Bsquare Corp (BSQR) 2003 Q2 法說會逐字稿

Good afternoon. My name is [Jaquife] [ph], and I will be your conference facilitator. At this time, I would like to welcome everyone to the Second Quarter Results 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 star, then the number one on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you.

Mr. Baxter, you may begin your conference.

Actually, I’d like to turn it over to Noqi Asp, the CFO, for an introduction.

Good afternoon, and thank you for participating in our second quarter conference call. I am Noqi Asp, Vice President of Finance and Chief Financial Officer of BSquare.

As many of you already know, today’s release of BSquare’s financial results for the second quarter of 2003 was accompanied by an announcement of key Management changes. Bill Baxter, Founder, Chairman, and CEO of BSquare has stepped down as Chairman and CEO effective today. Brian Crowley, BSquare’s Vice President of Product Development, has been named to succeed him as CEO. Don Bibeault, a consultant who has advised the company during the past three months, will join the BSquare Board and become the Board’s Chairman.

Both Bill and Brian are with me on today’s call, which will address the company’s results for the second quarter and the rationale for these Management changes. Don will also be available for questions after the call. Bill will begin the call by summarizing the operational highlights of the quarter and discussing the reasons for his decision to step down as CEO. Following my summary of the financial results for the quarter Brian will provide a general assessment of BSquare’s core strengths and challenges, and a brief outlook for the remainder of 2003. Finally, Bill will conclude with a brief status report on the Power Handheld. Then we’ll open the call for your questions.

But first, our comments on the Safe Harbor. Accept for the historical statements and information contained herein the matters discussed in this call 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 market to develop as anticipated, adverse changes in macroeconomic conditions, a decline in the market for our products, technology license and services, our ability to successfully implement, execute, and make adjustments in our business strategy, business model, or product offering, lack of customer acceptance of our new products or initiatives, risks associated with the affect of our restructurings, and our ability to successfully support our operations, competition, and intellectual property risk.

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 10-K for the year ended December 31, 2002 in the section entitled ‘Risk Factors,’ and those discussed in BSquare’s subsequent quarterly filings on Form 10-Q in the section entitled ‘Factors That May Affect Future Results.’

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.

And now to begin, I will turn the call over to Bill Baxter.

Thanks, Noqi.

Before I discuss the highlights of the second quarter I want to say how excited I am personally about the Management changes we announced today. As BSquare’s Founder and an entrepreneur by nature I believe I have led the company as far as I can in the direction it needs to go. The past few years have been difficult for everyone, employees and shareholders alike, and the future remains challenging.

As we implemented successive measures to reshape the organization and redefine our business over the past few years I felt obligated to see the process to the point where we had laid a solid foundation for a return to steady growth and profitability . I believe we are at that inflection point now, and I am confident that Brian, a key member of the Management Team and architect of many of the changes implemented during that time, is the right person to lead the company toward our goals.

For my own part, I am delighted by the prospect of focusing my efforts on the development, marketing, and sales of Power Handheld, a task that will allow me greater latitude to exercise my entrepreneurial skills.

I believe we are entering a very exciting period for BSquare, and all of us on the Board and the Management Team are eager to move forward. In a few minutes I’ll turn the call back to Noqi to discuss the financial results for the second quarter. But first, I want to briefly summarize during the second quarter and year-to-date.

We increased our Microsoft licensing customer base by 60 new customers purchasing development tool kits and over 50 new customers purchasing Microsoft licenses for their embedded devices. We licensed our Power Handheld software stack to a tier one OEM and have a pipeline for device licenses to major OEMs and wireless carriers.

In addition to the changes announced today we have made other changes within our Executive Team and in other key areas of the company that have resulted in a leaner, more agile organization with a narrower business focus. This included a reduction in headcount from 222 employees at the beginning of the year to 180 at the end of the second quarter.

Simultaneously we have reduced the number of product initiatives we are supporting to focus the company’s development resources on Power Handheld. We have also renegotiated the company and related obligations to reduce our future expenses. And finally, we have substantially slowed our operating cash burn, and currently our cash resources that we believe are ample to see us through these difficult times.

Now I’ll turn the call back over to Noqi for the review of the second quarter financial results.

Thanks, Bill.

Starting with the income statement, BSquare’s revenue was 9.4m for the second quarter of 2003, compared to 9.5m for the comparable period in 2002. Second quarter product revenue increased 6.4m, an increase of four percent over the first quarter. About 90 percent of second quarter product revenue came from the distribution of Microsoft licenses and other third party products.

Our overall gross margin for the second quarter was 24 percent, a substantial improvement over 10 percent in the first quarter, and better than our 19 percent gross margin in the second quarter of 2002. Gross margin improved largely as a result of increased demand, better capacity utilization, and improved pricing in our Engineering Service Group. And I’ll add this was in spite of increasing sales of lower margin third party products. We have initiatives underway that are designed to increase sales of higher margin products and services. Later, Brian will discuss these initiatives in the call.

Moving down the income statement operating expenses excluding a net restructuring gain were significantly lower than in the first quarter, and roughly half of the operating expenses in the second quarter a year ago.

Research and development expenses decreased $1m from 3.1m to 2.1m in the second quarter, and decreased 3.1m over the same quarter of 2002. These decreases reflect both our narrowing product focus and the development stage of our initial Power Handheld design nearing completion.

