Bsquare Corp (BSQR) 2002 Q1 法說會逐字稿

Good afternoon, my name is Julie and I today. At this time I would like to welcome everyone to the BSQUARE 2002 first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time, simply press *, then the number one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, please press the # key. Thank you. Mr. Ladd, you may begin your conference.

Good afternoon and thank your participating in our first quarter conference call. This is Jim Ladd, CFO of BSQUARE. Today's call will be divided into two sections. First, I will provide a financial overview of the quarter ended March 31, 2002, and then Bill Baxter, our President and CEO, will briefly talk about recent developments since December 31st and provide business and financial outlook. We will then open the call for questions.

Except for the historical statements and information contained herein, the matters discussed in this call, including revenue and net income expectations, are forward-looking statements that involve risks and uncertainties. Factors that could cause actual results to differ materially include, but are not limited to, adverse changes in BSQUARE's relationship with Microsoft, a decline in the market for Windows space smart devices or failure of such market to develop as anticipated, adverse changes in macro economic conditions, or announcements released by Microsoft of product releases, the failure of Microsoft to attract microprocessor vendors and secure contracts in sufficiently profitable terms, factors that may affect BSQUARE's ability to complete work under contract, competition and intellectual property risks. A more detailed description of risk factors that could affect actual results include, but are not limited to, those discussed in BSQUARE's annual report on Form 10K in the section entitled "Risk Factors". We caution you not to place undue reliance on these forward-looking statements which speak only as of the date of this conference call. BSQUARE undertakes no obligation to update publicly any forward-looking to reflect new information, events or circumstances after the date of this call or to reflect the occurrence of unanticipated events.

The business climate in the first quarter of 2002 continued to be very challenging for BSQUARE. Revenue was $8.7 million for the first quarter, down from $10.5 million in the prior quarter and below our original target range of $9-$10 million. These results continue to reflect the difficult business conditions of our marketplace and their effects on our customers and prospects in the semiconductor, carrier and manufacturing industries.

On a positive note and in line with our long term strategy, product sales for the quarter grew 28 percent to $2.7 million, or 31 percent of total revenue, well above our target range of 20-25 percent of total revenue. Approximately 67 percent of product revenue in the quarter related to distribution of third-party products. The increase in total product revenue is encouraging, given the weakness and the global economy. Going forward, we expect product sales to continue to increase in dollar value as we introduce new products in the market and as our current products gain increasing visibility and acceptance within the industries we serve and target.

During Q1, we saw further diversification of our revenue by customer. As expected, revenue from Microsoft declined to 25 percent of total revenue, compared to 39 percent in Q4 of 2001. Revenue from semiconductor vendors amounted to 7 percent and OEM revenue increased to 68 percent, up from 47 percent in Q2, 2001. Of the 68 percent from OEMs, 37 percent was for professional engineering services, 11 percent was for tools and 20 percent was for applications. We believe this diversification of our revenue stream was a very healthy trend.

Moving down the income statement, gross profit for the quarter was $3.3 million, or 37 percent of revenue, compared to $10 million, or 54 percent of revenue, in the first quarter of 2001. The year-over-year decline is due to the impact of reduced billing rates for services provided to Microsoft, as well as the excess capacity in our professional engineering services organization.

Early in the quarter, management made a strategic decision to close our engineering facility in Minnesota and reduce company-wide headcount by 20 percent. This decision was necessitated by the continued difficulty in the technology marketplace. In connection with these actions, we recorded restructuring charges of $2.2 million relating to severance and other costs associated with the headcount reduction, facility closure and consolidation costs, as well as payments for excess facilities under non-cancelable leases. Looking forward, we expect to realize annual savings of $8-$10 million from these cost reduction measures over the next year.

R&D expenses for the quarter were $4.1 million, or 47 percent of total revenue. In keeping with our long-term strategy, we believe it is vitally important to maintain our lead in technology products and services and to continue investing in new product area where we expect to see significant growth as the economy improves.

