Bsquare Corp (BSQR) 2002 Q4 法說會逐字稿

Good afternoon. My name is Michelle and I will be your conference facilitator today. At this time I would like to welcome everyone to the BSQUARE year-end results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer period. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "#" key. Thank you. Mr. Ladd you may begin your conference.

Thank you and good afternoon and thank you for participating in our fourth quarter and year-end conference call. I am Jim Ladd, Senior Vice President and CFO of BSQUARE. Today's call will be divided into two sections. First I'll provide an overview of our financial results for the quarter and year ended December 31, 2002, and then Will Baxter, our President and CEO will comment on our results in our business and financial outlook. We'll then open the call for your questions. But first let me provide the necessary safe harbor statements. Except for these historical statements the information contained herein, matters discussed in this call including the revenue and net income expectations are forward-looking statements that involve risks and uncertainties. Factors that could cause the actual results to differ materially include, but are not limited to, a decline in the market for Windows-based or other smart devices or the failure of such markets to develop as anticipated, adverse changes in macroeconomic conditions, a decline in the market for our products, technology licenses and services, our ability to successfully implement, execute, and make adjustments in our business strategy, business model or product offerings, lack of customer's acceptance of our new products or initiatives, risks associated with the effects of our restructurings and our ability to successfully support our operations, competition and any intellectual property risk. A more detailed description of risk factors that could effect actual results include but are not limited those discussed and disclosed in annual report on form 10-K for the year ended December 31, 2001 in a section entitled "Risk Factors" and those discussed in BSQUARE's subsequent quarterly filings in form 10-Q in the section entitled "Factors That May Effect Future Results." Listeners are cautioned not to place undue reliance on these forward-looking statements; we speak only as of the date of this conference call. BSQUARE undertakes no obligation to update publicly any forward-looking statements reflecting information, events or circumstances after the day of this call, which reflect the occurrence of unanticipated events. Now I'll review of our financial results.

2002 was a very challenging year for BSQUARE. During the year, we faced a very weak economy for technology services and products, observed a significant decline in business for Microsoft, completed a number of restructuring actions and at the same time launched new products and services. While our results reflect these challenges our financial results are better than expected and we have emerged with a stronger leader organization with a more focused positive outlook for 2003. Starting with the top of our income statement, BSQUARE's revenue was $9.3m for the fourth quarter of 2002 and $37.5 for the full year compared to$10.5m and $61.8m for the comparable periods in 2001. Continuing the trend into the third quarter, fourth quarter product revenue increased to $6.8m, an increase of 22% over the third quarter and equal to 73% of total revenues. That 83% of fourth quarter product revenue includes the distribution of Microsoft licenses and other third party products. Our overall gross margin for the fourth quarter was 7% of revenue compared to 10% in the third quarter and 31% in the fourth quarter of 2001. Gross margins remained under pressure due to the weak economy and our over capacity of engineering services, which we addressed in our December restructuring and also reflect our increasing sales of lower margin third party products. We now have several initiatives underway that are designed to increase sales of higher margin products and services. Bill will discuss these initiatives later in the call.

Moving down the income statement, we reduced our operating expenses exclusive of restructuring charges compatible to third 2002 and the fourth quarter 2001, particularly, our sales, general, and administrative expenses. R&D expenses increased somewhat in the fourth quarter to $3.9m compared to $3.6m in the third quarter of 2002, a down from $4m in the fourth quarter 2001. Throughout 2002, we continue to invest in R&D based on our belief it is vital important for us to maintain our market leading position in products and services and to enhance our product offerings.

The persistence of the weak economy and other factors force us to refine our strategy throughout the year, however, and to further reduce company wide headcounts in the fourth quarter. It's our commitment to maintain our market leading position as strong as ever. We have discontinued several product and service initiatives that have insufficient prospects for near term profits. In connection with those actions, we recorded the fourth quarter restructuring charge of $4.2m with severance payments, the cost of excess facilities and the non-consolable leases, and impairment of fixed assets. As of today, the company has about 200 continued employees, down from about 470 at December 31, 2001. Looking forward, we expect to realize annual savings of $6.5-7.5m, as a result of our December cost reduction measures. And we will continue to aggressively manage our service capacity and overhead expenses.

