Bsquare Corp (BSQR) 2003 Q4 法說會逐字稿

Good afternoon. My name is Kerry, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the BSQUARE's year-end 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. Thank you.

Mr. Mahan, you may begin your conference.

Good afternoon. And thank you for participating in our year-end conference call. I am Scott Mahan, Chief Financial Officer. With me today are Brian Crowley, our Chief Executive Officer and President and Don Bibeault, our Chairman, who has been playing an active role in BSQUARE's turnarornd. Don will be available at the end of our call for questions.

Today's call will be divided into two sections. First, I will provide an overview of our financial results for the quarter and year-ended December 31, 2003, and then Brian will provide additional commentary on those results and speak to our business strategy and outlook. We will then open the call for questions.

Before we begin, let me remind you that except for the historical statements and information contained herein, the matters discussed in this call, including any 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, a decline in the market for Windows-based or other Smart s 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, our ability to successfully support our operations, 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 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.

Now I'll move on to the financial results. First of all, let me say that I am pleased to be speaking with you for the first time as BSQUARE's Chief Financial Officer. Through my work with the company for the past few months, I have been closely involved with many of the changes in the company implemented in the fourth quarter.

2003 was a transitional year for BSQUARE, both top and bottom line. Driven by third party software sales, the fourth quarter revenue exceeded that of the previous eight quarters. During 2003, our services business absorbed a final significant decline in revenue from the discontinued Microsoft tools consulting. We completed a number of restructuring actions that have slowed our use of cash and increased our operation the effectiveness. And, finally, we delivered the first Power Handheld devices to customers. While our results reflect these achievements, they also reflect our cost. Nevertheless, our financial results for 2003 represent a solid improvement over the results for 2002, and we are confident that trend will continue into 2004.

Starting at the top of our statement of operations, BSQUARE's revenue was 10.8 million for the fourth quarter of 2003, and 37.6 million for the full year, compared to 9.3 million and 37.5 million for the comparable period in 2002. Fourth-quarter revenue of 10.8 million compares to 9.4 million in the prior quarter. It's worth noting that we achieved revenue growth both sequentially and year-over-year. Also notable is that software revenue grew steadily throughout 2003 and increased 21% sequentially to 8.6 million in the fourth quarter.

Our overall gross margin for the fourth quarter was 15% of revenue, compared to 21% in the third quarter and 7% in the fourth quarter of 2002. The decrease in margin, both as a percentage and in absolute dollars was attributable to two factors: First, our service margin fell 10% due to a number of underperforming service engagements. Most of these engagements were completed by the end of the fourth quarter, while a few will be completed early in this quarter. As a result of their completion, we expect to see improvement in service margins in 2004.

Second, the portion of software sales attributable to lower margin third party software products was much higher in the fourth quarter compared to the third, due to increased sales of third party software in the quarter, and to a lesser extent, the recognition in the third quarter of previously deferred SDIO revenue.

Moving down the statement of operations. Our operating expenses increased slightly from the third quarter of 2003 in both R&D and SG&A, but were down significantly from the fourth quarter of 2002. R&D expenses of 2.4 million in the fourth quarter were up approximately 300,000 from the third quarter, due to increased expenses associated with the Power Handheld launch. SG&A was up slightly from the third quarter due to increased expenses relating to our Japan operation closure. Brian will discuss go-forward investment in the Power Handheld and related topics shortly.

As of today, the company has 148 employees, down from 222 at December 31, 2002. Our net loss for the fourth quarter was 9 cents per diluted share, compared to a net loss of 8 cents per diluted share in the third quarter. For the year, our net loss was 37 cents per share -- per diluted share compared to $2.02 in 2002.

Now a quick update on our balance sheet. Our cash, cash equivalence, restricted cash and short-term investment balance was 17.7 million at December 31, 2003, compared to 22.9 million at September 30th, 2003. Reflecting the use of 5.2 million in cash during the quarter. Of that total, 2.2 million funded purchase commitments of Power Handheld inventory, and the remaining 3.0 million was used to fund operations, including increased expenses relating to the Power Handheld business and closing BSQUARE's operations in Japan.

