Bsquare Corp (BSQR) 2003 Q1 法說會逐字稿

Good afternoon. My name Shanita and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BSQUARE First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one, on your telephone keypad. If you would like to withdraw your question, press the pound key.

At this time, I would like to turn the call over to Mr. Ladd, CFO and Vice President of Operations. Thank you. You may begin your conference.

Good afternoon and thank you for participating in our first quarter conference call. I'm 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 ended March 31st, 2003, and then Bill Baxter, our President and CEO, will comment on our results and our business and financial outlook.

We will then open the call for your questions. But first, let me remind you that a copy of our press release announcing our first quarter results is available on our website, www.BSQUARE.com, in the Investor Relations section, and you also may listen to this conference call for one year from today, through a webcast link, at the same location on our website.

And now I'll provide the necessary safe harbor statement. Except for the historical statements and information contained herein, the matters discussed in this call, including those relating to revenue and net income expectations, profitability, cash usage, customer prospects, product sales, and manufacturing, are forward-looking statements that involve risks and uncertainties. Factors that could cause 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 acceptance of our new products or initiatives, risks associated with the effects of our restructuring and our ability to successfully support our operations, competition and intellectual property risks.

In addition, demand for our power hand-held based devices is uncertain and will be affected by a variety of business and economic conditions, including customer ordering patterns. Major health concerns, such as the possible spread of the SARS illness, could also adversely affect our manufacturing strategy and customer ordering patterns. 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 for the year ended December 31, 2002, in the section entitled ``Risk Factors.'' Listeners are cautioned 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 statements, to reflect new information, events, or circumstances, after the date of this call, or to reflect the occurrence of unanticipated events.

Now, a look at our first quarter results. The first quarter of 2003 was pivotal for BSQUARE. A series of restructuring actions initiated in 2002 began to take affect and are reflected in our reduced operating expenses. Nevertheless, we continue to face a number of challenges that are reflected in our quarterly results and our current outlook.

Starting at the top of our income statement, BSQUARE's revenue was $8.1m for the first quarter of 2003, compared to $8.7m for the comparable period in 2002, and $9.3m in the prior quarter, and just over the middle of the range of $7.5m to $8.5m we announced in our January conference call. Product revenue of $6.1m was up 9% from $5.6m in the third quarter of 2002, but down 11% from $6.8m in the fourth quarter of 2002. The spike in fourth quarter product sales was due primarily to a single large order for third-party products.

During the first quarter, roughly 90% of product revenue came from the distribution of Microsoft licenses and other third-party products. Service revenue was down for the quarter, reflecting a recurring seasonal weakness in the demand for professional engineering services at the beginning of each year. Our gross margin for the first quarter was 10% of revenue, compared to 7% in the fourth quarter. Although our gross margin improved, it remained under pressure due to the weak economy and lower level of service engagements, and again reflected the growth in our sales of lower-margin third-party products.

Moving down the income statement, we reduced our operating expenses compared to both the fourth quarter of 2002 and the first quarter of 2002, particularly our R&D expenses, which were $3.1m in the first quarter, compared to $3.9m in the fourth quarter of 2002, and $4.1m in the first quarter of 2002. We also reduced sales, general, and administrative expenses by significant amounts. We continue to invest in R&D because it's crucial that we maintain, improve, and enhance our product and service offerings, to remain competitive. But we have become more focused and expect further reductions in future quarters.

For the first quarter of 2003, our net loss was $6.6m, or 18 cents per share, which is outside the expected range of 12 to 16 cents per share we announced in our January conference call, but it's less than previous quarter's net losses. The first quarter's net loss of 18 cents per share compares to 26 cents per share loss before a cumulative effect of change in accounting principle in the same quarter in 2002 and a net loss of 30 cents per share in the fourth quarter of 2002. For clarity, let me add that the first and fourth quarters of 2002 included restructuring charges of six cents per share and 11 cents per share, respectively. In addition, the first quarter of 2002 included a charge of five cents per share, required in process R&D costs.

Now I'll touch on three key sections of our balance sheet. Our cash, cash equivalents, restricted cash, and short-term investments totaled $25.6m at March 31, 2003, compared to $35.4m at December 31st, 2002. During the first quarter, we used $9.8m in cash, including $2.8m used for restructuring and related purposes. As we stated in our January conference call, we had expected cash use for operations to be in the range of $7m to $8m, for the first quarter, not including payment of one-time restructuring and similar charges, so the $7m we used for this group was at the low end of what expected.

Accounts receivable at March 31st, 2003 totaled $7.2m, up from $6.5m at December 31, 2002. We are watching this number closely, as we continue to emphasize collection of receivables. The increase is due primarily to specific situations that we don't expect to result in collection problems.

As we look ahead, our biggest challenges clearly are to grow our revenue, increase our gross margins, reduce operating expenses, and eliminate our net use of cash to maintain the strength of our balance sheet. These are considerable challenges in the current economic environment.