In early March, BSQUARE took the opportunity to purchase superior telematics technology through the acquisition of in San Diego, California. The capabilities and customers obtained through this purchase will add value to BSQUARE's offerings long-term. Bill will discuss the benefits of this transaction in more detail later. This cash and stock transaction, valued at about $8 million, was accounted for as a purchase. The acquisition included the issuance of about 1.3 million shares of BSQUARE's common stock and about $3.65 million in cash for all the issued and outstanding common and preferred shares of privately-held . In addition, each option of purchase shares of common stock outstanding on the effective date of the acquisition will be treated as an option to purchase the equivalent number of shares of BSQUARE common stock as calculated by an exchange ratio used in the acquisition. With this acquisition, we incurred an in-process R&D charge of $1.7 million.

For the first quarter of 2002, we reported a net loss of 26 cents per diluted share, compared to a net loss of 17 cents per diluted share in the prior quarter. A reconciliation of diluted earnings per share to diluted cash basis net loss per share was contained within our press release.

Now I'll touch on a few categories of our balance sheet. Our cash, cash equivalents and short-term investment balance was $58.2 million at March 31, 2002, compared to $69.7 million at December 31, 2001. The decrease of $11.5 million was due to our net loss, plus the cash used in the acquisition of . We expect our cash burn rate to decline from this level, but to continue as we ride out the weak economy and invest in product developments.

Accounts receivable at March 31, 2002, totaled $9.9 million, a 13 percent increase from December, 2001. Days Sales Outstanding for the first quarter were 82 days, up from 69 days at the end of the fourth quarter. This increase in DSO was due to three slow-paying customers who account for more than 30 percent of our revenue. We believe that we have adequate reserves for potentially uncollectable accounts.

In equity, at March 31, 2002, we increased the recorded value of our investment in the publicly-held company, Insignia, to it's market value of $2.21 per share. We recorded adjustment of $277,000, net of tax, to the other comprehensive income line in our equity section.

As to outlook, as we look over the next three quarters our biggest challenge is, clearly, to reverse the trend in declining revenue while continuing to develop new products and services that strengthen our market position. At the same time, we will continue to focus on managing costs, improving margins and maintaining our healthy balance sheet. Having said that, we anticipate that in the near-term the factors that contributed to declining revenue through 2001 will continue to put pressure on sales. For this reason, we have set a target range of $6.5 million to $7.5 million with an expected loss in the range of 20 cents to 25 cents per share for the second quarter. We will reduce our rate of cash burn from Q1 levels of $11.5 million to about $8 million in the second quarter as we continue to invest in our product road map. With regard to cash burn, the majority of cash used in the first quarter of 2002 was for one-time cash expenses. We'll continue to focus on operational discipline to reduce the operational burn. We recognize that this level of burn cannot be sustained for any length of time and either revenue must come up or expenses must come down. That said, in the near-term, we do not deem it wise to take drastic or hasty measures that could jeopardize our competitive advantage, rather, we believe that it is in BSQUARE's best interest to continue to invest in our strategic initiatives.

I'll now turn the call over to Bill Baxter, President and CEO, who will comment on recent operational changes and strategic initiatives.

Thanks, Jim. First, while the first quarter did not measure up to our expectations, we do remain very confident about the long-term prospects. In spite of the set-backs we have experienced recently, we view the current environment as both a challenge and an opportunity to actively grow our market share by positioning the company as the preeminent strategy partner for companies investing in this smart device market. We still believe that we have the opportunity to leverage our technology, expertise and leading market position to expand our market share.

To accomplish this, we are continuing to align our organization and resources to support key growth initiatives. Specific steps include, first, strategic realignment of our sales and engineering organizations, re-deploy under utilized service engineers to product development and R&D, and realign the sales force and re-deploy personnel as field application engineers. Second, focus on three major smart device markets, hand-helds, and automotive using four major BSQUARE product initiatives.

First, Smart Bill, which is BSQUARE's complete development solution for Windows CE-based smart devices, including reference hardware, and software applications with remote management capabilities. This offering is available now and is currently being utilized by over half a dozen customers in hand-held and home smart device market segments.