For the fourth quarter of 2002, our pro forma loss was 18 cents per diluted share, incurred with the loss of 20 cents per share in the third quarter. Our GAAP based net loss for the fourth quarter was 30 cents per diluted share including $4.2m of restructuring and related charges compared to a net loss of 69 cents per diluted share in the third quarter on the same basis. The reconciliation of diluted GAAP based loss per share to diluted pro forma net loss per share is contained in our press release. I will touch on three sections of our balance sheet. Our cash equivalents, restricted cash, and short term investment balance was $35.4m at December 31, 2002 compared to $43.8m at September 30, 2002 reflecting the use of $8.4m in cash during the quarter including $2m useful restructuring related purposes. As we stated at the end of the third quarter, we have expected cash used in operations to be in the range of $8-9m for the fourth quarter not including payment of one-time restructuring and similar charges. For the $6.4m, we actually used for operations was better than expected, although most of our improved business due to timing of expenditures. On a similar basis, we expect to use about $7m for operations in the first quarter of 2003, not including the late payment of restructuring, lease termination, and similar charges. Including those charges, we expect to use about $9m in total. Management and the board of directors are committed to retrench profitability in the third quarter of 2003.

Accounts receivable of December 31, 2002 totaled $6.5m, unchanged from September 30, 2002. We are watching this number closely as we continue to emphasize watching the receivables. As to liabilities, I want to play down it again that we still have no long-term debt. As we look ahead to 2003, our biggest challenge is clearly to grow our top line revenue and increase our gross margins. At the same time, we will continue to focus on reducing operating expenses and eliminating our net use of cash, maintaining strength of our balance sheet. We have set a target range of $7.5-8.5m in revenue for the first quarter of 2003 with an expected pro forma loss of 11-16 cents per share. I will now turn the call over to go back our President and CEO Bill Baxter who will comment on recent operational changes and strategic initiatives.

Thanks Jim. First let me start by saying that the financial results of the previous year reflect many adjustments we made to our business model over the past days. We've had to evolve quickly because of changing business condition. At the same time, we have remained stead fast for our long-term strategy to be the one stop shop, for its market device development. In the past, SQUARE provided comprehensive solutions for all customers segments including Original Equipment Manufacturers, original device manufacturers, semiconductor vendor's service providers and even end users. Recently we have refined our solutions to meet a smaller range of customer segment. We've eliminated some of our initiatives to better meet the needs of our core horizontal and vertical market using expertise, we believe, none of our competitors has. And now we are developing solutions based primarily on customer need rather than attempting to be the leading market innovator in multiple areas during the shaky economic time. As a result of these changes, we are more customer-driven organization. We believe that the adaptability of our current offerings will enable us to emerge as the dominant systems integrator and device development solutions provider in the smart device industry.

I remain very confident about BSQUARE's long terms prospects. Even in the current economic environment we believe the focus and discipline of our significant leaner organization position us for a return to profitability within our expected range of future revenue. Next, I want to highlight some of our achievements in 2002 that demonstrate our strength and rebellion. Product revenue grew by 141%. We increased our customer base by 216 licensing customers. We lodged marketing efforts for our power handheld device. Our first full software and hardware reference design to rave reviews. We added new talent to our executive team and in other key areas of our organization. We recently added respected professionals Elwood Howse and Ren Jurgensen to our Board Of Directors. We have slowed our cash run rate and had a cash position that we believe is ample to see us through the difficult time.

Now I want to highlight some of the accelerators that I believe will drive our growth initiatives during 2003. Our relationship with Microsoft has improved as a result of our licensing business. Microsoft, is funding marketing for our product and wants to work more closely with BSQUARE. Similarly Texas instruments have increased its efforts on our behalf, notably enforcing partner activity. Several wireless carriers in OEM's are evaluating our power handheld reference design. With this low cost, lightweight configuration, retractable keyboard, full function, full screen functionality, and powerful processing capabilities, this device represents a superior alternative for larger laptops and smaller less powerful handheld devices. The potential market for this product is very large. And we expected to see some significant wins in the near future. Our SDIO Now! System software, driver development tools and related offerings that enable secured digital input and output on Microsoft operating systems, such as Pocket PCs, Smart Phones, CE, and CE.NET are beginning to take off. We have recently licensed the source code for our SDIO system software, the Microsoft for inclusion in future generations of their operating system. We already have 21 customers with 41 in the pipeline and we expect sales to accelerate through the year. Finally, we enjoyed several significant Pocket PC design wins in 2002 that we believe related 2003 relative revenue from OEM, like NEC and other. In closing, while the year just ended was more difficult than the number of respect that anyone would have expected. We believe, we have successfully addressed the major issues affecting our profitability. More to the point, we believe we are well positioned in terms of products and services, financial resources, and market position to return to profitability in the second half of 2003. Finally I would like to reiterate that we have set target for revenue in the range of $7.5-8.5m and an expected pro forma loss in the range of 11-16 cents per share in the first quarter of 2003, with further improvement as the year progresses. Thank you very much. And we will now open for your questions.