Accounts receivable at December 31st, 2003 totaled 6.4 million, down 2% from September 30th, 2003 due to concerted collection efforts. This is especially significant given the increase in revenue during the fourth quarter.

Now I'll turn the call over to Brian Crowley, who will comment on operational results and strategic initiatives.

Thanks, Scott. The financial results of the fourth quarter in 2003 reflect the shift in our business and operational improvements we have made over the past two years. In the second quarter of 2003, we implemented a comprehensive turnaround plan that resulted in sequential improvements in our quarterly operations and redefined our long-term strategy. Our turnaround plan is continuing into 2004. Our plan includes several major elements, and I would like to report on our progress and outlook.

First, we set off the strength in our management team. In Q4, we brought on Kerry Butler to run our services business. Kerry brings a wealth of experience in building and growing service organizations and has already made a difference at BSQUARE. She has installed an efficient set of processes and disciplines into our business that will allow the service group to scale as our business grows.

Late in 2003, Andre Fournier joined BSQUARE to lead our Power Handheld R&D and operations team. Andre has a telecom hardware and software background and has been instrumental in working with our contract manufacturer as we bring the Power Handheld to market.

Early in 2004, we announced the arrival of Scott Mahan as our new CFO. Scott brings a very strong focus on operational efficiencies, as well as strong financial experience in software and service companies.

Second, we have taken aggressive action in order to reduce our operating expenses and cash burn. During 2003, we eliminated several unprofitable product lines, worked hard to reduce the amount of overhead that the company was carrying and renegotiated lease costs associated with our California facility. In 2004 we expect to continue this activity by completing the closure of our unprofitable Japanese operation and conclude lease renegotiations for our headquarters.

Finally, we continue to focus our efforts on what we do best, selling software products and services to blue-chip Smart device makers. For example, we grew software revenue by 45% year-over-year. We made initial shipments of our Power Handheld device to customers and we became one of Microsoft's largest value-added partners for Windows embedded software worldwide. As a result, I believe we have positioned BSQUARE for continued growth and a return to profitability as the preferred software and service solution provider to the Smart device industry.

Now I'd like to highlight some of the accelerators that I believe will drive our growth during 2004. First, the overall Smart device market is growing rapidly. For example, in the convergent Handheld device category, IDC is forecasting a market for over 70 million devices in 2007, up from less than 10 million in 2003. BSQUARE is well positioned to take advantage of this growth with the products and services that we provide to customers who are designing, building and selling these devices.

Next, Microsoft is gaining momentum in the Smart device marketplace. According to IDC, Microsoft market share in the convergent Handheld device space is expected to grow from 12% in 2003 to 22% in 2007. To our close partnership with Microsoft, we participate in joint sales and marketing activities that have resulted in significant increase in our software sales and increasing number of service engagements for Windows Mobile and Windows embedded devices. We expect that these joint activities will continue in 2004.

We are working hard to grow our service business. During 2003, we successfully completed several major service engagements in growing areas including: Smart phones, Handheld devices, point of sale terminals and retail kiosks. We believe that BSQUARE has unmatched expertise in embedded Windows development and we feel that we can package this expertise in order to win larger and more profitable service engagements in 2004.

During 2004, we will actively look for additional products and services that are complementary to our existing offerings and fit within our sales channel. Such products or services may be developed internally or obtained through partnership or acquisition of other companies. We feel that our growth will accelerate when we can offer our customers products and services starting from when they select an operating system for their device, all the way through final testing before the device goes to market.

During the fourth quarter of 2003, we shipped initial Power Handheld units to customers and early response to the product has reinforced our belief that the Power Handheld represents a significant opportunity within the wireless device market, particularly as our customers launch their enterprise marketing initiatives. At the same time, it has become increasingly apparent that BSQUARE cannot continue to support the substantial product and operational costs necessary to exploit that opportunity without additional funding.

As we indicated in our release of this quarter's results, our Board of Directors has formed a strategic committee that is actively exploring various financing options for the Power Handheld business unit. These options may include funding of the business unit inside of BSQUARE or as a stand-alone entity.