In the second quarter, we expect to earn revenue of $8m to $9m, and have a net loss of 15 to 20 cents per share. We expect to use $4m to $5m cash in the second quarter, including about $1m for continuing lease obligations from past restructuring, but reduced by $2.9m refund of prior year's income taxes.

I'll now turn the call over to Bill Baxter, our president and CEO, who will comment on recent operational developments and strategic initiatives of the company.

Thanks, Jim. I'd like to briefly highlight several aspects of the company's current condition that make me optimistic about its future. As a result of the many changes we implemented in 2002, these [inaudible] financial results are beginning to reflect on operational controls, customer needs, and competitive positioning. At the same time, we believe the adaptability of our organization and our product and service offerings position us to re-emerge as a dominant systems integrator and solution provider in the smart device industry, when the economy improves.

As the management team continues to fine-tune our organization and refine our product and service offerings, we remain squarely focused on driving revenue growth and improving gross margin.

On the product front, I am encouraged that our Power Hand-Held reference design is beginning to get traction in the OEM market and is being recognized as one of the most innovative new products in the wireless hand-held device market. NEC Solutions America has contracted to purchase 25,000 licenses of Power Hand-Held Software Suite for their next generation of mobile Internet devices. We also continue to drive towards a definitive purchase agreement with Hoeft & Wessel, with whom we entered into a letter of intent during the first quarter, to introduce Power Hand-Held product into the German, Swiss, and Austrian markets. At this time, more than a dozen other OEMs have expressed interest in evaluating this product. We expect customers to begin manufacturing Power Hand-Held based devices in the third quarter of 2003.

In addition to the OEMs, BSQUARE continues to vigorously develop a channel for the Power Hand-Held with the wireless network operators. Several major operators worldwide are currently evaluating the Power Hand-Held. We are currently planning to advance to corporate trials with at least one operator, and possibly two, in the current quarter. I believe that the opportunity to move the Power Hand-Held product through both the OEM and the operator channels enables the possibilities for rapid growth in Power Hand-Held sales.

During the quarter, we also saw increased interest in our SDIO system software, driver development tool, and related offerings, that enable secure digital inputs and outputs on Microsoft operating systems, such as Pocket PC, SmartPhone, Windows CE, and Windows CE.Net. New customers, such as Samsung Electronics, Seiko Instruments, and Toshiba Semiconductor, are using these products and feedback has been very positive.

In the first weeks of the current quarter, we've seen a pick-up in demand for our professional engineering services, following a seasonal decline in the first quarter. Much of the new work is repeat business, with major customers such as Sharp and Motorola, a fact that reflects positively on the prior work we've done for them and the ongoing strength of our relationship. As BSQUARE begins to realize the benefits of the operational and organizational changes we made in 2002, I believe efforts to grow the company's product and service revenue will lead its return to profitability. While management's current goal is to achieve profitability by the end of 2003, the continuing uncertainties of the business climate could delay the achievement of that goal. Nevertheless, with our renewed focus on conserving cash and strengthening our balance sheet, we believe we have the financial resources to stay the course. I remain fully committed to BSQUARE's success, and I'm energized by the prospects and challenges ahead.

Now I'd like to turn the call over to Shanita to open it up for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one, on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from David Dooley.

Hi, this is actually Jennifer West for Dave. My first question was in regards to the balance sheet. It looks like you moved your cash around to long-term assets. Can you explain that?

I can explain that, Jennifer. This-- we have, in some of the restructuring we did, we received early terminations of some of our leases, which do involve payments through the end of next year, primarily, and some going a bit beyond that, and some of those arrangements required us to put some cash into restricted accounts to sort of secure the payments, and the reason some of it then appears outside of current assets is some of those payments will be made, you know, more than one year out from today, so they have to go into the ``non current section'' of the balance sheet.

OK, great. And the uptick from professional engineering services, how did the gross margins in that business fare? Is that going to cause your gross margins next quarter to decline?

No. Actually, the margins, we expect, will go up, for two reasons. They were higher in this quarter than the previous quarter, and because of some of the right-sizing that we did in December, but in addition, the volume of professional engineering services is going to be going up in the second quarter, as Bill mentioned, and therefore, that will drive up the margins up as well.

So those do carry higher gross margins than the overall company average?

Yes, that's right, and the-- but the main factor is the revenue goes up without a commensurate increase in costs, as our engineers become more fully utilized.

OK. And kind of the same question with the NEC deal -- does that license deal how does that profile look compared to actually selling the product?

This is Bill. The NEC deal is a license of the software stack itself. It went in conjunction with the design of a custom hardware device that we had been developing already for NEC, so the margins that we get on a per-device basis are not significantly lower than what we would plan for Power Hand-Held, certainly higher than purely just the software license deal overall.

OK. And do you have any estimation on your current break-even level?

We prefer-- we have not given a public notice of that, so no, we don't have guidance on that.

OK, thank you.

At this time, there are no further questions.

All right, well thank you very much. We appreciate you attending this call. Our next conference call is scheduled for July 24th, 2003, the fourth Thursday of the month, following our next quarter-end. Thank you very much.

This concludes today's BSQUARE Conference Call. You may now disconnect.