Bsquare Corp (BSQR) 2004 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the BSQUARE third quarter 2004 conference call. At this time all participants are in listen only mode. Following today’s presentation instructions will be given for the question and answer session. If anyone should need operator assistance at any time during the conference, please press star followed by the zero. As a reminder, this conference is being recorded today Thursday November 4, 2004. I would now like to turn the conference over to Mr. Scott Mahan, Chief Financial Officer. Please go ahead sir.

Good afternoon. With me today is Brian Crowley our President and CEO and Don Bibeault our Chairman. Before we begin let me remind you that this call is being recorded and broadcast live over the internet and that a recording of this call will be archived on our website at www.BSQUARE.com. Let me also remind you that except for the historical statements and information contained herein, the matters discussed in this call including any revenue and net income expectation and comments regarding our product and other growth initiatives 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 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 offering, lack of customer acceptance of new products or initiatives, risks associated with the effects of our restructuring, our ability to successfully support our operations, competition and intellectual property risks.

A more detailed description of certain risks, certain factors that could affect actual results include but are not limited to those discussed in BSQUARE’s annual report on from 10 K for the year ended December 31, 2003 in the section entitled risk factors and in our subsequent quarterly report on form 10Q. 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.

Prior to my detailed discussion of our quarterly results I would first like to call out three significant achievements in the quarter. First, BSQUARE achieved the bottom line profitability for the first time since the first quarter of 2001. At that time our business was dominated by the now defunct Microsoft Tools consulting business. BSQUARE is a very different company today with our business turnaround and reengineering efforts finally reaping the benefits our board contemplated when we began this process in mid-2003. This achievement is a result of the hard work of our employees and some difficult decisions we have made over the last year. I would also add that we achieved profitability one quarter ahead of expectations set on the last conference call. Second and arguably more importantly, we generated income from continuing operations in the quarter. While not substantial, it was a significant validation of our turn around plan and momentum. We demonstrated during Q3 that our go-forward business of providing software and services to smart device makers is a profitable one.

Finally the company generated positive cash flow in the quarter. Similar to profitability this is an achievement BSQUARE has not been able to point to since the first quarter of 2001. We ended Q3 with $4.1m in cash and securities and no debt. With that said I will now turn to a detailed discussion of our quarterly results.

Total revenue for the quarter was $10.6million up 19% compared to $8.8m in the second quarter of 2004 and up 12% compared $9.4m in the year ago quarter. Top line improvement from the second quarter stems primarily from an increase in software revenue slightly offset by lower service revenue. In particular we saw substantial sequential growth in sales of Microsoft embedded operating systems which totaled $7.4m in this most recent quarter Microsoft embedded OS sales increased $2.2m or 44% from last quarter and were up $1.5m from Q3 of last year. In fact this was our second best quarter ever of Microsoft Embedded OS sales trailing our Q4 2003 total of $7.6m only slightly. This increase was driven by a volume improvement at several major accounts something we anticipated and spoke to on the last conference call as well as new account growth.

We expect the growth of Microsoft Embedded operating systems sales to continue into the fourth quarter. In addition sales of Microsoft Embedded OS toolkits jumped 93% sequentially over Q2. What is significant about this increase is that sales of toolkits are a forward-looking indicator of future Microsoft Embedded long time license sale because customers purchase toolkits at the front end of their development cycle.

In the third quarter we saw continued strength in sales of our SDIO Now! software product. Q3 SDIO Now! revenue was $578,000 down very slightly from our record SDIO Now! revenue of $584,000 in the second quarter of 2004. SDIO Now! revenue in Q3 of last year was $946,000, however that amount included a cumulative pick up of previously deferred revenue in the amount of $470,000. As discussed in the prior call we had an agreement with Microsoft to provide them the SDIO Now! source code which was incorporated into recently released versions of Microsoft Embedded operating systems. Consequently we expect SDIO Now! revenue to decline in the near term until we begin to see the impact of the release of our SDIO Now! 2.0 product which will ship this month and other future SDIO related releases. Ryan will discuss the future of the SDIO Now! and other propriety product initiatives momentarily.

For the nine month ended September 30th 2004 software revenue was $21.8m compared to $19.6m in 2003, an increase of 12% similar to the quarter commentary above, the increase was driven by higher sales of Microsoft Embedded operating systems which contributed $19.4m to our software revenue line in 2004 compared to $17m in 2003 for reasons similar to those just discussed. The only soft spot during the quarter came in our service revenue line. Worldwide service revenue was $2.4m in the current quarter down $414,000 from the prior quarter but up $124,000 from the year ago quarter the sequential decrease was due both to delays in contract signings and the deferral of revenue on some contracts due primarily to project delays. Despite this disappointment, the service pipeline remains healthy and we expect service revenue to pick up in the fourth quarter as we realize the benefit of additional sales capacity as well.