At this time I would like to remind every one in order to ask a question, please press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. The first question from the line of David Duley with Wells Fargo Securities.

Good afternoon.

Good afternoon, David.

May be you can just help us -- one thing, just to review so we understand when you look at the gross margin year-over-year, may be you could give us kind of which buckets accounted for the biggest magnitude of the decline. And then you mentioned about hitting profitability in the second half of this year, what would be the level -- what would be your assumption on profitability, what sort of revenues and margins are you assuming -- whatever you know for this profitability matrix?

The two biggest factors that has contributed to the margin decline at BSQUARE are, because of over capacity in our services business. We have incurred at times negative margins. So that's obviously a bad situation, which we addressed, in the fourth quarter reduction in force. The second contribution to the decline in the gross margin has been the increasing sales -- Microsoft Licenses which carries an average gross margin about for 15% range in aggregate. So when you combine the negative gross margins in some service engagement along with the 15% gross margins, you do see that decline. Going forward, we have -- corrected the situation in terms of over capacity in our services business and in addition we have established several mechanisms to be able to leverage a lower cost work force to enable us to be able to reduce the cost of our service engagement, enabling us to drive higher gross margin. In regards to the second half of your question, which is the return to profitability and what revenue run rate it would take us to achieve that -- that's not something that we are making publicly available. I will say that -- you know that if we don't hit our revenue targets, and we have some various specific hurdles that we need to achieve to know if we going to make that revenue target that we are prepared to make further reduction in order to achieve our profitability.

I guess, I just start reading in between the lines then the revenue number has to be higher than the current quarter that hit this number?

That would not be a bad assumption.

Okay. A couple of other things in the -- you mentioned, however you think you going to get to profitability whatever the march toward the numbers that you guys have in your head. May be you can help us with -- when you return to profitability, what do you think the cash burn in the first half of the year -- so we just have some sense about the second quarter?

Okay. Jim.

Well we expect the cash burn rate to be declining through the year. We've just announced the weather expectation is for Q1. We're not going to announce the details for other quarters but we have also said that we expect to return to profitability in the third quarter. So that that would be mean a progression.

Obviously your progression.

Obviously, progression exactly. So will be lower in the first quarter largely as the numbers I announced were similar in the first quarter -- to what we have this quarter because of some unusual things that have progressed down to the third quarter.

Dave let me address sort of - there was an implied prior question which was, what is it look like to get to back to profitability for BSQUARE. I think there are really a couple of things you need to understand about the business. As we shifted away from a dependent on Microsoft for service revenue, we identified a persistent cycle in our business that really, Q1 is effectively a low point for our business. It starts to build in Q2, it peaks in Q3, and then decline somewhat in Q4. And so there is a reason for that is really our -- you know our fiscal year aligns with other budgetary cycles around the development of smart devices. So looking at our pipeline going forward what it looks like this brings us to profitability are several initiatives to do full turnkey hardware and software designs for customers. That would generate significantly higher margins revenue for us then we have incurred in the past and secondly the fruits of our Power Handheld efforts will begin to pay off in that same time frame as those devices begin to enter in to market.

Maybe you could -- give us an update on statistics related to Power Handheld Reference design now you have - what progress have we made since we last all met?

Sure. A lot of -- carriers have been handling the devices, using the devices getting a feel for how they fit between their market strategies. Q1 is a particularly active month for the wireless space due to CTIA and we expect at this time to make announcements about our progress in the wireless industry consistent with us, which is March.

Okay. Thank You.

Thank You. Dave.

And now I would like to remind everyone in order to ask a question please press "*" then the number "1" on your telephone keypad. At this time there are no further questions. Do you have any closing remarks?

Thank you very much. We appreciate your attendance on this call. Our next conference call is scheduled for the fourth Thursday of April 2003.

This is today's BSQUARE year-end results conference call. You may now disconnect.