Feb 20th: My Latest, Greatest Report on SCKT......
I'm probably still the #1 expert on this company. More by the process of attrition as the other long-term shareholders have fallen at the wayside while I trudged on. I have been a bigger poster on SCKT on the MicroCap Club with my research over the last year. I will share some of it here now and in the future, but only after it goes there first. It's a quid pro quo type of thing---the Club gives a lot back in research to me on other stocks. I want to reward them back in turn.
To start my post here, I will reiterate why I'm in this stock and have stuck with it through the hard times.
The reality is I have a love/hate relationship with Socket Mobile.....
I love their business plan. We are all starting to see the benefit it in 3Q and now 4th Q. Build a business that uses an SDK (software development kit) to capture software partners. This is their moat against competition. Who is going to pay the software developers later to change their code to use a competitor's barcode scanner? It's not just plug/play. If you want to customize the data and usage that the scanner produces, you need an SDK built into the main software code do deal with all the functions. The mobile/tablet market is not your grandpa's previous PC computer industry. It's different. By being first (and most aggressive) to market to software app developers with their SDK, Socket has captured a good portion of the tablet/smartphone barcode business before the competition is even realizing it. The plus is that they did it while their balance sheet sucked. Now that they are becoming a cash cow, they can fight even harder.
Capture the developers, capture the market! The developer then tells the final customer what barcode scanner to use. ex. NCR Silver only has the Socket scanner as an option on their webpage to order with their system. The final customer usually doesn't get a choice. Socket then, in effect, will eventually have 1000+ software companies being their sales force. This is why Socket has engineers, a crew of gals in the backroom who snap scanners together, people for marketing, but little sales force expenses. This is how they can grow sales going forward with minimal expense increases. That's leverage! Their plan is it to produce the best SDK on the market & then innovate by providing every type of scanner (color, hardness, 1D vs 2D, anti-microbial coatings, accessories) that a developer and their end customer could want. NCR, Shopify, Square, Lightspeed (all these are $1B companies) + lots more are using their SDK in their software. The found Socket in the first place. If they are happy, why change? You could say that someone will undercut Socket on prices in the future? Really? Their margins are 50% and will go higher as they sell more and more (as cost to produce goes down per unit due to volume in manufacturing). Perhaps as volume increases, they keep them at 50% and just drop the price of the scanner then to fend off competition. It's nice what a very profitable low expense company can do once the ball starts to roll. And, again, who is going to pay the software developer to change the code? These developers are in the software business, not the hardware. They just want a reliable solid partner for scanners. They aren't in business to cater to the Motorola's or the Honeywell's of the world. These big players can't muscle their way around so easily anymore.
Increasing scanners sales + increasing margins (due to lower cost to manufacturer per unit) + limited expenses + LOTS of tax loss carry forward = $ flows to the bottom line nicely = microcap cash cow :)
What I don't like about the company: The industry has taken off slower than I thought and it's frustrated me. Socket grows as fast as their software partners do. The growth is coming. The use of the Cloud by retail, warehouse, field, hospitality operations is only at it's infancy. I'm hoping 2016 starts to build up at a faster rate. As they said on the cc call----the connections they did 2 years ago are what's paying off now. It will just keep pyramiding as time goes by and more and more of their partners release their software and expand their business. If you read the transcript, James Lopez is THE guy at the company leading the direction. He is the one building the relationships with the developers on what they need and what Socket can do for them. It's like their new RFID TouchPoint product. I can talk about this more later as I've talked to the company about it all, but the idea is to go after a market that really won't exist for another year or two. If you want to be a player in this new area later, then they have to work with everyone as it emerges, not chase after it later. I do know the TouchPoint idea builds on the scanner business nicely.
I have to keep reminding myself of something.....this is NOT the same business it was 3-4 years ago. The whole scanner business plan is coming together, the Somo going away, they have proven they are tight on expenses, the balance sheet is getting cleaned up nicely. This isn't the same ol' Socket Mobile of before. If you just look at what has happened in the last 2 years separately (from the prior 15 years before debacle), this is actually a great little company. This is the kind of investment that a lot of microcap investors should like.
4th Q Analysis:
Solid quarter obviously. Everyone here is a big boy/girl and can read the pr and cc call transcript on their own for the main info. Here is some extra I've found out:
1. As explained in the cc call, $320K of the $850K of Somo revenue was 20% of the big $1.6M OEM contract. This surprised me as so little was shipped. The order is firm and so the next $1.3M (shipped in 1rst? 2nd? part of 3rd?) will be a nice boost.
More info.....$400K of the Somo revenue was "regular Somo sales to customers". This was up from $350K in 3rd Q. As the Somo is going end-of-life, businesses who use it will want to buy what they can. The Somo has sold over 85K units in it's lifetime and is still be used by long-term customers. I will discuss the future of this down below.
$120K of the Somo was 1/2 of the 600 unit Japanese order. The other 1/2 of this order (ie. another $120K) will ship in 1rst Q. This will give 1rst Q a nice boost.
2. After asking the previous question, I also noticed that inventory numbers were up quite a bit for the end of the quarter compared to normal.