Now I’ll turn to a discussion of our gross profit margins. The overall third quarter gross profit margin decreased to 22% from 25% in the second quarter but was up slightly from 21% in the year ago quarter. The decrease from last quarter primarily reflects a revenue mix that is skewed towards sales of lower margin Microsoft and other third party products. Specifically sales of Microsoft and other third party products represented 71% of total revenue in the third quarter of 2004 versus 60% in the second quarter. During this most recent quarter, we were able to manage our service cost to sales proportionately such that our Q3 service margin of 24% was flat compared to Q2 despite the $414,000 sequential revenue decline. Our Q3 service margin was up dramatically from a negative 6% margin in the year ago quarter due primarily to lower overall cost of service, better pricing and contract management. For the nine months ended September 30th, the total gross profit margin was 23% in 2004 compared to 19% in the prior year. This improvement stems primarily from a substantial increase in our service margin from 0% a year ago to 25% in 2004 for reasons similar to those just discussed.

Total SG&A and R&D operating expenses were 2.4 million in Q3 compared to 2.9 million in Q2 and 2.8 million in the year ago quarter. The sequential decline in operating expenses all in the SG&A line resulted from the previously announced $310,000 Microsoft audit settlement cost in the second quarter this year. Additionally, professional fees, payroll related costs and marketing program cost were lower in Q3 of this year as compared to Q2. You’ll note that R&D expenses increased in the most recent quarter compared to Q2 as we begin to ramp our proprietary product initiatives.

The year over year improvement in operating expenses resulted from similar reasons to those just discussed as well as lower facility costs. Overall, SG&A and R&D operating expenses were 22% of revenue in Q3 of this year compared to 33% in the second quarter and 30% in the year ago quarter, a substantial improvement. For the nine months ended September 30th, total SG&A and R&D operating expenses were 7.9 million in 2004 compared to 11.4 million in the prior year, a decrease of 30%. If you’ve followed us over the last few quarters, you’ve heard us discussing initiatives we have undertaken to reduce operating cost including savings in facilities, head count and other areas. SG&A is down significantly as a result of those efforts.

Additionally, in the first half of 2003, we terminated a number of unprofitable proprietary product efforts which reduced our R&D expense substantially year over year. I’ll reiterate what we said last quarter as well as in our earnings release, which is that while we have certainly made substantial progress in right sizing our operating expenses to fit our new business strategy. You should not expect significant go forward improvement. In fact, R&D expense will ramp in the near term as a result of product initiatives.

I am not going to spend much time speaking to the historical results of our discontinued power handheld business unit. In the third quarter of this year, we recorded income from discontinued operations of $169,000. This income primarily related to better than anticipated results in selling some of the inventory associated with the manufacturing of the device. In total, we sold $270,000 worth of inventory in the quarter, whereas inventory had been written down to zero value as of June 30th based on information available at that time.

Net income for the quarter was $208,000 or $0.01 per diluted share. That compares to a net loss of $3m or $0.08 per diluted share in the year ago quarter and a net loss of $5.1m or $0.14 per diluted share in the second quarter of this year. Note that the second quarter included a $4.5m loss from the discontinued power handheld business, including a $3.3m impairment and restructuring charge.

At September 30, we had $14.1m in cash and short-term investments compared to $14m at the end of the June quarter. As noted in our press release, significant cash uses during the quarter included $315,000 related to the discontinued power handheld business, $370,000 in CapEx, and $300,000 in lease restructuring payments. These cash uses were off-set by a positive working capital impact in the quarter which resulted from an increase in our Microsoft royalty payable driven by higher Microsoft Embedded operating system sales.

Going forward, we expect cash uses related to our discontinued power handheld business to be nominal and our CapEx to be much lower as well now that the build-out of our new headquarters facility is complete. We have one remaining lease restructuring payment of $285,000 which was made in October.

Now, I would like to turn the call over to Brian, who will provide commentary on our business initiatives and trends.

Thanks, Scott. First, I want to take a moment to recognize the hard work and dedication of our employees in delivering profitability this quarter. We are really proud of our team and without their support, we never could have reached this milestone.