Second, managed device services, which provides hosted remote management services for smart devices. Each will focus on providing manufacturers and service providers with the end-to-end solutions and management services enabling easy to use, maintenance-free, end user device experiences. Expect an announcement detailing this service in about one quarter.

Third, wireless, BSQUARE's investing in a wireless product that incorporates key technology from our Smart Bill product line, which will support GSM, GPRS wireless networks. We will announce more specific information about this product in the second half of this year.

Fourth, telematics. BSQUARE, with the acquisition of , offers a high quality line of products and services, offering development of onboard and hand-held vehicle navigation systems, one of the largest and fastest growing smart device market segments.

Finally, we will focus on geographic regions where we have critical mass and shared areas where we don't. Specifically, we believe we can grow our markets in Asia and Southeast Asia and we plan to invest in our recently opened Taiwan office.

We believe these steps will help drive sales, build our customer base and increase the dollar value and marketability of our design wins. At the same time, our focus on cost controls and operational discipline, coupled with macro-economic improvements, should allow us to return to profitability and revenue growth. In addition to the steps I just mentioned, we will continue to utilize strategic relationships with existing and prospective channel partners and develop third-party relationships to deploy our products and services across multiple market segments. As we continue to reduce our dependence on Microsoft, it is important that we focus on solidifying our current customer relationships and building new ones.

As we look out over the next year, we are encouraged by several factors that we believe will help drive our growth and lead a return to profitability. As Jim mentioned, product revenue accounted for 31 percent of total revenue in the first quarter, achieving our target range of 20-25 percent. Our goal over the next several quarters is to continue to grow this segment of our revenue stream in absolute dollars and to increase the sales percentage of these core products relative to third-party product. BSQUARE's customer base grew in the first quarter along with new design wins for many repeat customers. During 2002 we will focus on developing new accounts and winning new projects to add to our existing customer base. BSQUARE has strategic partnerships with 20 companies in 17 countries. This serves as excellent channels for our products and services. We expect to continue adding new partners and broadening our international market reach during the current year.

We'll also committed to enhancing our senior management team and building out our Board of Directors. Specifically, we recently announced the addition of Jim Ladd, our Senior VP of Operations and Chief Financial Officer, and since December 31st, we've brought in a seasoned executive to run Research and Development in Belleview, and we've hired a new Senior VP of Marketing who will start on May 1, filling the vacancy that has existed since the third quarter of 2001. Additionally, we are happy to announce the appointment of Gregory Hinkley to our Board of Directors. Hinkley serves as the President of MetroGraphics, an electronic design automation company that provides software and hardware design solutions. In addition, he is a director of Amcor Technology. Before Mr. Hinkley joined in January of 1997, he was Senior Vice-President and Chief Financial Officer of the LSI Technology, Inc. in San Jose, California. We believe his extensive experience, superior education and perspective will be a great addition to our Board.

In closing, as we drive our strategic initiatives over the next three quarters, we will continue to adjust our business model to the demand of changing business conditions. In addition, I am dedicated to strengthening our management team with talented and experienced people who share a commitment to deliver superior shareholder value through the exercise of concentrated product marketing and sales efforts and disciplined financial management. As a team, our goals are to excel in every aspect of our business to achieve the expectations of our customers and to return BSQUARE to profitable double-digit growth.

Thank you so much. Now I'll turn this call over to questions.

At this time, I would like to remind everyone, in order to ask a question, please press * followed by the number one on your telephone keypad. Your first question comes from with Wells Fargo Securities.

When we look at your guidance for Q2 and then your guidance for the year, it kind of pencils out a pretty significant ramp in Q3 and Q4. I was wondering if you could give us the key reasons why you think things will rebound so fairly dramatically in the second half and what your level of confidence is that that will happen?

In has been in our policy for the last few quarters to give guidance no more than a quarter in advance. The difficulties, of not only the economy, but of our industry, have made it very difficult for us to have a significant duration of outlook at this point in time.

OK. I guess I was just kind of looking at the statements you made about $30-$40 million in your press release for the year and, then, your guidance for Q2, and that does adjust a pretty significant ramp in revenue to get there. You can't be flat or down the balance of the year to hit 30 or 40. One way or another, things have to improve in the second half. Maybe, if you don't want to talk specifically about the guidance, maybe you could just tell me why you think things will improve in the second half?

