Bsquare Corp (BSQR) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the BSQUARE Corporation Q4 2008 Earnings Conference Call. (OPERATOR INSTRUCTIONS) This conference call is being recorded today, Thursday, February 19, 2009. I would now like to turn the conference over to Scott Mahan, Chief Financial Officer. Please go ahead, sir.

Good afternoon, everyone. With me today is Brian Crowley, our CEO.

Let me remind you that this call is being broadcast over the Internet and that a recording of the call and the text of our prepared remarks will be available on our website. I would also like to direct listeners' attention to the Safe Harbor Statement contained in our press release issued on February 11, 2009, which applies to the content of this call.

During the discussion today, references to "this quarter," "the quarter" or "Q4" and references to "the third quarter" or "Q3" mean those respective quarters in 2008, while references to "the first quarter" or "Q1" mean the first quarter of 2009. Further, references to "this year" or "the year" mean fiscal 2008, while references to "last year" mean fiscal 2007.

Before I begin, it should be noted that we recently issued a press release stating that the financial statements for fiscal 2007 and the first two quarters of 2008 could no longer be relied upon because of clerical accounting errors affecting third-party software cost of sales. These errors had the effect of increasing software cost of sales and reducing net income by approximately $440,000, or $0.04 per diluted share in FY07 and by approximately $164,000 or $0.02 per diluted share for the first six months of 2008.

As noted in the press release, these estimates are preliminary and are subject to further review by management and audit by our public accounting firm. Further, because we will be delayed in our Form 10K filing, the likelihood of an event occurring between the date of this call and that filing increases, which could affect the financial results discussed today. As a result, all Q4, FY08 and prior period financial information discussed today should be considered preliminary. Prior period financial information discussed today has been adjusted where appropriate for the effect of the known accounting errors.

With that said, let me recap our preliminary financial results. We expect to report total revenue for the quarter of $17.1 million, up 10% from $15.6 million in the year-ago quarter and up 6% from $16.2 million in Q3. This quarter should represent our thirteenth consecutive quarter of year-over-year total revenue increases. We had expected total revenue to increase roughly 5% to 10% sequentially but came in at the low end of the range for two reasons. First, revenue was negatively affected by a number of sales opportunities, which pushed out in the last several weeks of the quarter, and second, we did not recognize $670,000 in service revenue in Q4, pending completion of a new agreement with a major silicon vendor. Total revenue for FY08 is expected to be $65.8 million, up 11% from $59.4 million in 2007.

Sales of third-party software are expected to be $8.4 million this quarter, down 3% from $8.7 million in the year-ago quarter and up 6% from $7.9 million in Q3. Year-over-year decline was driven by a decrease in overall customer account, whereas the sequential increase resulted from improvement in major account revenue.

We had expected third-party software sales to increase roughly 13% to 18% compared to Q3. Sales opportunities pushing out at the quarter, especially Flash Lite licensing deals, drove the expectation shortfall. Several of the Flash Lite licensing opportunities have closed in Q1.

Third-party software sales are expected to be $35.4 million for FY08, compared to $34.2 million in 2007, representing an increase of 4%. Sales of Flash Lite and Solidcore increased $1.4 million full year over year.

Proprietary software revenue is expected to be $706,000 this quarter, compared to $1.4 million in the year-ago quarter and $831,000 in Q3. This quarter included $233,000 in TestQuest product revenue as a result of our November acquisition. The year-over-year decline resulted from lower service contract royalties, lower royalty revenue for our legacy SmartBuild reference design and the fact that Q4 '07 benefited from a $364,000 settlement with a former customer.

The sequential decline resulted from lower SDIO and SmartBuild revenue as well as lower service contract royalties, largely offset by TestQuest product revenue.

We had expected proprietary software revenue to decline roughly $180,000 sequentially, excluding the effect of TestQuest, whereas the actual decline was $357,000. Again the primary driver behind the shortfall was opportunities falling out of the quarter, which Brian will speak to.

Proprietary software revenue is expected to be $3.1 million for FY08, compared to $4.2 million in 2007. Service revenue is expected to be $7.9 million this quarter, up 44% compared to $5.5 million in the year-ago quarter and up 5% from $7.5 million in Q3. Year-over-year and sequential increases were driven by a large project with the Ford Motor Company, with the sequential growth partially offset by a decline in APAC service revenue.

