It almost sounded negative. I (and others) communicated with the company after the cc call. It was told to us that they have been burned badly by "over promising and under performing" in the past so they are being conservative in what could happen in 3rd Q. July has started off really strong (they have shipped or have orders just this month from distributors for 50% of what they did last quarter). In my inventory tracking for N.A., I know July has been a very strong month. I also see where a lot of scanners are coming into stock. I also know that distributors don't order scanners unless their end customers are asking for them. The real question is what will Sept do for the month?? The CFO told someone I know that they don't expect as much of a slowdown as years past. Software developers are ready and used to the Apple IOS transition now. However, they want to be cautious. He said if Sept is only a slight downtrend in their pattern of growth, then expect a much more positive cc call in 3rd Q as they start to lay out their future.
2. Somo division: This division is what's killed the company as it's shrank each and every quarter. It's down slide has hidden the growth of the scanners in the revenue numbers. I know that the OEM medical device buyer who purchases $300K of "Somo guts" last year for their European device is coming back in 3rd Q to buy again. I had been under the impression that this company had gotten FDA approval already to sell this product in the U.S, but from the cc call it was made clear that it hasn't happened yet but should start to play out going forward. Other manufacturers have reached out to them for the same purpose. The reality is the Somo isn't getting anyone new writing software for it, but it still is a low priced piece of hardware that could save medical device companies money by switching over to it. Everyone else has pretty much phased out their products. When pushed on the cc call if this could FINALLY put some stability in the down slide of Somo sales, the CEO replied that they actually could cause it to rebound back to $1M/qtr. You could tell he was hesitant to make a statement like that---he's been criticized horribly for those in the past. If there was any rebound in sales in the Somo then that's like free money at this point as their are almost no costs associated with the Somo anymore. In reality, the Somo is and will be meaningless as the scanners grow in volume, but free money is free money, especially when the gross margins on the Somo are over 50%.
3. Profit margins. As the scanners have gone from $2.4M to $3.6M, gross margins have gone from 41.1% to 43.3% this quarter. They will only continue to increase as more scanners are sold each quarter. It's simple purchasing power. They switched to manufacturer's in Mexico for the parts to the scanner and as they buy more, the average price/unit will continue to go lower. It's like buying nuts/bolts----the price/unit goes down as you buy in bulk.
4. Expenses. They aren't going up. They're costs are more fixed than people realize. They should even go down next quarter now that they got part of their debt refinanced. The company is determined to keep an eye on expenses going forward.
5. Large orders: In 2Q, they did two shipments in conjunction with a software partner for around 1200 units each. These orders are from trials that occurred in 2014. The CEO expects some to happen in 3rd Q. It was obvious he was expecting more in 4th Q. They will only grow in number and size going forward. The more you do, the more large companies trust your product. They have trials going on now for deals to close in 2015. This doesn't not include the van line deal----which the CEO talks about in the cc call (which is still a very strong possibility) or the Japanese deal (which is unknown right now). I do know that they have said they can't really publicize these deals as they are more the software partners with the end customer, not Socket as the main lead. These big deals show the power of having your software integrated into the customers---you are the choice the developer recommends to the final customer whether it's a mom-n-pop or a 1000 store chain. The big companies still do demos on the scanners to make sure they are happy with the product. I also know the CEO is trying to get people to focus on the sequential "day-to-day" sales growth that is occurring and then when the big deals happen they will be nicely incremental.
Summary of positives: The company is bringing their business plan together. The balance sheet is a bit of an issue, but they have made it work till now and being cashflow and net income positive from here on out will clear problems up quickly. 43%+ profit margins and fixed expenses makes for serious cash being generated as sales ramp up.
Unless the economy rolls over (always a risk), little Socket Mobile should start to play out nicely. The more developers they get, the more sales they do, the more they are included in big deals, the more the will grow. It just feeds itself as they are accepted as a real player in the industry.
Negatives:
1. I've said many times in the past that I don't trust them----not that they aren't honest, but more a matter of competent. This is passing. It's obvious they have a plan and are executing it wisely. I'm still frustrated with them because I don't like the stock price, but it will take care of itself in time as the scanner business continues to grow sequentially.
2. Low trade volume. I think this is the biggest negative right now. The stock is not well known. It needs publicity and exposure. The CEO said on the cc call that if the 3rd Q plays out well then they will start to make a point of spending money there. They are just being tight right now with expenses. It's a catch-22.....they need to promote the company but they also need to prove 100% to investors that this isn't the same ol' Socket Mobile of promising without performing. 3rd Q will be important to show sequential growth in the scanners yet again. If they do that, even with Apple issues, then it's obvious this business can start to grow for a long time going forward as smartphones and tablets take over the world of retail.
3. The balance sheet needs work. It's not horrible anymore (now that the money is coming in instead of out), but they need to grow the business to pay off debt.
4. They need audited results of $5M shareholder equity to get back on the Nasdaq. They are no where near that----they need 4-5 quarters of net income positive results + warrants and options exercised to raise additional money. The reality is that won't occur until spring 2016. As such, they will be on the OTC market. Even if things start to play out really well, will anyone notice?
OVERALL: In the 3 years I've owned this (and probably the last 10 years total), never have they been in a better position going forward. They have a real business and a plan to make it work. There are still hurdles, but with a market cap of just 1/2 x sales, it could do very well going forward if sequential quarterly scanner sales keep happening. With profit margins growing and fixed expenses, it becomes a cash cow. We will know for sure after 3rd Q. If they can grow sequentially then during their toughest quarter, then this company will be a winner over the next few years. The ol' Socket Mobile will finally be in the rear view mirror.
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