Bsquare Corp (BSQR) 2003 Q3 法說會逐字稿

Good afternoon. My name is Shaela, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the third quarter results conference call. (OPERATOR INSTRUCTIONS). Mr. Asp, you may begin your conference.

Thank you. Good afternoon and thank you for participating in our third-quarter conference call. I am Nogi Asp, Chief Financial Officer of BSQUARE. With me today is Brian Crowley, our President and CEO, and Don Bibeault, our Chairman of the Board, who is providing active guidance to BSQUARE's turnaround. Don will also be available at the end of the call for questions.

Today's call will be divided into two sections. First, I will provide an overview of our financial results for our third quarter ended September 30th, 2003, and then Brian will comment on overall operations and business outlook. When we will then open the call for your questions. A copy of our press release announcing our third-quarter results is available on our Website at www.bsquare.com in the Investor Relations section. You may also listen to this conference call for one year from today through a webcast link at the same location on our Website.

But first let me start with our Safe Harbor statement. Except for the historical statements and information contained herein, the matters discussed in today's 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 a 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 effect of our restructurings and our ability to successfully support our operations; competition, and intellectual property risks. A more detailed description of risk factors that could affect our actual results include, but are not limited, to those discussed in BSQUARE's annual report on Form 10-K for the year ended December 31, 2002 in the section entitled "Risk Factors" and those discussed in BSQUARE's subsequent quarterly 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.

As we indicated in today's press release, our third quarter of 2003 was characterized by increasing stability across our operations and progress on several fronts that we believe will result in material improvements to our business over the next several quarters. Starting with the income statement, BSQUARE's revenue for the third quarter was 9.4 million, which equaled our prior quarter. Product revenue was 7 million, an increase 11 percent over the second quarter. About 84 percent of our product revenue came from the distribution of Microsoft licenses and other third party products. The majority of all other product revenue was due to continued strength of sales of our SDIO Now! product. Professional services revenue was 2.3 million, down from 3 million in the prior quarter, due in part to a temporary delay in a significant professional service engagement, which resumed early in the fourth quarter.

Moving down the income statement, our gross margin for the third quarter was 21 percent, down 3 percent from the second quarter. This decrease was due primarily to the previously discussed professional service engagement delay.

Moving onto operating expenses. Overall when excluding the net restructuring gain in the second quarter, total operating expenses were down approximately $500,000 sequentially. Research and development expenses were up slightly to 2.2 million in the third quarter. These expenses reflect the final development and certification stages of our Power Handheld product. Sales, general and administrative expenses were 2.9 million in the third quarter, down from 3.6 million in the second quarter of 2003 and significantly down from 5 million in the third quarter of 2002. In addition, the Company is making satisfactory progress in regards to its negotiations to reduce its remaining lease obligations.

Overall we continue to focus on controlling and reducing costs in order to meet our goal of returning to profitability. Our net loss for the third quarter was 8 cents per diluted share compared to a net loss of 2 cents per diluted share in the prior quarter The net loss in the prior quarter included a net gain of 2.8 million or 7 cents per diluted share from restructuring activities. Excluding the prior quarter net gains from restructuring activities, the Company reduced its net loss by over 500,000, which was about 1 cent per diluted share.

Turning to our balance sheet, the Company ended the third quarter with 22.9 million of cash and cash equivalents, restricted cash and short-term investments. That does compare to 26.5 million at the end of the prior quarter. During the third quarter, we used 3.1 million of cash for operations and 1.2 million for restructuring, offset by the sale of an investment which contributed an additional 750,000 of cash during the quarter. Total cash used in the quarter was 3.6 million. In the prior quarter, the Company used a total of 3.4 million of cash for operations and restructuring. Our Accounts Receivable was 6.5 million at the quarter end. Accounts Receivable Days Sales Outstanding has improved to 62 days from 68 days at the end of the prior quarter and from 77 days at the end of 2002 in comparison.

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

Thanks, Nogi. During the third quarter, BSQUARE continued to execute on its turnaround plan. Product sales increased 11 percent from the prior quarter. With solid sequential gains in sales of both BSQUARE products and third-party licenses. Although professional engineering services revenue was down sequentially, overall revenue was on track with our expectations. In addition, we made significant progress in lining up new customers for our Power Handheld and preparing for first customer shipments of this product in the fourth quarter of 2003.