During the quarter we generated $4.1 million in service revenue from Ford compared to none in the year-ago quarter and $2.6 million in Q3. APAC service revenue increased 529% this quarter compared to the year-ago quarter, driven by growth in Japan. APAC service revenue was down 34% sequentially due to softness in Taiwan. Japan, a market which we re-entered in Q4 '07, contributed $1.3 million in service revenue for FY08, coming in well above our expectations. In Q4, we hired a dedicated sales rep in Europe, and our goal is to replicate similar success there in 2009. Service revenue is expected to be $27.2 million in FY08, up 30% compared to $21.0 million in 2007. Ford contributed $6.8 million in service revenue for FY08 compared to none in 2007.

As discussed in our press release last week, we entered into a service contract with a certain silicon vendor partner in Q3, under which we generated $153,000 of service revenue in that quarter. In Q4 we began discussions with this SV partner to modify the nature of our relationship such that we would terminate thee existing service agreement and enter into a new collaboration agreement which defines rights to IP developed under the agreement and per-unit fees to be received by BSQUARE, among other things.

Although the parties were not able to conclude on the new collaboration agreement by quarter end, it is our expectation that we will enter into this new agreement by the end of Q1. Consequently, we did not record service revenue in Q4 in the amount of $670,000 under the existing service agreement and recorded $350,000 in labor costs associated with the project as R&D expense in Q4. If the parties do not conclude on the new agreement, the SV partner will owe BSQUARE for all service work done in Q4 and subsequent periods. Brian will speak more to this opportunity momentarily.

Turning to gross profit and margins, overall gross profit is expected to be $4.5 million this quarter or 26% of total revenue, compared to $4.8 million or 31% of revenue, in the year-ago quarter, and $4.4 million or 27% of revenue, in Q3. Year-over-year decline in both gross profit and margin was driven by a $645, 000 drop in high-margin proprietary software revenue, the majority of which related to the $364,000 customer settlement, which benefited Q4 '07.

Third-party software margin is expected to be 16% this quarter, compared to 17% in the year-ago quarter and 15% in Q3. We continue to maintain a high gross margin on our proprietary software revenue of 91% this quarter, which is down both year-over-year and sequentially, largely due to $44,000 in TestQuest purchase price amortization, which affected proprietary software cost of sales.

Service gross margin is expected to be 31% this quarter, compared to 37% in the year-ago quarter and 33% in Q3. Year-over-year service margin decline was due to a $350,000 contract restructuring which benefited Q4 '07 and improved that quarter's service margin by five percentage points. The sequential decline was largely driven by excess capacity in Taiwan and an increase in low-margin rebillable service revenue.

On a full-year basis, service margin is expected to run 32% in FY08, compared to 29% in 2007. We fell short of our goal to improve service margin into the mid 30% range for FY08 as a result of the Ford project. Overall gross profit is expected to be $17.2 million or 26% of total revenue for FY08, compared to $15.5 million or 26% of revenue in 2007.

Moving down to P&L, operating expenses are expected to be $4.6 million for the quarter, compared to $3.7 million in the year-ago quarter and $3.6 million in Q3. An increase in R&D expense, over $800,000, accounted for the bulk of the year-over-year and sequential increases. Incremental OpEx associated with the TestQuest acquisition and costs associated with the silicon vendor project rose the majority of the R&D increase. Higher sales costs in North America and APAC, some of which related to the TestQuest acquisition, also contributed to the increases.

Total operating expenses are expected to be $15.4 million for FY08, as compared to $13.6 million in 2007.

Now I'll speak to our bottom-line results. We expect to report a net loss for the quarter of $370,000 or $0.04 per share, compared to net income of $1.1 million or $0.11 per diluted share in both the year-ago quarter and Q3. This quarter was negatively affected by a $377,000 other-than-temporary loss on an auction-rate security, whereas the year-ago quarter benefited from $364,000 in revenue from the customer settlement and the $350,000 service contract restructuring, while Q3 benefited from a $300,000 [product sale]. This quarter was also negatively impacted by the TestQuest acquisition and the aforementioned silicon vendor project.

