Bsquare Corp (BSQR) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for joining the BSQUARE quarter one earnings call. In a moment I will turn the call over to Mr. Scott Mahan, CFO of BSQUARE. Questions will be held until the end of the presentation at which time questions will be fielded for the management team.

Now I will introduce Mr. Scott Mahan, CFO of BSQUARE Corporation. Mr. Mahan, I will now turn the conference over to you.

Good afternoon and thank you for participating in our first quarter 2004 conference call. I'm Scott Mahan, CFO. With me today are Brian Crowley or President and CEO and Don Bibeault, Chairman of Our Board of Directors. I will begin by giving you an overview of the financial results for the quarter and then Brian will offer his views on results as well as insight for the rest of the year before we open the call for questions.

Before we begin the financial results discussion, let me remind you that except for the historical statements and information contained herein, the matters discussed in this call including revenue and net revenue 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 devices or the failure of such market to develop as anticipated, adverse changes in macro economic 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 restructurings, our ability to successfully support our operations, competition and intellectual property risk.

A more detailed is 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, 2003 in the section entitled "Risk Factors". Listeners are cautioned not to place undo reliance on these forward statement, 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, on to the discussion of our financial results. The first quarter clearly demonstrated that the steps taken in 2003 and early 2004 to improve the performance of the company are taking hold. We experienced both year over year and sequential increases in revenue resulting in our best top line since the third quarter of 2001.

Additionally, we realized improvements in our first quarter 2004 gross profit and operating expenses through the restructuring and operational actions we have taken. The topline gross profit and operating expense progress all contributed to significant improvements in our bottom line this quarter, demonstrating real progress toward our goal of profitability.

Total revenue for the quarter was $11.1 million up from 8.1 million a year ago and $10.8 million in the fourth quarter of 2003. Overall we were pleased by both our year over year and sequential topline improvements as is also the case in the fourth quarter of 2003.

Software revenue was $7.7 million in the quarter compared to $6.1 million a year ago and 8.6 million in the fourth quarter. First quarter 2004 sales of Microsoft Embedded software were $6.9 million, versus $5.4 million in the first quarter of 2003 and $7.6 million in the fourth quarter, demonstrating the continuing strength of our relationship with Microsoft and our OEM customers. The sequential software revenue decrease was the result of expected seasonality.

Service revenue for the quarter was $2.9 million compared to $2.0 million and $2.1 million in the first and fourth quarters of 2003 respectively. The completion of several underperforming fixed price service engagements, coupled with improvements in resource utilization, pricing and contract management, contributed to the service revenue increase. At the same time we're working with an expanding range of customers to bring the latest smart device technology to the marketplace.

Revenue from the company's hardware business increased $524,000 during the quarter as compared to $73,000 in the fourth quarter of 2003. We recognize revenue on approximately 700 units of the Power Handheld this quarter as compared to approximately 100 units in the prior quarter. The company shipped units to three customers in the quarter the most notable being Vodafone U.K..

Overall gross profit for the first quarter was up significantly to 20% of total revenue compared to 10% a year ago and 13% in the third quarter. The increase was driven largely by a substantial improvement in our service gross profit, which increased to 28%, versus a negative profit a year ago and in the fourth quarter of 2003. The service gross profit improvement stems from the combination of higher revenue, discussed previously, and lower service costs driven by reduced personnel, facilities and other expenses.

We have and will continue to focus on improvements in our resource utilization, pricing and contract management. We saw the first substantial benefits of that focus this quarter.

Software gross profit improved slightly to 21% of software revenue, versus 20% a year ago and in the fourth quarter. Gross profit for the hardware business was a negative 40% of hardware revenue this quarter compared to a positive 14% in the fourth quarter of 2003 when we started shipping the Power Handheld. During this quarter, certain personnel and other costs, previously shown as research and development expense, were charged to cost of revenue coinciding with the first meaningful shipments of the Power Handheld device.

Research and development and selling general and administrative operating expenses decreased to $4.2 million during the quarter compared to $6.9 million and $5.6 million in the first and fourth quarters of 2003, respectively. The improvement stems from several factors. The most notable were lower facility costs related to lease restructuring actions, as well as reduced Power Handheld research and development expense due to the completion of testing, certification and other preproduction activities.

In general operating expenses were down across the board from the fourth quarter due to the impacts of our turnaround initiatives. Total operating expenses for the quarter were 4.4 million which included $262,000 of amortization expense and restructuring charges. This amount included $1.7 million of direct expenses related to the Power Handheld business and $193,000 related to the, now closed, Japan operations.

Our net loss for the quarter was $2.2 million or 6 cents per diluted share. That compares to a net loss of $6.6 million or 18 cents per diluted share a year ago and a net loss of $3.7 million or 10 cents per diluted share in the fourth quarter of 2003.

At quarter end BSQUARE had 130 full-time employees versus 148 at December 31, 2003.

Turning to the balance sheet. Cash, cash equivalents, restricted cash and short-term investments were $15.4 million at March 31, versus $17.7 million at December 31, 2003. We used $2.3 million in cash during the quarter compared to $9.8 million and $5.2 million in the first and fourth quarters of 2003, respectively. The majority of cash used in this quarter went to fund Power Handheld operations and the restructuring costs for the, now closed, Japan operations.