End of 4th Q 2015: $957K
1rst Q 2016: $808K
2nd Q 2016: $621K
3rd Q 2016: $972K
4th Q 2016: $1.326M
I asked about this too thinking it might be Somo related. It is. I was told that a good portion of it was that they bought bulk supplies of the Somo components to last them through the balance of their orders in 2016. It was more efficient (and less costly) to have their manufacturer produce it in an extra large lot size. As explained in the 3Q cc call---there are certain components in time that won't be available and Socket stocked up on them.
----two things about this: It means they should have reasonably firm orders going forward for these Somos. Kevin said on the 3Q cc call and it's been repeated to me that they don't want a bunch of extra inventory of Somo's later. They are only intending to build what they can sell in the future for sure.
Also, the build up in inventory means they will be generating more Somo revenue for the foreseeable future. That means 1rst Q for sure, probably 2nd, some into 3rd Q?
No investor wants to pay for the revenue generated by a legacy product, however, also keep in mind the extra sales from the Somo now are cleaning up the balance sheet (fast!) and will get them to the Nasdaq (which is a high priority for them). The future is the scanners and so it'll be important to watch what their year-over-year growth rate is (more on this later).
NASDAQ LISTING:
A NASDAQ listing after 1rst Q......there are 3 main requirements:
1. Closing price above $3 for 5 consecutive days.
2. $4.0M in shareholder equity, of which Socket now has $3.34M. They need $666K more. They added $1.05M in 4th Q.
3. $750K in net income in "latest fiscal year".
I know for sure that the company is adamant they are going after a listing as soon as they qualify and that they will do a mid-year audit to make it happen. I was wondering about requirement #3. Does this mean $750K in net income in 2016 if you are doing a full audit after 1rst Q or does 2015's #s satisfy it? I reached out to the company and asked to see if they had gotten clarification on it. They had. Dave Dunlap spoke with the Nasdaq already as they weren't sure themselves. The answer was that 2015's net income of $1.8M will satisfy the latest fiscal year requirement and so #3 is already done.
Can they do a Nasdaq listing after 1rst Q?? I'd put the odds at 75% if none of the $1.3M OEM order is shipped in 1rst Q. I doubt that to be the case. My guess is it's closer to $600K (of the $1.3M total) that gets shipped which will make them getting to the necessary $4.0M in shareholder equity a done deal when you add in scanner growth + regular Somo + service revenue + 1/2 of 600 unit Japanese order.
Do I want off the Nasdaq vs staying on the OTC market? Darn right I do. I've pushed the company hard on this, not that it's needed as they are agreeing 100%. This wouldn't be a $2.70 stock based on what's happening if it was on a listed market. They need to get away from penny stock flippers and go after more serious investors and institutions. Only 4 years ago Socket had 7-8 institutional owners. When they dropped to the OTC market they all sold out. It'd be nice for the company to pursue them again. As you heard on the cc call, they intend to put the time and $ into publicizing the stock only after they get a Nasdaq listing. It's smart imo.
Scanners for 1rst Q: For 4th Q, in my inventory tracking, I saw the numbers go from (imo estimate) $1.99M in 2014 to $2.7M in 2015 = 35% growth rate. As such, I knew 4th Q would be good at some level. The true scanner plus accessory revenue overall went from $3.1M in 2014 to $4.2M in 2015 = 35%.
Overall, scanners did 65K units in 2015 vs 55K in 2014 = 19% growth. Scanner revenue grew from $3.66M in 2014 to $4.25M in 2015 = 16% growth. Everyone needs to remember something.....2014 were skewed by a non-POS related large order in 2Q and 3Q. 2014 had an extra $600K in 2Q and 3Q combined from this. (I found out this later after the numbers came out in 3Q in 2015). 2015 was more small true retail POS orders representing the future here. When you look at it that way, the core of the scanner business grew nicely in 2015 overall.
2016: I was told last fall that they expect larger enterprise deals to have much more of an impact on 2016 than 2015. These deals take a long time to develop. I don't have anymore info than that. They refuse to discuss them in detail.
(side note: On this last comment....they are and intend to be conservative in their forecasts. It's 100% opposite of they way they once were. Their opinion is to let the #s do the talking for them. 4th Q's numbers sang a sweet song.)
International orders......they made up 20% of the total scanner revenue. This is an area I'm hoping builds and grows faster than domestic growth rate in 2016 (vs lagging before). Several of the large retail POS developers that sell Socket scanners in the U.S. have now set up large operations in the U.K. Plus, the Yen is 10% higher than it was just in November. Since Socket has their products priced in dollars there, they are now 10% cheaper. This should help scanner. It should also help those business that have used the Somo there (it has always done well in Japan) to buy the units they need for the future now while the currency exchange is more favorable.
1rst Q estimates: It's too early to make a prediction here. My inventory tracking, as of last week, was up 25% for the first six weeks of the year vs a year ago. I haven't added up the numbers for this week yet. I do know it was a weaker week, so that % probably slid a little. March will be the #1 month this quarter for sure. 40% of the scanners inventory I tracked in 1rst Q last year happened in March. The retail POS industry starts to kick into gear in late February and keeps building.
As they said on the cc call, this POS season extended later this year. It made sense to me as I was seeing very strong scanner sales into December still.
That's about it for now.
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