I appreciate that. I think the guidance there is really looking at, basically, a flat year. If you extrapolate it out, it comes in at the low end of $30 million and pencils in, if you see some into the higher end of that outlook.

OK. What gives you confidence that your business won't continue to go down then?

As you know, we've been fighting a trend, repeated declines in revenue from Microsoft that were precipitous in Q4 of last year and, then, Q1 of this year. We have reasonable confidence that we will see flat headcount with respect to outsourcing to Microsoft, so we won't see any further declines in that business, which accounted for the vast majority of decline for that business.

OK. So kind of going forward, I think it was a $2 million Q4 -- So kind of a $2 million run rate going forward for Microsoft and the balance of the business showing some improvement?

Yes.

I missed the first, like 30 minutes of the call, but I saw a huge dramatic growth in the product revenue side between Q4 and Q1. Could you just give us a quick explanation as to why it went from $1.5 to $2.7 because I can't recall hearing where it showed that kind of sequential growth? Congratulations. Also, along the same lines, when I look at the gross margin of the business, it looks like cost of sales there are a lot higher than normal and maybe you could just give me some insight as to why that was?

On the product revenue?

Yes.

There's two parts to the question. I'll take the first part first, which is what accounted for the increase in product sales. As you know, we entered into a strategic agreement with a company called Insignia over a year ago to, essentially, internalize their Java virtual machine and they, basically, turned over all of their CE business to BSQUARE. We've internalized that as a BSQUARE product, enhanced it and improved the performance. That accounted for a significant up tick in Q1 product revenue as we started shipping that in a number of different pocket PCs. If you look at the Java market for pocket PCs, BSQUARE is the de facto standard with our GEM CE virtual machine. That's one big thing and that accounted for a big chunk of the growth. We also had growth in Smart Bill, the number of Smart Bill design wins. Then, there's miscellaneous spots, but Java was really the biggest part of that.

In terms of the gross margin, the cost of sales, I believe that's largely contributed to the excess in capacity in our Services organization that couldn't be offset. We had a lower realization rate from our engineering services, which, ultimately, resulted in decline in our margin for services.

You just allocated the expenses there?

Jim, if you want to comment on the cost of sales line?

I think you've covered it. It's, basically, having excess capacity in services, which is headcount that's not billing out all the time.

OK. I may have missed this early on but, typically, you talk about design wins during the quarter, could you share that with us?

We've, historically, made a -- We've talked about design wins and then people have extrapolate our future revenues. There was not a material change in design wins in this quarter, but we still want to focus people on the design win metrics because it hasn't been an effective way of measuring our business.

Why do you think that is?

I think, clearly, while design wins may grow or decline and revenue increases, it hasn't been a good future indicator of royalty revenue at this point. We're trying a nice metric that can help us forecast future revenue opportunities from how we monetize these design wins.

OK. Thanks.

Your next question comes from of Second Line Capital.

A few questions. Could you comment, are there any 10 percent or who are the 10 percent plus customers in the quarter?

Microsoft, clearly, falls into that. Motorola fell into the 10 percent category. We can't disclose the names of the others.

I kind of want to tie into the comment that was made that you had three slow-paying customers that accounted for 30 percent of the revenues. Is that to say that these guys, whoever they are, are in financial distress or they're not happy with what you delivered or they're just being a pain?

No, that's not the case. Subsequent to the quarter close, we have received payments, but this was the outlook through March 31st. We have an increase in DSOs and some of it has to do with more business going overseas and such, but we do believe we're adequately covered for that in any exposure that we might have.

Did you take a greater reserve this quarter than in the past or can you comment what the reserve is that you have?

It's similar to past quarters. It's a percentage of receivables. I think a lot of slowdown has to do with the size and processes of the bigger companies. As Bill said, the payment practices overseas are different from in the U.S. and slower, particularly in Japan.