Although we have not reached a conclusion yet, we are focused on finding the best way to ensure the ongoing success of all of our businesses while maximizing shareholder value.

In conclusion, we are pleased with the changes that the company has put into action throughout 2003. And we feel that we are in a good position to reap the benefits of the growing Smart device market.

Now we'd like to take your 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 keypad. We'll pause for just a moment to compile the Q & A roster.

Your first question comes from [Quint Flattery] with Symmetry Peak Management.

Hey, guys. Just a quick question because I'm on another call as well. Did you guys guide the profitability when you're looking for profitability, as well as what is the most likely option you're going to do with the Handheld unit? Thanks.

Hi, Quint. No. We have not given any guidance on profitability at this point. As far as the most likely option, we're really keeping all the options open. You know, the -- the board committee is engaged in some pretty detailed investigation at this point. And as we just indicated, we think by the end of Q1 we should be able to reach some conclusions.

I guess maybe a better way to ask it would be what are the options that you're considering.

Right now, the options are is, you know, could we keep it inside of BSQUARE? Is there a way for us to do that? We're considering potentially raising some money for the product either inside of BSQUARE or as a stand-alone entity. And we are looking at potential strategic partnerships.

Okay. Thank you. And just in terms of -- of this year, are you expecting profitability this year, some -- for -- on a quarterly basis at some point this quarter.

Sometime during the year we expect to get to profitability.

Okay. Thank you.

Your next question comes from Sean Matthews with (inaudible) Asset Management.

Yes. Good quarter. Could you just tell me, how many units were shipped and do you have any sort of projections going forward, how many units will be shipped next quarter as well.

We -- we can't disclose how many units were shipped. Our contract with our customers does not allow us to disclose those numbers. As we get more customers and we're able to aggregate numbers together, we will be able to disclose shipment value.

As far as expectations for this quarter, we haven't provided any forward-looking guidance, and we're not prepared to do so at this time.

Can you tell us about margins on the product at least, what sort of margins you anticipate, or are you generating right now.

Well, you know, once again I think that margin information is something that we're not prepared to disclose.

Okay. Are you -- do you anticipate next quarter having new partners other than Vodafone as well, or is this something that -- obviously you're negotiating with people as we speak, do you anticipate having at least one or two new players next quarter.

Well, right now we are primarily working with the -- the Vodafone UK operation, and obviously Vodafone has many other operating companies and, you know, the UK tends to be the lead operating company. So we are talking to several other Vodafone operating companies at this time.

Would there be any other companies other than Vodafone.

There are other OEMs and there are other -- you know, we've been out talking to (inaudible) obviously and there are other operating companies that we are talking to.

Okay. Thank you.

Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad.

At this time, there are no questions.

Okay. Thank you very much.

I'm sorry, Mr. Mahan.

Yes.

You have a follow-up from [Quint Flattery].

Okay.

Hey, guys. Just on the utilization rate, what are you seeing on the utilization rates on the servicing side, and then how about the pricing as well on the services side?

Well, we don't -- we don't disclose our utilization figures publicly, but they are -- they've started to increase pretty dramatically during the quarter. And we're also seeing a pretty significant -- or a significant increase in our -- in our bid rates for new business that you'll see coming through in 2004.

That's a combination of a lot of different things. And also reflects the -- my comment earlier of the -- the impact of the underperforming service engagements in 2004 -- I mean in the fourth quarter of 2003.

Okay. And as for revenue next quarter, for guidance, um, what should we be looking for? And then for next year?

Yeah. [Quint], we haven't provided any guidance at this point.

Okay. Well, are you expecting normally that it's -- normally down Q1 sequentially, or are you expecting it to be up sequentially? Because it sounds as if utilization rates are picking up and pricing is picking up, so wouldn't you expect that to be going up sequentially.

Well, you know, we're optimistic about our revenue.

Okay.

And, you know, we think we're going to have a good year, but again, we're not providing detailed guidance.

Okay. Thanks.

At this time, there are no questions.

Okay. Thank you.

This concludes today's teleconference. You may now disconnect.