We expect to generate net income of $2.0 million or $0.19 per diluted share in FY08, compared to net income of $2.3 million or $0.23 per share in 2007. Net income in FY08 was affected by the ARS write-down and the product sale, which had a net full-year negative impact of $77,000 or $0.01 per share. Net income in FY07 was positively affected by the customer settlement and a gain recognized in Q2 '07 of $287,000 related to the sale of an equity investment. Together these items benefited FY07 net income by $651,000 or $0.06 per share.

Non-cash expenses including depreciation, amortization and stock-comp expense, are expected to be $532,000 for Q4 and $2.0 million for FY08. Cash and investments, both short and long term, declined $2.8 million to $13.3 million at year end, or $1.32 per share, compared to $16.1 million at September 30. These cash and investment amounts are net the auction-rate security impairment reserves.

Quarterly decline was primarily due to cash paid to acquire assets of TestQuest, and additional impairment reserves taken against our auction-rate securities. Our accounts receivable increased sequentially this quarter, ending the year at $10.7 million net. Ford represented $3.7 million of AR at year end, which has since been paid.

CapEx was $58,000 this quarter and $615,000 for the full year. We currently expect FY09 non-cash expenses to be roughly $2.5 million and CapEx to be approximately $500,000.

As of quarter end, we had $5.6 million in auction-rate securities, or ARS, at par value. That is down from $6.5 million as of September 30, due to issuer redemptions. Twelve different issues make up our ARS portfolio representing ten different issuers. Of the $5.6 million in ARS at quarter end, $4.1 million is invested in student-loan ARS, $1.1 million is invested in auction-rate preferreds, and $500,000 is invested in a CDO-like ARS. We have an impairment reserve of $945,000 recorded against our ARS as of year end. Impairment reserve represents the difference between fair value as determined by a third-party valuation firm, and par.

Of the $945,000 impairment, $377,000 relating to the CDO-like ARS was deemed to be other-than-temporary this quarter and recorded as a charge against operations. The remainder of the impairment has been deemed to be temporary and the corresponding loss is expected to be reported in other comprehensive income and shareholder equity.

Now let me provide more detail on the TestQuest acquisition. Total purchase price of $2.3 million, which is comprised of $2.1 million in cash and $0.2 million in assumed liabilities and deal expenses. $1.9 million of the purchase price was allocated to intangible assets, primarily acquired technology, with the bulk of the remainder representing acquired accounts receivable. The intangibles will be amortized over approximately five years, and will result in amortization expense of $411,000 on a full-year basis.

During the quarter, TestQuest contributed $233,000 in software revenue and impacted our bottom line negatively by roughly $250,000 or $0.03 per share, which included $51,000 in purchase price amortization.

As with most proprietary software products, TestQuest customers typically purchase support and maintenance contracts, which generally represent 20% to 25% of the product sales, and which are amortized over 12 months. Under purchase price accounting rules, we did not record deferred revenue related to existing support and maintenance contracts, such that we will need to build up our support and maintenance revenue stream over time via renewals of existing contracts and the signing of new ones. Brian will speak to the TestQuest outlook in a moment.

Head count including contractors is currently 292 compared to 276 as of the date of our last conference call. As a result of the TestQuest acquisition, our headcount increased 21. Engineering services headcount is currently 197, down from 200.

And with that, I'd like to turn the call over to Brian.

Thanks, Scott. Today I'll provide a little more detail on our Q4 results, an update on our key initiatives and our outlook on the first quarter.

While our overall third-party sales were up over Q3, we actually had expected them to come in stronger than they did. October and November were both good sales months, but in December we saw a rapid pullback by several of our Microsoft licensing and Adobe Flash Lite customers, many of which pushed their purchase orders into Q1. Some of these delayed orders have since closed. However, our overall Q1 third-party software sales have been soft thus far.

Sales of proprietary software also came in lower than our expectations, mainly due to a large SDIO order that was delayed into Q1 and also due to lower royalties from past royalty-bearing service engagements. We still expect that the delayed SDIO order will close in the first quarter and that the drop in service contract royalties is timing related in that the royalty streams for several existing devices are beginning to tail off and replacement royalty streams, which we have secured with new royalty-bearing service contracts, will not pick up until the second half of 2009.

During the quarter, we recognized almost $70,000 in revenue from our Texas Instruments, or TI, Windows CE Board Support Package, or BSP, initiative. We expect that the revenues from our TI BSP initiative will grow through 2009 as more customers have the opportunity to evaluate and adopt TI's OMAP processors.