In our last earnings call, we outlined a top line revenue goal of $20m to $22m for the second half of 2004. We are pleased to be half-way to that goal with a quarter to go and a solid pipeline. We returned the company to profitability this quarter, one quarter ahead of schedule and turned in solid sales of our software products.

The one area of disappointment this quarter was in our service revenue. The company has been through a lot since that last profitable quarter in Q1 of 2001. We have made many difficult decisions. The most recent of which was to shut down our power handheld business unit. We have chosen to return this company to a focus providing software and services to smart device makers, employing our resources towards expanding our customer base and ensuring that our customers received outstanding service and overall value. We are now realizing the benefits of this focus which along with continued diligence and cost controls have brought the company back into the black.

Looking at our software results, we recorded very good progress. We followed last quarter’s records SDIO Now! software sales with another quarter with almost identical results while increasing the total number of SDIO licensees to 75.

In November, we will make available our latest SDIO Now! version 2.0 software. This version includes new functionality and enhancements that our customers have been asking for, including performance improvements and support for the latest SD card association specifications. We will continue to invest in software technology like SDIO as we look to bolster the depth and breadth of our offerings for smart device makers.

As Scott mentioned earlier, we saw a rebound in sales of Microsoft Embedded operating systems during the quarter. Our combined strong sales of Microsoft Embedded licenses, coupled with the renewal of our Microsoft OEM agreement for another year and our status as Microsoft’s largest embedded value-added partner, demonstrates our commitment to selling and supporting Microsoft technologies, as well as the strength and depth our relationship with Microsoft.

In October, we took part in a new Windows-embedded point-of-sale platform announcement which we expect to bring additional service and licensing opportunities to BSQUARE once Microsoft releases its offering in the first half of next year.

Looking at our service results, service was unexpectedly soft this quarter as contract delays pushed business into Q4. Despite the disappointment, our service pipeline remains healthy and we expect improvement in the fourth quarter. We have been working diligently to integrate our Taiwan and Bellevue service organizations by cross-training our service engineers and by hiring new engineering talents into Taiwan. We have successfully executed on our first major service project using a virtual team made up of both Taiwan and Bellevue service engineers.

We believe this model to be important for two reasons. First, many large Windows mobile opportunities are occurring in Asia. And by having a local presence, we will have a competitive advantage in winning the business. Second, it provides BSQUARE a more competitive cost basis for service projects worldwide.

During the quarter, we completed eleven service engagements. Demand for our services continues in a variety of industries that we serve. Examples of projects completed during the quarter include, we collaborated with Texas Instruments and Motorola in the development of the Motorola CM620 mobile office device that incorporates GSM and WiFi capabilities in a mobile phone form factor. We worked hand in hand with Matrix Semiconductor to provide an optimized version of the Microsoft Windows CE Operating System for their innovative Matrix 3-D Memory. And we’ve provided a variety of hardware and application designs as well as two-way services for a North American OEM that creates in-vehicle monitoring and telematic solutions based on Windows CE.

Our ability to solve complex problems and provide deep and scalable service expertise demonstrates the depth of talent and experience that we possess at BSQUARE. Now I would like to spend a few minutes describing new investments we are making to grow our business and I will also use this opportunity to discuss other issues that are being addressed by management and the Board of Directors.

We’ve been out talking to our partners, customers and potential customers about opportunities for BSQUARE to add value to their smart device development efforts. Our customers are telling us that their devices are becoming more powerful, more connected, more complex and they increasingly want to focus their resources on value added applications. They are looking at companies like BSQUARE to provide the embeddable building blocks that sit underneath their applications and provide enhanced functionality.

We intend to enable this model by building additional software components for our customers to include in their devices. We believe that there are untapped opportunities to provide our customers with connectivity solutions, wireless software, user interface technology as well as other related software technologies. According to industry estimates provided by IDC, Connors, Microsoft and others, over 1 billion smart devices of all types, are expected to ship this year and that number is expected to grow to 1.4 billion by 2006 providing a ripe opportunity for BSQUARE to execute on this strategy.

The first manifestation of the strategy is our SDIO version 2.0 technology to be released in November and then additional SDIO related technologies that we are working on for release in 2005. Another example of this strategy came about through our smart phone service engagements, we recognized an opportunity to create software that manages a smart phones audio subsystems and we expect to offer this technology as a standard component to our customers in 2005.

In addition, we are actively working with customers in Taiwan and elsewhere to define a new offering based on the software technology derived from our power handheld device. We expect that this offering will also be available in 2005.

Moving on to other topics, I would like to speak to BSQUARE’s current stock price and cash resources. I’m sure that many of you are wondering what we will do about the company stock price, given that the stock is still trading under $1.00 and the company has been in non-compliance with the minimum bid price listing requirements for some time.