On the expense side of our business, we reduced corporate overhead by 17 percent over the previous quarter, a rate slightly faster than expected. And as Nogi has indicated, we continue to work on reducing our lease obligations, paving the way for future expense reductions.

Overall we are encouraged by the early results for the second half of 2003 and are pleased that the decisive turnaround actions the Company took in prior periods are beginning to prove successful.

During the quarter, our headcount decreased to 162 employees, down from 180 at the end of the second quarter. As a result of this and other restructuring moves, we have slowed our operating cash burn during the past two quarters.

Now let me comment briefly on several key aspects of our business. BSQUARE is on track with our goal of first customer shipments of the Power Handheld in the fourth quarter. As we indicated last quarter, we expect revenue from Power Handheld in the current quarter. We received our first purchase commitment from Hoeft & Wessel Skye Webpanel AG as a follow-up to the letter of intent that we announced earlier this year. Additionally, we have received a purchase commitment from a major wireless operator and expect to ship product to this customer during the quarter.

Revenue from the sale of Microsoft licenses grew during the third quarter, reflecting continued strong demand by OEMs and our increasing penetration of the North American market. We believe this will continue to be a stable component of our business and a source for increasing revenue.

SDIO Now! has grown with worldwide market adoption of our technology by OEMs and ODMs who are delivering leading-edge Microsoft Windows Embedded and Windows MobileSmart devices. Ten companies including Motorola, Broadcom, Sharp, and LG Electronics joined BSQUARE's SDIO Now! program bringing total membership in this program to 47 companies. Although we are very pleased with this growth as BSQUARE and Microsoft collaborate further to integrate our SDIO Now! functionality into the Next Generation Windows operating system during 2004, we expect the market window for new SDIO Now! licenses to narrow.

During the third quarter, our professional engineering services revenue of 2.3 million was in line with our expectations. Overall services activities and the size of early stage bids are trending upwards and utilization of engineering staff increased during the quarter.

As we look ahead to the last quarter of 2003, our goals are to grow topline revenue and improve gross margins. 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. As I indicated earlier, our licensing business is increasing. We're 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 this year have been steady on increasing revenue, and our distribution customers, particularly OEMs using Windows CE and those migrating to XP Embedded, represent an expanding addressable market for BSQUARE products and services.

Second, our professional engineering services business is stabilizing as a platform for future growth. We are continuing to focus our efforts on growing our relationships with our Tier 1 and silicon customers on a more strategic level in order to understand and respond to their business needs.

Third, we have made significant progress with the development, production and sales activities for Power Handheld. Because Power Handheld product defines a new category of device that merges the important features of a laptop with the form factor of a handheld device, we continue to see a high level of interest from the marketplace. We are close to making our first customer shipment in the current quarter, and we believe Power Handheld will become a significant component of our revenue stream in fiscal 2004.

In closing, I believe we are successfully addressing the major issues affecting our profitability and that we are well-positioned in terms of products and services and market position to return to profitable growth within fiscal 2004. In addition, I am confident our current management structure is one that can leverage all the Company's strengths to achieve our corporate goals. Although we expect to see further improvement in the fourth quarter, including lower expenses and some revenue growth, we view this as a continuation of the transition we began last quarter and have not provided specific revenue and earnings guidance.

Now I would like to open the call for questions. Shaela, if you are ready, we are ready for questions.

(OPERATOR INSTRUCTIONS). Dominic Marshall, Benson Associates.

So you peaked my interest with this commentary in the press release about the order from a major wireless operator -- a significant order. I was wondering if you could give any more color on that? I am assuming you can't because you did not put it in the press release.

Unfortunately our customer, we are bound by confidentiality. So we cannot disclose either the name of the customer nor can we disclose the size of the order. Although as soon as we are able to, we certainly at that time will be forthcoming.

How about the timing of it?

Well, we expect to start shipping devices this quarter to the customer.

I guess you said a significant order, but will it be significant quantities this quarter?

Well, it is part of a rollout that our customer is doing, so the order is staged. This is an initial order at this point.

Can you say if it is a U.S. carrier?

I cannot say where the carrier is located.

Can you say -- I am trying to get at this anyway I can -- can you say if the carrier has announced it yet or made their plans available for the product?

The carrier has not made their plans available at this point, which is why we cannot talk about it any further.

I am assuming that once they begin to put that product out on the market, then you guys will be able to say something about it.