Another positive for the quarter is that we recognized approximately $233,000 of TestQuest revenue during the quarter. I will discuss both our TI initiatives and our TestQuest acquisition in more detail in a moment.

Turning to Q4 service revenue, on our last call I indicated that we expected slight sequential increase in service revenue, mainly due to continued work on our contract with the Ford Motor Company. In fact, we saw a 6% sequential increase in service revenue, which was based mainly on scheduled expansion of the ongoing Ford engagement. Outside of the automotive space, demand for our services by our more traditional Windows CE and Windows Mobile clients remains soft. We did see a pickup in our bid activity during Q4 as compared to Q3; however, the overall customer environment remains cautious.

We continue to work closely with Ford on the next-generation [synch] platform, and the project is going well. We expect that the Ford engagement will generally run at its current level during the first two quarters of 2009 and then gradually ramp down over the balance of 2009, with a service and support tail continuing at a much lower level into 2010. We are actively talking to Ford regarding follow-on work for future-generation synch projects; however, no commitments have been made at this time.

I would like to spend the remainder of our call today talking about progress on other key initiatives for our company. I mentioned a moment ago that we are now earning revenue from the Windows CE investment that we made with TI last year. In this arrangement, BSQUARE created a production-quality Board Support Package for the TI OMAP35x family of processors. A Board Support Package, or BSP, is a piece of software, often very complex, that glues the Windows CE operating system to the underlying processor. Any OEM who creates a device using an OMAP35x processor and Windows CE will need this BSP, which is jointly owned by BSQUARE and TI.

Under our arrangement with TI, BSQUARE has made the Windows CE BSP available to potential customers to download and evaluate. We receive a fee from TI when certain customer milestone around evaluation and adoption of the BSP and TI's OMAP processor are met. In addition, TI recommends BSQUARE to its customers looking for help implementing Windows CE on their devices. And of course we have the opportunity to sell these customers our other products, services or licenses.

Under this arrangement, the interests of BSQUARE and TI are directly aligned towards making customers successful with BSQUARE software and TI's OMAP processor family. This is the first time we have worked with a major silicon vendor in this fashion, and we believe that this can be a powerful business model.

Last year, we began a services engagement with the TI team responsible for selling OMAP processors into high-end Smartphones designed by Tier 1 OEMs worldwide. BSQUARE was engaged to help create a Windows Mobile 6.5 and 7.0 Board Support Package for TI's OMAP34x family of processors. Our engagement began as a straight services project, and in fact we recognized a little more than $150,000 in service revenue during the third quarter from this engagement.

During the fourth quarter, we began discussions on the feasibility of converting from a straight service engagement to a co-investment arrangement whereby BSQUARE makes the investment to complete the Windows Mobile BSP and in return receives future royalties.

Based on TI's market position, the strength of the OMAP34x offering and our discussions with Microsoft around the Windows Mobile roadmap, we feel that this investment represents a substantial opportunity for BSQUARE to earn several million dollars in royalties over the next three to five years. This is well in excess of the hundreds of thousands of dollars we would receive in a straight service engagement.

Now I'd like to spend a few minutes discussing our TestQuest acquisition. TestQuest software products are designed to improve and accelerate the device testing process. Their first product, TestQuest Pro, has historically been sold into general embedded device testing applications such as medical devices, data collection applications, security and automation solutions. The second and more recent product, CountDown, is primarily aimed at mobile device testing such as Smartphones. However, the product has also found its way into many non-Smartphone applications such as telematics, data collection and enterprise applications.

The business model for TestQuest products is straightforward. Customers purchase a license to use the software, and typically purchase a separate support contract which is priced as a percentage of the base license fee. In addition, customers may elect to purchase training or professional services to assist them in implementing the product in their environment. An average TestQuest transaction is in the $30,000 range. However, some of the larger transactions will be in the $100,000-plus range, depending upon the number of seats and options that a customer elects to buy.

We believe that TestQuest products are a great addition to BSQUARE's product line and a good fit for our sales channel. These products have been sold to approximately 235 customers since they were first released. Only about 20% of TestQuest's existing customers are also existing BSQUARE customers. This means we have a great opportunity to sell TestQuest products into our existing customer base. We also think that the remaining 80% of TestQuest customers represent a market expansion opportunity for BSQUARE's services.