Sales, general, and administrative expenses were 3.6m in the second quarter, down from 3.8m in the first quarter of 2003, and significantly down from the 5.3m in the second quarter of 2002. Although we have made progress in reducing these expenses we are continuing to work on reducing our high overhead, and you should anticipate further reductions in SG&A expenses during the coming year.

For the second quarter of 2003 our net loss was two cents per diluted share, compared to a net loss of 18 cents per diluted share in the first quarter of [2003] and 35 cents per diluted share in the second quarter of last year. The loss for the second quarter included a net gain of 2.8m, a benefit of seven cents per diluted share which was primarily the result of lease restructuring.

Turning to our balance sheet, during the second quarter we saw a number of balance sheet improvements which increased our total cash balance and decreased several liabilities. Our cash, cash equivalents, restricted cash, and short-term investments collectively increased $900,000 from 25.6m at March 31 to 26.5m at June 30th, 2003. This was much better than the $4m to $5m net cash use we anticipated at the beginning of the quarter, but also reflects receipts from two non-recurring items.

Specifically we had non-recurring collections of 2.8m from refunds of prior years’ income taxes, and received a payment of 1.5m in connection with the settlement of outstanding litigation. We used 2.3m for operations which was lower than expected due primarily to improved accounts receivable collections, and to a lesser extent to reduced operating expenses resulting from our past restructuring.

We also spent 1.1m for restructuring in the quarter, which included paying for lease restructuring obligations owed our landlord at our Corporate Headquarters in Bellview and included new lease buy downs of unoccupied California facilities that will save the company 3.5m in rent payments over the next two years.

Finally, we also restricted 2m of cash to secure long lead-time parts for a manufacturer of the Power Handheld.

And now, I will turn the call over to Brian Crowley who will review the status of our core business.

Thanks, Noqi.

Before I begin, I want to say how excited I am to be stepping into the role of CEO. Like Bill and the other members of the Management Team I believe that the changes we have implemented in our organization and business models over the past two years have positioned BSquare for steady growth and a return to profitability within the next 12 months.

As we look ahead to the second half of 2003 our goals are clearly to grow our top line revenue and continue to improve our gross margin. At the same time we will continue to focus on reducing operating expenses and eliminating our net use of cash to maintain the strength of our balance sheet.

In reviewing our current businesses I believe there are several positive trends. First, our licensing business is increasing. We are currently the largest distributor of Microsoft operating systems for embedded systems in North America, and we believe our relationship with Microsoft will continue to strengthen. Our margins in this business are steady and improving. In addition, our distribution customers represent an expanding addressable market for engineering services and other BSquare products.

Second, our Professional Engineering Service business is on the upswing. Several of our tier one customers have increased their use of our Service organization, and that has helped to stabilize our overall engineering capacity. We intend to leverage this trend by continuing to work with our tier one customers on a more strategic level in order to understand and respond to their business needs.

Also of importance is that included in our Service results for the second quarter of last year Microsoft service revenue was 19 percent, while in the second quarter of 2003 service revenue from Microsoft was only three percent. This further speaks to the fact that we have transitioned the Service business away from dependence on Microsoft.

Finally, our SDIO software and driver development tools that enables secure digital input and output on Microsoft operating systems such as Pocket PC, Smart phone, and CE.Net, are increasing their contribution to our product sales and service results. Last quarter we licensed the source code for our SDIO system software to Microsoft for inclusion in future generations of their operating system.

Sales have accelerated since the first of the year, and we already have 38 customers with several more in the pipeline. We have also made significant progress with the development, production, and business development activities for Power Handheld.

To update you on our progress there I’d like to turn the call back to Bill.

Thanks, Brian.

I’m proud of the results we achieved in Q2 of 2003. Increasing product revenue to 6.4m and an overall growth in revenue of 16 percent with an increasing gross margin of 10 percent from Q1 of 2003 to 24 percent in Q2 of 2003.

Also, as I mentioned earlier, I am very excited about the prospects for Power Handheld and the opportunity to focus my energy on that program. As many of you know, Power Handheld is a wireless handheld device with low cost, light weight configuration, retractable keyboard, full screen functionality, and powerful processing capabilities. We believe it is a superior alternative to larger laptops and smaller, less powerful handheld devices. The potential market for this product is very large, and several wireless carriers and OEMs are currently evaluating the Power Handheld Reference design. As a result, we expect to see some significant wins in the near future.

While Power Handheld is one of the more exciting aspects of our business I believe our core business is on a very solid footing, and has the potential to grow steadily and profitably even in the current economic climate.

In addition, I am confident our current Management structure is one that can leverage all of the company’s strengths to achieve our Corporate goals.

During the past few years I believe we have successfully addressed the major issues affecting our profitability. Now that the bulk of that effort is completed I believe we are well positioned in terms of product and services, financial resources, and market position to return to profitability.

In closing, please note that the company is not currently providing outlook on quarterly revenue and earnings expectations to allow the current and new Executives to adapt to the transitions in our business and management.

Now, I’d like to turn the call over for questions.

(Caller Instructions.) At this time you have no questions.

Okay. Well, thank you very much, and thank you for your continuing interest in BSquare. Our next conference call is scheduled for the fourth Thursday of October 2003.

Thank you very much, and good-bye.

This concludes today’s conference. You may all disconnect.

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