Socket Mobile, Inc. (NASDAQ:SCKT) Q4 2023 Earnings Call Transcript March 5, 2024
Socket Mobile, Inc. beats earnings expectations. Reported EPS is $0.08, expectations were $-0.06. Socket Mobile, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Socket Mobile Inc. Q4 2023 Earnings Call. My name is Jen, 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 include 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 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 that market acceptance and sales opportunities may not happen as anticipated; the risk 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 in 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 filed with the Securities and Exchange Commission.
Socket does not undertake any obligation to update such forward-looking statements. On the call with me today 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. Mr. Mills, you may begin.
Kevin Mills: Thank you, operator. Good afternoon everyone and thank you for joining us today. Our 2023 revenue was $17 million, a 20% decrease compared to $21.2 million in 2022. In 2023, we had an operating loss of $3.1 million compared to an operating loss of $446,000 in 2022. Our 2023 financial performance was below our expectations. However, we believe that the $17 million in reported revenue does not accurately reflect the underlying demand for our products and services. In 2023, our sales out, that is sales from our distribution partners to resellers and then customers totaled $19.1 million, a 2.8% decrease from 2022's sales out, which were $19.7 million. We view sales out as the key metric in determining the underlying strength of the business.
While demand did soften in 2023, the timing of shipments to distributors in late 2022, which had a positive impact on reported sales in 2022 also had a negative impact on reported sales in 2023 and made the year-over-year decline dramatic. Our 2023 revenue was also impacted by reductions in distributor inventory and reserve adjustments as our distribution partners rebalance their inventory levels based on the current demand and supply situation. On the positive side, in 2023 we did complete many of our longer term projects and were able to launch several significant products, products that we believe will be major contributors to revenue in the coming quarters. I would now like to turn the call over to Dave Holmes, who will provide an update on the significant products and milestones achieved in 2023 and how they will impact our business moving forward.
Dave?
Dave Holmes: Thank you, Kevin, good afternoon everyone. As Kevin said, today I'd like to highlight a few of the significant milestones that we achieved in 2023 and talk a little bit about how our investments in innovation are helping transform Socket Mobile into a more comprehensive data capture company. We launched several new products in 2023. At the end of the year, we launched SocketCam C860, an advanced camera based scanning solution. SocketCam C860 is a follow on to our free camera based scanner, SocketCam C820, launched earlier in 2023. C860 offers an upgrade path for users on both iOS and Android platforms and is tailored for users with more demanding scanning needs, those working in challenging conditions or those dealing with poorly printed or damaged barcodes.
A software engineer in the company's development center working with a software developers kit.
There are no licensing fees for our app providers to include SocketCam into their apps. They simply integrate our CaptureSDK with SocketCam enabled into their applications. This enables them to service a wide variety of end users with various data capture requirements from price sensitive end users with our free C820 and address performance sensitive needs with the C860 or any of our hardware scanners. App end-users access the capabilities of SocketCam C860 via monthly subscription fee. Our XtremeScan product line was also introduced in 2023. It's comprised of three different configurations, XtremeScan Case, XtremeScan and XtremeScan Grip, all designed for iPhone and work with iPhone 15, 14, 13 and 12. This product family represents a significant milestone in our commitment to delivering high quality data capture solutions for our customers in industrial manufacturing, warehousing, oil and gas, and airports.
XtremeScan is designed to enable iPhones to withstand harsh industrial conditions, offering robust scanning capabilities with military grade durability. This opens the door to new customer segments that demand the ultimate performance in the most difficult conditions. Both SocketCam and XtremeScan are gaining traction with earlier adopters. Each has gone through extensive testing by our customers and app partners. We're getting a lot of good feedback and starting to see initial orders come in. We also made progress with our NFC products in 2023. Our SocketScan S550 NFC Mobile Wallet Reader is Apple certified to comply with Apple VAS protocol enabling seamless integration with Apple wallet. Additionally, it meets Sony's FeliCa standards and CIPURSE international security standards.
Also, our SocketScan S370 Universal NFC and QR Code Mobile Wallet Reader received a certification from NFC Forum. These certifications empower our NFC products to cater to a wide range of needs, including wallet passes, digital mobile driver's licenses and nontraditional payments. Our Socket products – our new Socket products will extend our reach and diversify our customer base. SocketCam will provide Socket Mobile with a recurring revenue stream each month. Ultimately, this will make us a more diversified and sustainable and less dependent on retail. We become a more complete hardware and software data capture company. With that, I'll turn it over to Lynn for more details on our financial results. Lynn?
Lynn Zhao: Thanks, Dave. Good afternoon, everyone. Thank you for joining today's call. In 2023, we experienced softened demand and reduced channel inventory as a result of actions taken by distributors. They scaled back their orders and returned products, causing a decline in channel inventory from $4 million at the beginning of the year to $2 million by year-end. These returns also prompt an increase in our reserve for returns, further impacting our revenue. As a result, our revenue for 2023 decreased 20% year-over-year to $70 million, down from $21 million in 2022. Gross margin was 49.7%, an increase from 48.8% in 2022. The rise is attributed to decreased component cost, which contrast with 2022 when we faced elevated costs due to shortages and extended lead times.
Operating expenses for the year reached $11.6 million, a 7% increase from $10.8 million in 2022. This increase is partially due to higher payroll related expenses resulting from increases in headcount, salary adjustments, and increased benefits cost. Additionally, we accounted for increased amortization of software development costs associated with our launch products as we continue to invest in our business to fuel long-term growth. In 2023, the diluted loss per share was $0.27 compared to the diluted earnings per share of $0.01 in 2022. Both years saw the adoption of Section 174 of The Tax Cuts and Jobs Act of 2017, which requires the company to capitalize and amortize R&D expenditures. The adjusted EBITDA for 2023 was negative $1 million, a significant decrease from the positive $1.3 million in 2022.
Our Q4 revenue decreased 15% to $4.4 million compared to $5.2 million in prior year’s quarter but increased 37% sequentially compared to $3.7 million in Q3 2023. Q4 gross margin was 52.8% compared to 49.3% in the prior year’s quarter and 44.2% in the preceding quarter. Q4 operating expenses were $2.8 million, increased 3.6% over the prior year’s quarter but decreased 0.7% sequentially over the preceding quarter. In Q4, we recorded an operating loss of $475,000 compared to $152,000 loss a year ago and the $1.4 million loss in the preceding quarter. Q4 adjusted the EBITDA was $52,000 versus $300,000 [ph] a year ago and a loss of $866,000 in Q3. Q4 diluted earnings per share were $0.11 compared to $0.06 in Q4 2022, both quarter’s results included income tax benefits related to the adoption of Section 174 of The Tax Cuts and the Jobs Act of 2017.
Turning to our balance sheet, we concluded the year with a cash balance of $2.8 million. During 2023, we invested $2.1 million in capital expenditure and raised $1.6 million by issuing subordinated convertible notes. As of December 31, 2023, our inventory level net of reserve was at $5.4 million compared to $5.6 million a year ago. This wraps up our prepared remarks. Now, I will hand the call over to the operator for questions. Jen?