The two most immediate market expansion opportunities are enterprise customers, such as Federal Express, who typically use hand-held and wireless devices to support their line of business and who often look for outside help in the design, testing and deployment of the applications that run on their devices. And wireless operators such as Verizon wireless, who sell devices and who often look to outside experts to port applications to and perform testing on the devices that they sell.

Since the acquisition closed in November, we have been busy integrating the TestQuest sales and engineering teams into their BSQUARE counterparts, and the integration has gone well. During December, we kept the TestQuest sales team focused on closing deals in their pipeline, and then in early January we trained the full BSQUARE sales force on selling TestQuest products and services. With our entire sales force selling the product, we are now expanding our pipeline and we expect to grow TestQuest product and service revenues as the year progresses.

In parallel with the sale integration, we have spent considerable time developing a product roadmap. We recently announced Version 2.0 of CountDown, which provides for improved performance, includes a new collaboration function that allows test and development teams located in separate locations to share and execute a common set of tests, added support for RIM BlackBerry devices, and includes numerous bug fixes and other feature improvements requested by customers.

Our longer-term roadmap adds support for android handsets, even more performance improvements and integration into industry-standard testing frameworks, plus other functionality that customers have been asking for.

We have long believed that testing and quality assurance is a growth opportunity for BSQUARE. For the past couple of years, the quality assurance practice in our service group has been growing as our customers have struggled with the complexity of testing a modern device that may contain accelerated multi-media interfaces or multiple wireless radios. We believe that TestQuest is a product that provides our customers with the framework and tools necessary to master this complexity and to build repeatable test solutions.

We believe that during 2009 TestQuest will directly contribute $4 million to $5 million in product and service revenue to BSQUARE's top line and that the TestQuest acquisition will be accretive starting in the second quarter and for the full year. We think that over the next several years, as we integrate the TestQuest solution into more operating systems, support more device types and other development tools, we can grow TestQuest revenues well beyond $10 million per year.

To finish, I'd like to remind investors that we have several other service engagements in process or recently finished that have resulted in BSQUARE products being designed into devices that will ship starting later this year and into 2010 and beyond, and will result in royalty streams for BSQUARE. In particular, in 2007 we secured a design win for BSQUARE's productivity plus stack in the L-3 Guardian, a highly secure Smartphone sold by L-3 Communications. Last year, we secured a design win for our Schema and Media Plus software in a retail device that will be deployed by a Fortune 100 customer.

We believe that taken together, these two opportunities represent $2 million to $4 million of potential royalties over the 2010 to 2013 timeframe. Obviously we have no control over when and if these customers decide to ship their devices, but when shipments do commence royalties will flow to BSQUARE.

Like most companies, we expect that 2009 will be a challenging year, but we are committed to closely managing our business in order to make it through the year and be ready for growth when the economy picks up again. We entered Q1 with a record service backlog, thanks to a strong set of anchor customers we have developed over the past few years. Our TestQuest acquisition brings us an established product with an ongoing revenue history and a strong value proposition. Our investments with TI give us a strategic relationship with an important silicon vendor that will bring us royalties and many opportunities to sell our products and services to key customers.

With that said, we also see several challenges in our business. Our third-party software business was soft in Q4, and we expect it to be soft again in Q1. We are concerned that our customers' businesses can suddenly decelerate, which in turn would negatively impact our business. Along these lines, we proactively initiated a series of cost-reduction actions at the end of January that included targeted headcount reductions, salary freezes, temporary elimination of our 401K match, reduction in our travel budget and suspension of our executive bonus program. Our goal is to reduce our overall operating expense run rate by around $300,000 to $400,000 per quarter, starting in Q2.

I will finish our call today with our expectations for the first quarter. These expectations are developed from sales forecasts as of today. We do see a fair amount of volatility in the market, and as we saw in Q4 customers can quickly push out orders, especially third-party software orders, which can cause our top line to swing dramatically. Based on our book backlog, we currently expect our service revenue to be up slightly sequentially from Q4, in the single-digit percentage range. Based on book business and our sales pipeline and the effect of a full quarter of TestQuest product sales, we expect our proprietary product revenue to increase fairly significantly over Q4.

