Socket Cellular, Inc. (NASDAQ:SCKT) Q3 2023 Earnings Convention Name October 27, 2023 5:00 PM ET
Firm Individuals
Kevin Mills – President & CEO
David Holmes – Chief Enterprise Officer
Lynn Zhao – CFO
Convention Name Individuals
Chris Sakai – Singular Analysis
Operator
Welcome to the Socket Cellular Inc. Q3 2023 Earnings Name. My title is Jen, and I will probably be your operator for at present’s name. Earlier than we start, I might wish to remind everybody that this convention name could comprise forward-looking statements inside the that means of Part 27A of the Securities Act of 1933 as amended and Part 21E of the Securities and Change Act of 1934 as amended.
Such forward-looking statements embody, however aren’t restricted to, statements concerning cellular knowledge assortment and cellular knowledge assortment merchandise, together with particulars on timing, distribution and market acceptance of merchandise and statements predicting the developments, gross sales and market circumstances and alternatives within the markets by which Socket Cellular sells its merchandise.
Such statements contain dangers and uncertainties, and precise outcomes might differ materially from the outcomes anticipated in such forward-looking statements due to a variety of components, together with, however not restricted to, the danger that manufacture of Socket’s merchandise could also be delayed or not rolled out as predicted resulting from technological market or monetary components, together with the provision of product elements and obligatory working capital; the danger that market acceptance and gross sales alternatives could not occur as anticipated; the danger that Socket’s software companions and present distribution channels could select to not distribute the merchandise or might not be profitable in doing so; the danger that acceptance of Socket’s merchandise in vertical software markets could not occur as anticipated in addition to different dangers described in Socket’s most up-to-date Kind 10-Ok and 10-Q reviews filed with the Securities and Change Fee. Socket doesn’t undertake any obligation to replace any such forward-looking statements.
On the decision with me at present are Kevin Mills, Chief Government Officer; Dave Holmes, Chief Enterprise Officer; and Lynn Zhao, Chief Monetary Officer.
I’ll now flip the decision over to Kevin Mills. Mr. Mills, it’s possible you’ll start.
Kevin Mills
Thanks very a lot, operator. Good afternoon, everybody, and thanks for becoming a member of us at present. Our Q2 (ph) income was $3.2 million, a 14% lower in comparison with $3.7 million in Q3 2022. In Q3, we had an working lack of $1.4 million in comparison with an working lack of $947,000 in Q3 2022. Our Q3 revenues have been a lot decrease than anticipated primarily resulting from modifications in our distributor companions’ stock ranges.
I will start by explaining how our gross sales supply system works. Socket Cellular delivers most of its merchandise to our finish customers through 2-tier distribution system. We promote our merchandise to our distribution companions, resembling Ingram, which is the primary tier. Our distribution companions promote the merchandise to resellers like Amazon, which is the second tier, the resellers ship to finish customers. Our Q3 revenues have been considerably impacted as a result of our distribution companions lowered their inventories.
In Q3, our distributors lowered their inventories by 50% by promoting rather more than they bought. The stock discount was pushed by market uncertainties and better rates of interest. And whereas it had a dramatic influence on our reported Q3 income, we consider it doesn’t have a major influence on the underlying demand for our merchandise. We consider that gross sales from distribution to resellers and finish customers present a extra correct image of the underlying demand in that enterprise and this demand was considerably increased than the reported income and was in keeping with our expectations. On the constructive aspect, in Q3, we did full a lot of our longer-term tasks and we’re in a position to launch a number of vital merchandise, merchandise that we consider will probably be main contributors to income within the coming quarters.
I’d now like to show the decision over to Dave Holmes, who will present an replace on the numerous merchandise and milestones achieved in Q3. Dave?
David Holmes
Thanks, Kevin, and good afternoon, everybody. As Kevin mentioned at present, I might like to spotlight a number of of the numerous milestones that we achieved in Q3 and discuss just a little bit about how our investments in innovation are serving to rework Socket Cellular right into a extra complete knowledge seize firm. We launched a number of new merchandise in Q3.
The XtremeScan product line comprised of THREE totally different configurations, XtremeScan Case, XtremeScan and XtremeScan Grip are designed for iPhone and works with iPhone 15, 14, 13 and 12. This product household represents a major milestone in our dedication to delivering high-quality knowledge seize options for our prospects in industrial, manufacturing, warehousing, oil and gasoline and airports.
XtremeScan is designed to allow iPhones to face up to harsh industrial circumstances, providing strong scanning capabilities with military-grade sturdiness. It opens the door into new buyer segments that demand the last word efficiency in probably the most tough environments. We additionally launched SocketCam C860, a complicated cameras primarily based scanning resolution.
SocketCam C860 is a follow-on to our free camera-based scanner, SocketCam C820 that we launched in Q2. C860 is tailor-made for customers with extra demanding scanning wants, these working in difficult circumstances or these coping with poorly printed or broken barcodes. There aren’t any licensing charges for app suppliers to incorporate SocketCam into their apps. They merely combine our Seize SDK with SocketCam into their functions.
This allows them to service a variety of finish customers with varied knowledge seize necessities. This strategy permits builders to service price-sensitive finish customers with the free C820 and tackle performance-sensitive wants with the C860 or any of our {hardware} scanners. App finish customers can entry the capabilities of SocketCam C860 with a month-to-month subscription charge.
Seize SDK was additionally upgraded in Q3 and is absolutely — with full compatibility to IOS 17. It helps our full vary of barcode scanners and NFC reader writers throughout your complete Socket Cellular product line. Guaranteeing that iOS and Android software builders can absolutely meet their knowledge seize necessities and maximize efficiency for his or her finish customers.