Once they get out to the market, then we can talk more about it.

Okay. And you chose not to give any guidance for this quarter, but you talked about continuing the cut expenses and move towards cash flow breakeven. Do you have any sort of a stated goal for when you want to get to that cash flow breakeven level?

We certainly expect to become cash flow breakeven during 2004. Beyond that, we really have not provided specific guidance.

Well, I guess that does it for me for now. Good luck.

Paul Sethi, Vertical Ventures.

I wanted to drill down a bit more on the Power Handheld side. I am not sure if you can give any more clarity. More in the general sense, when you look toward 2004, you say it is going to be a significant revenue contribution. Can you give any more clarity to that whether it would be on a revenue number side or give us any kind of range revenue contribution percentagewise even if it is toward the end of next year? In terms of number of units -- any kind of sense, any kind of guidance?

At this point, we're choosing not to give guidance.

Okay. So we really have no basis whether this is going to be in the hundreds of units, thousands of units, tens of thousands of units?

I think we said in the past that we believe the market for this product is significant, in the hundreds of thousands of units. But we are just really getting started here on the sales side. We're not going to give guidance until we feel like we have some good visibility.

When you say the market in the hundreds of thousands, do you base that on current products out there that you are looking to replace, or do you base that on a new market that you are creating?

I would say it is really a combination of both. There are certainly -- we talk too many people who are using current products who express some level of dissatisfaction with functionality. Also, we talk to a lot of the industry analysts about some of their numbers and what they see, so we think it is a large market.

Okay. And what about the margins on these products?

We have not disclosed any kind of margin information at this point.

Okay. So we have no sense even in terms of just on this portion of the business, what unit level will make this portion of the business breakeven?

Right. We have not given any specific guidance around that at this point.

Okay. Thank you very much.

Dominic Marshall, Benson Associates.

A follow-on on that previous question. In terms of gross margin contribution from the Power Handheld, this is going to be pure royalty revenue, correct?

No, it's not going to be pure royalty revenue.

It is not. Aren't you basically just selling a reference design here?

We are actually selling a product here.

Okay. So who is manufacturing it?

We have a partner in China who is actually doing the manufacturing.

So you're not just selling the design, you are actually selling the product?

That is correct.

In terms of branding, it will be both -- say, in both of the customers that you have announced, one with the name and one without it, is this going to be branded BSQUARE at all, or is it going to be purely branded with the carriers?

This will have our customer's brand upfront. BSQUARE will be standing behind that brand.

But your name will not be on it?

That is correct.

For instance, with these two customers you have announced so far and hopefully more in the future, my understanding was the actual product may look a little bit different from customer to customer. Is that correct?

One of the differentiators for this product is the customer's ability to do branding and localization and customization of product. I don't expect that the firm factor will be hugely different, but certainly the applications on the product, the look and feel of the user interface, and even the colors of the product will be different.

Okay. Are you still trying to sell this -- maybe I am mistaken because I recall in the past you guys talked about selling this as a reference design, where someone else would take it and basically pay you on a royalty basis and manufacture it themselves. Is that still part of the plan?

We still have talked to potential customers about that. In fact, we announced earlier that NEC licensed the software component of the design as a reference, that they are putting onto one of their product. So that is still part of the plan, but we have found significant interest from customers in just buying the finished product from us.

Right. Then the last question for me. In terms of the gross profit dollars this quarter, it was pretty much all on the product side. You were about breakeven on the gross profit line from service. Of the 2 million or so in gross profit dollars, I guess what I am getting at is I am assuming the gross margins are still pretty slim on the $6 million in third-party revenue that you're doing, or are you starting to see a better margin there?

The gross margins have been pretty stable throughout the year on the third-party revenue.

So I am assuming that if it is still pretty thin, then you must be getting pretty good revenues on the million plus that you did in your own SDIO Now! and your own proprietary products?

Yes. We had very nice margins on our own proprietary products.

Okay. But I am assuming you're making money at the gross profit level on the third-party products?

Yes. That is correct.

You must be, obviously.

Yes.

All right. Thank you.

At this time, there are no further questions.

Okay. I guess that wraps it up for this quarter then. We want to thank everybody for dialing in. I want to remind everybody that our next conference call is scheduled for the fifth Thursday of January in 2004.

This concludes today's conference call. You may now disconnect.

Thank you, Shaela.

You're welcome, sir. Have a great day.