Third-party software sales are the most difficult to predict. As I mentioned earlier, Q1 third-party software sales have been soft, and we see no immediate indications that they will pick up soon. I believe that the best result we will see is for our third-party software sales to remain flat sequentially, but more likely we will see a modest sequential decline. Remember that third-party software carries lower margins than our proprietary software and services; therefore, swings in the top-line revenue do not result in significant swings in gross profits. In this environment, we are obviously focused on controlling costs and managing our expenses to our level of business.

In closing, I will say that while I am disappointed that we broke our stream of profitable quarters, I believe that over the long term we are making good investments and we are prudently managing our business. Thank you for attending our call today. This ends the prepared portion of our call. We will now open up the call for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Management, I'm showing that we do not have any audio questions. Actually, we just had a question that popped up here. It comes from the line of Michael Potter with Monarch Capital. Please go ahead.

Hey, guys. Obviously a disappointing quarter and a lot of moving parts going on. I have a lot of questions, but just generally speaking, we're trading at cash value right now and at cash value with no enterprise value for the company at all, it seems. Can you speak to that and speak to what management has planned in order to get a more realistic valuation for the shareholders in the near term?

Sure, Michael. So obviously we're not happy that we're trading at around cash value, either. We just talked about the things that we have planned. We're really keeping our heads down, and we're focused on continuing to drive our services business. I think we're making some really good investments. I believe that TestQuest was a really good investment for BSQUARE, and I think it just fits perfectly with our business. And we're already seeing that just in the sales process with the kinds of customers that our sales guys are bringing to the table. So we intend to really just continue to drive that program through 2009, and I think that we're very hopeful that our results will speak for themselves as the year progresses.

Obviously that's one piece of the puzzle, but it's certainly not the only piece when running a public company. That the market has discounted the operation of the company to basically zero basically tells us there is a significant disconnect in the message of what we're trying to achieve and management's, I guess, ability to execute. Listen, I'm a long-term shareholder, and I think I know the story. I guess what going forward do you anticipate changing in order for this message to get out and for the value that's in the company to be realized to the shareholders?

We certainly hope to get more active in getting out on the road and telling the story this year. I think that it's a good story, and we just need to tell it more often. And we need a little help from the overall market to turn around at some point as well. We're not alone in our pain here. So that's the program for the year.

Okay. So we can expect for you guys to be able to communicate more, be more visible, I guess have more of an outreach program for 2009?

Yes, absolutely

All right. Terrific. Appreciate it, guys.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of [Ryan Bartaman] with Pelagic Capital. Please go ahead.

Hi, guys. Can you--I got on the call a little bit late, and I was madly taking down notes as you were speaking, so I've probably missed a few things. But do you mind just walking through sort of the royalty--actually what you got in royalty for this quarter? And then you mentioned that Ford--no, I'm sorry. You mentioned a couple royalty opportunities in 2010 to 2013 as it relates to those two opportunities. Could you just itemize or from a high level give us sort of the royalty opportunities that we've gotten, even if it is way out in the future? What sort of timeframe we're looking at?

Yes, sure. So first off, our script will be out on our website after the call, and so you can go back and take a look at that, and it's got all the details in it, so you don't have to take wild notes. As far as royalties go, the two in particular that I highlighted, one is a design win that we actually got back in 2007. It's for our customer L-3 Communications. They have a highly secure Smartphone device called the L-3 Guardian, which is really for things like first responders, homeland securities. There's military applications. It's actually one of the devices that they talked a lot about giving to Obama to replace his BlackBerry. There's a competitor device in General Dynamics. And so that device contains BSQUARE's Productivity Plus IP, and so when that device begins shipping in volumes, which they're in control of when they ship but we think it will start shipping later this year or some time in 2010, we'll start to get royalties from that. We had another design win. It's with a Fortune 100 customer that we can't identify just yet, the specific customer and device for this one. But this customer is making a retail device that contains our Media Plus software. That device will also start shipping later this year and in 2010, and we'll get royalties from that. It contains our Media Plus and our Schema software. And we think that those two alone are going to be somewhere over the 2010 to 2013 timeframe. And of course this is very forward-looking here, but we think it's somewhere in the $2 million to $4 million range just from those two. And then on top of that we have--I talked about our relationship with TI. So we've got some current investment with TI around Windows CE and Windows Mobile software. And we will begin receiving royalties, we hope, starting at the end of 2009 from that relationship.