Now, I'll turn the call over to Brian who will provide additional comments on the quarter as well as some insight to our strategy and objectives for the rest of this year.

Thanks, Scott. We are pleased with what we accomplished this quarter. We again recorded sequential and year over year top line growth, making this the best quarter since Q3 of 2001. This speaks to the dedication, focus and hard work from all BSQUARE employees as we put some difficult times behind us and move forward with positive momentum.

The turn around plan that we initiated in Q3 2003 continues to pay dividends. As Scott indicated earlier, weaker revenues from both our software and professional service offerings year over year. We believe our revenue growth is indicative of the overall market growth for smart devices and increasing share of smart devices running Microsoft Embedded operating systems. BSQUARE is well positioned to take advantage of this momentum due to our proven track record in consulting and professional services, our portfolio of embedded software products and our unmatched expertise in Microsoft Embedded licensing.

In addition, our relationship with Microsoft remains strong. We are one of the largest resellers of Microsoft Windows Embedded licenses world wide and we participate in a number of joint sales and marketing activities, which have resulted in significant software sales and service engagements.

Scott also mentioned the significant gross profit margins related to our professional service offerings. While we do not expect another large increase in our service margins next quarter, we do see that the activity levels and interest in our professional services remains strong and we feel that the operational improvements we have made in our service line should result in positive contribution for the remainder of 2004.

In our recently filed Form 10-K, we described our ongoing strategy of growing our product portfolio through partnering or acquisition. We are continuing to execute against this strategy and remain focused on growing our software portfolio of Windows XP Embedded, Windows CE and Windows mobile products.

From an acquisition standpoint we are focussed in finding companies that offer services that fit within the current markets we serve and can be immediately accretive to our top and bottom line. In the area of partnering we intend to find complimentary products that allow us to create value added bundles that we we'll be able to offer to our existing customer base at higher gross profits. We are engaged with several companies and expect to announce progress on this initiative in the coming months.

Now I'd like to update you with progress on our SDIO Now! product. This quarter we announced that additional smart device makers have joined our SDIO Now! program to develop and advance their innovative smart device technologies. SDIO or Secure Digital Input Output is the industry standard for very small form factor peripheral cards for smart devices.

Our SDIO Now! solution has become the industry standard for software solution for smart devices running Microsoft Windows CE, Pocket PC and smart phone operating systems. New OEMs we announced this quarter who are utilizing our include a SDIO technology include [Asustech] Taiwan's largest OEM, Hitachi, a leading Japanese smart device OEM, [Wynon] a Taiwanese smart device manufacturer, Quanta, the second largest Taiwanese OEM and [Wellchallen] a large North America medical smart device maker. These customers joined our SDIO Now! programs to expand their flexibility of their Window mobile-based smart devices and Pocket PC devices.

We have now have more than 60 OEMs and other customers including Dell, HP, Intel, Motorola and Sharpe that have licensed BSQUARE's SDIO Now! technology to integrate into their smart devices. As we have discussed previously, Microsoft will be incorporating our SDIO technology into future Windows Embedded operating systems. We are working on our next generation SDIO product to compliment the SDIO functionality expected to be included in these upcoming operating system releases. We expect continued demand for SDIO technology in 2004.

Turning to the hardware side of our business, we increased shipments of our Power Handheld device during the quarter after having made initial shipments in the fourth quarter 2003. Our ongoing Power Handheld sales and market development activities reinforce our belief that there is demand for converged device that can combine wireless voice and data across an open platform with true laptop functionality.

However, we have realized that due to the long sales cycles involved when dealing with corporate enterprise and IT departments, the time and resources needed to exploit this opportunity to an economically viable level for BSQUARE are likely outside our window for future investments; therefore, we announced last quarter we would be seeking outside financing for the Power Handheld business or a sale there of.

Since our announcement we have been working diligently on obtaining financing and we have several parties who have expressed interest or are engaged in due diligence activities. We believe that the ultimate out come will be either a spin-out of the Power Handheld unit or a sale of the Power Handheld unit to a third party.

While we remain optimistic that we will be able to close outside financing, management and the Board of Directors are carefully monitoring and evaluating the Power Handheld's impact on the company's cash resources and will take further action if necessary.

Along these same lines, we made the decision in the quarter to reduce operating expenses in the Power Handheld unit to give us more flexibility and time to pursue financing options. We do not believe that these reductions will have any impact on our ability to manufacture units and to provide sustaining engineering and support to our customers. We are working very hard to conclude Power Handheld financing and will issue updates as we are able to speak publicly regarding our efforts.

This concludes our discussion on BSQUARE performance and business. We would now like to take your questions.

Ladies and gentlemen, in order to ask a question, please press star then the number 1 on the telephone keypad. We'll pause for just a moment to compile the Q&A roster.

It seems at this time there are no questions.

Okay. We thank you for participating in our call and for continued interest in BSQUARE and we'll be posting an audio copy of this onto our website. Thank you very much.

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