Socket Cellular Seize SDK has been built-in into hundreds of functions throughout varied industries. Our new merchandise will prolong our attain and diversify our buyer base. SocketCam will present Socket Cellular with a recurring income stream every month. In the end, this may also make us a extra diversified and sustainable and fewer depending on retail. We have gotten a extra full {hardware} and software program knowledge seize firm.
With that, I will flip it over to Lynn for extra particulars on our monetary outcomes. Lynn.
Lynn Zhao
Thanks, Dave, and thanks, everybody, for becoming a member of at present’s name. In Q3, our income was $3.2 million, representing a 37% decline from Q2 and a 14% lower in comparison with the identical quarter final yr. As Kevin defined, our reported income relies on gross sales into distribution channel.
The Q3 income decline was primarily resulting from our distributors decreasing their stock in response to persistent market uncertainty and elevated rates of interest. In distinction to the gross sales from our distribution companions to resellers and finish customers totaling $4.9 million. Our Q3 gross sales into distribution channel have been solely $3.2 million. This determine contains $2.8 million in shipments, excluding returns and a $400,000 adjustment for the reserve of channel stock.
Our Q3 gross margin was 44.2%, representing a 4.4% lower in comparison with Q2 and a 0.2% lower from Q3 of the earlier yr. The lower in gross margins in Q3 was primarily as a result of allocation of producing overhead prices throughout decrease shipments throughout the quarter.
Q3 working bills have been $2.8 million, reflecting a 4% lower in comparison with prior quarter. The discount was primarily resulting from sure G&A prices, such because the annual audit, which have been concentrated within the first half of the yr. Nonetheless, their working bills have been 8% increased than Q3 2022 pushed by the prices related to the brand new product improvement and the rise in head depend.
Throughout Q3, we recorded a web lack of $1.3 million or $0.16 per share in comparison with a web lack of $510,000 or $0.06 per share in Q2 and a web lack of $870,000 or $0.11 per share in the identical interval final yr. Our Q3 EBITDA was a unfavorable $817,000 (ph) in comparison with a constructive $230,000 within the prior quarter and a unfavorable $500,000 in the identical quarter final yr. The full non-cash bills, together with depreciation, amortization, asset base compensation bills and revenue tax amounted to $460,000 in Q3.
Shifting on to our stability sheet. Our money stability was $3.1 million as of September 30, decreased $530,000 in comparison with December 31, 2022. Over the 9 months, the first money outflows included $1.5 million in capital expenditures and $500,000 for working actions. The outflows have been partially offset by the $1.6 million convertible word financing accomplished in Could. When it comes to stock, we ended the quarter with $5.5 million, a slight lower from $5.6 million on the finish of 2022.
This wraps up our ready remarks. Now I’ll hand the decision over to the operator for questions. Operator?
Query-and-Reply Session
Operator
[Operator Instructions]. And our first query will come from Chris Sakai with Singular Analysis.
Chris Sakai
Sure. Hello. Good afternoon. Are you able to discuss concerning the gross sales to resellers and finish customers that you simply say have been considerably increased and that might be an excellent estimate to your demand. How is that this quarter and the way ought to we take a look at that within the coming quarters?
Kevin Mills
Okay. Hello, Chris. So our gross sales from distributors to resellers and finish customers was $4.9 million. So nearly our gross sales in have been 3.2%. So the delta of $1.6 billion is admittedly what was lowered in stock within the distribution channel. We’d contend that the $4.9 million is a good stability of the underlying demand for the merchandise than the $3.2 million. So traditionally, distributors, I believe, had possibly $2.5 million of stock originally of any quarter.
And our goal is that, that stock is comparatively static. They add and so they subtract roughly the identical fee. As we speak, they solely have $1.6 million in stock, which we consider is presumably too low. And that is the consequence of, I believe, a mix of the pandemic the place folks have been involved about provide and introduced in additional than they wanted within the quick time period. and rates of interest, which have been comparatively low, and so they’re now comparatively excessive.
So I believe that is we have form of reached the low a part of the underside of the barrel when it comes to what’s doable. And we might anticipate stock to be just a little bit nearer to possibly $2 million, $2.5 million going ahead, and we’d work onerous to maintain that stock steady. So to reply your query, we might contend that the 4.8%, 4.9% quantity is a greater reflection of the underlying demand, and that may be the quantity I’d use as a mannequin for the demand we noticed within the quarter.
Chris Sakai
Okay. Thanks for that. After which are you able to discuss working bills? The place can we — the place ought to we see them going sooner or later?
Kevin Mills
Go forward.
Lynn Zhao
Sure. Simply — sure, the administration is conscious of their market uncertainty and different challenges whereas we proceed specializing in investing of their new merchandise, we attempt to handle their liquidity and bills tightly. So we anticipate that the working bills for the remainder of the yr in This autumn to be related on the Q3 stage. And total for subsequent yr, we anticipate, I believe mentioned that throughout the first half of the yr will probably be on the identical stage as this yr.
Chris Sakai
Okay. Nice. Thanks to your solutions.
Operator
[Operator Instructions]. And it seems there aren’t any additional questions right now. Mr. Mills, I will flip the convention again to you for any further or closing remarks.
Kevin Mills
Thanks very a lot, operator. We might similar to to thank everybody for taking part in at present’s name, and want you all an excellent afternoon. Goodbye.
Operator
This concludes at present’s convention name. Thanks for attending.