Assuming we sign that agreement.

Yes, assuming we sign our contract with TI. And so that will be on top of the $2 million to $4 million that I just talked about. And we haven't put a number on that except to say that we think it's going to be several million dollars in the 2010 to 2013 timeframe. And I don't want to bound it by any more than that right now. And then we have just ongoing royalty streams. We often take on contracts, particularly in Asia, where we will do some service work at a lower upfront rate in exchange for royalties as customers ship devices. And for the last few quarters we've tended to recognize anywhere from maybe around $100,000 per quarter--is that number right, Scott? About $100,000 per quarter of royalties from those kinds of engagements. We expect the next quarter or two, that that rate is going to drop a little bit, but we expect it to come back in that same $100,000 type of range and stay there.

So Ryan, to answer your question on how much of the software revenue was royalties, in Q4 we generated just slightly over $700K in proprietary software. A little under $450K of that was royalties, either from our SDIO product or our Legacy SmartBuild reference design or the service contract royalties that Brian referred to. And primarily the rest of it is the sale of the TestQuest products, which is more the classic software licensing model where you sell a license and it's X amount of money. And on the TestQuest product, at least on the current business models, there are no downstream royalties, but there are, however, downstream support and maintenance revenue streams. That's something I spoke to in my section, which is the fact that in a classic software business model you can just sort of bank on a 20% to 25% coupon every quarter in your revenue, representing the amortization of support and maintenance revenue. And because of the way we accounted for the TestQuest acquisition, we'll have to build up that support and maintenance revenue stream over time through renewal of existing support and maintenance contracts and the signing of new ones.

Okay. And as that--okay, I don't want to jump around too much, but the press release that you issued a couple of days ago about the TI relationship, it mentions in there the SDIO Hx stack. Is that a new product, or is that something that you had ongoing for some time?

We've had our SDIO product for some time. This is a version of it that we built for the TI OMAP processor.

Okay. So when it refers to the performance of 11.5 megabits peak and all that, that's actually a new twist on what you've had?

Yes. This product has been around for a number of years, and we continually port it to new architectures in order to keep it fresh and continue to sell it. And to the extent the customer adopted that particular software stack that we're partnering with TI on, in addition to the per-unit piece we would receive from the baseline Board Support Package, if the customer chose to adopt SDIO Hx, that would be incremental revenue to us.

Are there any other little nuggets in any of the press releases that you've issued in the recent past that we should glean, "Hey, these are new royalty opportunities that may manifest themselves at some point in the future?"

No, I don't know so.

Okay. And then what is the per-quarter maintenance revenue you expect from TestQuest?

Well, to put this in--

Of the I guess $4 million a year you're expecting from this next year?

For next year, you can expect it to look like--out of the total--so remember the $4 million to $5 million that Brian provided, some amount of that, somewhere between $750,000 and $1 million, will be service revenue. So it will be TestQuest-related service revenue, whether that's integration services or training or mentoring. The rest would be pure product sales. So in FY09 my guess is that the support and maintenance revenue component of the product component would be in the $300K, $400K range.

Okay. Great. And then on the balance sheet items that you outlined, what changes were there and what should cash flow look like in Q1?

I haven't provided any specific items. I'm hoping that cash flow, we will be up on the balance sheet side on cash in Q1, so maybe we can get our receivables squeezed back down. So the major balance sheet items I referred to on the call, we said that accounts receivable were up again sequentially, so we ended the year with $10.7 million in AR net, of which Ford represented $3.7 million at year end, which they have paid us for. The other balance sheet item I talked to was our auction-rate securities. So total cash dropped $2.8 million in the quarter, both of which related to the money we paid out to acquire the assets of TestQuest, and the rest of the remainder of the drop primarily had to do with an increase in our impairment reserves and our auction-rate securities.

Okay, you said Ford has paid the $3.7 million?

Yes.

Okay. All right. Thank you very much. Good luck.

Thanks, Ryan.

Thank you. And management, I'm showing that there are no further questions. I'll turn it back over to you for closing comments.

Okay. Well, with that then I guess we're finished. And thank you, everybody, for attending the call today, and we will talk to you again next quarter.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time you may disconnect. Have a nice day.