Let me start off by confirming the specifics of our listing status. BSQUARE is currently a Nasdaq national market issue and has until December 28 2004 to regain compliance with the $1.00 minimum bid price requirement. The company must also maintain compliance with all other continued listing requirements as all Nasdaq companies must. We feel that our stock has been undervalued for some time now. We expect that with this quarter’s result coupled with continued execution of our plans and initiatives, the market will reward our performance with a higher stock price. We have shown that we can run the business profitably, and have both a solid operating platform and have begun investing in new initiatives that should start to pay off in 2005. If the markets continue to value our stock below $1.00 and potential the listing concerns continue, we are prepared to exercise the options available to us including a reverse stock split or seeking a Nasdaq small cap listing.

The potential of the listing concern is a serious issue for us. We feel that our public company status provides strategic advantages in our market place, such as acquisition currency and we believe and we will take appropriate steps to preserve that status. We have been asked if the company intends to raise additional capital. We currently have no plans to do so. There are two primary drivers for this. First there is currently no compelling reason for us to do so given our balance sheet stability and roughly cash flow break-even state. Second, to the extent raising additional capital did make sense, we would hope to do so when the market has fully reflected our achievements and go forward potential in our stock price. The most likely scenario that would have us raising additional capital would be in an M&A context.

Well I’m sure I haven’t addressed every question you have. These are certainly key questions we concern ourselves with regularly. Let me close the business discussion by saying how personally excited I am to be leading the company. We have come through a difficult period and have emerged with a sold platform and tremendous opportunities ahead of us. We intend to work diligently but responsibly on initiatives that grow the company and increase shareholder value. Now we’ll wrap up the call with some guidance commentary.

In our last conference call we began providing limited guidance for the second half of our fiscal year. Specifically we said that the company would post revenues of between 20 and $22m in the second half and that we would be profitable on a quarterly basis in the fourth quarter. Updating our second half guidance we are currently expecting second half revenues to be between 21 and $22m driven by continued strengthened sales of Microsoft Embedded operating systems as well as an increase in worldwide service revenue that did not materialized in Q3. We also expect to repeat our Q3 profitability achievement in the upcoming quarter. Appropriate guidance for fiscal 2005 will be given in our year-end conference call. We will be issuing a press release in January announcing the date of that call. This ends the scripted portion of the call today. I would like to thank everyone for their time today and continued interest in BSQUARE. We will now open up the call for questions.

Thank you sir. Ladies and gentlemen at this time we will begin the question an answer session. If you do have a question today please press the star followed by the one on your push button phone. If you would like to decline from the polling process please press the star followed by the – you will hear a three tone prompt acknowledging your selection and your questions will be polled in the order that they are received. If you are using speaker equipment today you will need to lift the hand set before pressing the numbers. One moment please for our first question. And our first question comes from Sean Matthews with Alchemist Capital Management, please go ahead.

Congratulations guys very good quarter.

Thanks Sean.

With embedded toolkit sales being up 44% sequentially are you seeing real traction for next quarter? Is that like going out one or two quarters because I would think guidance then looks a little low even based on your performance from last quarter to this quarter.

The embedded toolkits are typically bought at the start of a project Sean and these projects can go on – you know probably the shortest would be 3 months and you know the typical project might be 6 to 9 months.

Okay.

You know bigger ones go even longer.

So when we talked last quarter about the embedded toolkits being up, did you see like half of that revenue coming in the quarter? I’m just trying to get a metrics going on following your revenue based on embedded toolkits.

I mean I think that we view it more as an overall indicator. Because there is sort of a de-coupling between when the toolkit is bought and when the revenue comes in. it’s tough to do a one for one match.

Okay and as far as -- do you guys have a backlog number that you would like to share or is that something that you’re still kind of going on an on going basis and just getting contracts when you can?

Sean we do have a backlog number but we’re not prepared to share it with you.

Sean Matthews Okay well great quarter guys keep up the good work.

Thanks Sean.

Once again ladies and gentlemen if there are any additional questions today please press the star followed by the one on your push button phone. As a reminder if you are using speaker equipments today you will need to lift the hand set before pressing the numbers. Gentlemen we have no further questions at this time please continue.

Okay I guess that wraps up our call thank you very much for attending and we look forward to talking to you again next quarter.

Ladies and gentlemen this concludes the BSQUARE Third Quarter 2004 Conference Call. Thank you for your participation you may now disconnect and thank you for using AT&T.