Bill, a completely separate issue, from a strategic standpoint, what's going with the industry, and I don't know if it's relevant, but acquisition of, say, AI Technology, and they had a number of other acquisitions, is anything happening that's relevant to us or interesting in terms of imbedded systems in the EDA markets or anything along those lines that has long-term ramifications for us do you think?

I would caution you not to draw any conclusions from Mr. Hinkley's joining us on BSQUARE's Board in regards to interest in BSQUARE. It's really Mr. Hinkley joining the Board, not . The industry is a challenging environment where companies want to see return on their current investments before they make investments in new R&D initiatives. That, unfortunately, does not bode well for BSQUARE's recent quarters because we are the R&D department of a lot of these companies. It makes it difficult for us when they don't want to initiate project . It requires, in a lot of cases, a return of consumer spending, because a lot of the devices we develop for these customers are consumer-oriented devices, so that has prolonged the recovery for BSQUARE's revenue. when the recovery may occur.

Lastly, has anything happened in the last three months, anything positive happen?

There's been lots of positives. We're involved in some very top tier design wins. The nature of our business is unfortunate that we can't comment who these are with and what they are for. The business is going along and we're getting design wins. It's just that customers are pushing quarter to quarter and they're pressing us on rates and things like that, so it makes it a difficult economic environment to work in.

With the business change at the margin, you don't feel better today than you did three or four months ago, or you don't feel materially worse, for that matter?

In hindsight, the first quarter ended below our expectations so I would have to say, yes, I feel a little bit worse than I did when I made that forecast for the first quarter. I do believe that the economy will recover and these markets will recover and it's for those who have the staying power and we just have to have the staying power.

OK. So, basically, we're all waiting for the economy just like everybody else?

I believe that is largely the case, yes.

Thank you.

Once again, if you would like to ask a question, please press *, then the number one on your telephone keypad. Your next question is from , private investor.

I read a release, I think it was this quarter, about your involvement in . Can you give me an idea of what you're doing there?

We have worked directly with TI to make sure that Windows CE supports their architecture. We've released to them the products that they need to have Windows CE supported on their architecture. We, subsequently, have been working with some of their OEMs, both inside of the Windows CE space and, to some extent, outside of the Windows CE space to help them integrate TI's CSP technology, or their technology, into OEM products.

Do you see this as a services revenue stream or in products?

The relationship with TI has been both one of partner and one of customer. They're a customer of ours on the one hand that led to services. A partner of BSQUARE's on the other hand, which leads, potentially, to product sales as they bring customers to BSQUARE.

Yes, we do see traction for TI's new technologies, but I don't have any specific information in that regard. If you want more information on that, I'm sure we can provide it to you as long as it doesn't cause us to violate any agreements with TI.

OK. That would be interesting because that looks like it's going to be a real high-growth area within the next year. Next question. In the past you'd mentioned that you worked with voice-over IP. Can you give us an idea of what you've been doing there recently?

Largely, our voice-over IP technology is used by end users. It isn't a big revenue source for us. Microsoft has integrated some voice-over IP capabilities directly into Windows CE. We have shifted our focus two or two and a half years ago over to wireless hand-held devices and other types of devices.

You're not incorporated voice-over IP into technologies?

I wouldn't say we're not. I'm just saying it's not material.

Bluetooth wireless LANs, are you still working in those areas?

Yes, we are.

To what extent?

We offer complete Bluetooth solution, stack technology and device scriber development tools for the Windows CE operating systems.

Are you seeing any traction there?

Traction. Well, we have customers. It is not a material part of our business.

Are you involved with ?

No, we are not.

The last question I have is that you mentioned that your is 37 percent product?

31 percent.

Can I imply from there that the rest is for services?

Yes, sir.

No, sir.

Care to do that?

We don't make it a policy to do that.

Are you planning on repurchasing any options in the near future?

No, sir.

OK. Thank you.

At this time, there are no further questions.

OK. Thank you very much. I appreciate you joining this conference call. Our next earnings conference call is scheduled for the fourth Thursday of July, 2002. Thank you very much.

Ladies and gentlemen, that does conclude your conference for today. Thank you for participating and you may now disconnect your lines.