Bsquare Corp (BSQR) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the BSQUARE Corporation First Quarter 2009 Earnings Conference Call. (Operator Instructions) This conference call is being recorded today, Thursday, May 7, 2009. I would now like to turn the conference over to Mr. Scott Mahan, Chief Financial Officer of BSQUARE. 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 release issued today, which applies to the content of this call.

During the discussion today, references to "this quarter," "the quarter" or "Q1" mean the first quarter of 2009, references to "the fourth quarter" or "Q4" mean the fourth quarter of 2008, and references to "the second quarter" or "Q2" mean the second quarter of 2009. Further, references to "this year" or "the year" mean fiscal 2009, while references to "last year" mean fiscal 2008.

With that said, let me recap our financial results. We reported total revenue this quarter of $16.7 million, down 2% from $17.1 million in both the year-ago quarter and Q4. A drop in third-party software sales accounted for both total revenue declines. Our largest customer, the Ford Motor Company, accounted for 31% of total revenue this quarter.

Sales of third-party software were $7.3 million this quarter, down 28% from $10.1 million in the year-ago quarter and down 13% from $8.4 million in Q4. A decrease in Microsoft licensing sales drove both declines, with poor economic conditions affecting sales across all customer segments. Also, the year-ago quarter benefited from a $1.3 million Microsoft licensing order.

Our licensing customer account fell slightly year over year and was basically flat sequentially. However, average revenue per customer fell 25% year over year, and 17% sequentially. Fundamentally we haven't lost customers; they are just ordering less as their business has been negatively affected by the economy.

Proprietary software revenue was $961,000, compared to $863,000 in the year-ago quarter and $706,000 in Q4. $277,000 in TestQuest product revenue coupled with smaller increases in a number of other product lines drove the year-over-year increase, offset by a decline in service contract royalties of $288,000.

Increases in TestQuest, SDIO, Schema, 3G Dev Kit and SmartBuild revenue drove the sequential growth. None of these increases were particularly significant, but do speak to our broadening product portfolio. We had expected proprietary software revenue to increase significantly compared to Q4, and while a 36% increase is significant, proprietary software revenue did come in below our expectations due to soft TestQuest sales, which Brian will discuss.

Service revenue was $8.4 million this quarter, up 38% compared to $6.1 million in the year-ago quarter and up 6% from $7.9 million in Q4. Ford drove both increases and accounted for $5.2 million or 62% of service revenue this quarter, none in the year-ago quarter and $4.1 million in Q4. While overall service revenue has increased due to Ford, it has masked some disappointing performance out of our APAC region. APAC service revenue was down 86% year over year or $656,000, and 81% sequentially or $448,000, due to poor economic conditions.

This quarter's billable hours were up 55% year over year and 6% sequentially, driven by growth in North America. This quarter's effective bill rate declined 11% year over year and was flat sequentially. Year-over-year decline was primarily due to the Ford project.

Turning to gross profit and margins, overall gross profit was $4.4 million this quarter, or 27% of total revenue, as compared to $4.5 million or 27% of revenue in the year-ago quarter and $4.5 million or 26% of revenue in Q4. Year-over-year gross profit decline was driven by a $478,000 drop in third-party software gross profits, offset by an increase in service gross profits. The sequential gross profit decline was only $33,000.

Third-party software margin was 16% this quarter, flat from the year-ago quarter in Q4. Proprietary software gross margin was 87% this quarter, compared to 99% in the year-ago quarter and 91% in Q4. Both declines had to do with $89,000 in TestQuest-related amortization, which impacted cost of sales this quarter.

Service gross margin was 29% this quarter, compared to 34% in the year-ago quarter and 31% in Q4. Year-over-year decline was driven by the bill rate decrease I mentioned, which negatively affected service margin by 7 percentage points. The sequential service margin decline largely resulted from the decline in APAC service revenue with no meaningful decrease in related cost of sales, coupled with lower training revenue and a decline in rebillables gross margin.

Moving down to P&L, operating expenses were $4.7 million for the quarter, compared to $3.7 million in the year-ago quarter and $4.6 million in Q4. Of the $1 million year-over-year increase, $737,000 was R&D related. Of this amount, $548,000 related to TestQuest while $265,000 represented costs associated with the Windows Mobile initiative we mentioned on last quarter's call.

Increased sales expense in North America and [AMIA] accounted for the majority of the remainder of the year-over-year increase, $62,000 of which was TestQuest related. Total opex increased $83,000 sequentially. Professional fees accounted for $115,000 of the increase, the majority of which was restatement related, and our fringe benefits expense increased $121,000 as it does in the first quarter of every year. Company wide, our fringe benefits expense increased $213,000 from Q4.

Now I'll speak to our bottom-line results. We reported a net loss for the quarter of $90,000, or 1% per share, down from net income of $931,000 or $0.09 per diluted share in the year-ago quarter, and up from a net loss of $370,000, or $0.04 per share, in Q4. This quarter included approximately $90,000 restatement-related expenses, while Q4 was negatively affected by a $377,000 auction rate security write-down.

This quarter's bottom line was also negatively affected by the TestQuest acquisition in the amount of $476,000, or $0.05 per share, compared to none in the year-ago quarter and approximately $250,000, or $0.03 per share, in Q4. The increase in the TestQuest-related loss was due to the full quarter effect of related operating expenses.

We are expecting significant improvement in the bottom line impact of TestQuest in Q2 based on our expectation of an increase in TestQuest product sales and lower operating expenses. Current forecast is for TestQuest to negatively impact the bottom line slightly in Q2 but be slightly accretive to EBITDAS.

As we have mentioned previously, we are currently engaged with a major Silicon vendor on a Windows Mobile-related initiative. This initiative began as an engineering service contract in Q3, but as a result of subsequent discussions between the parties, we chose to forego recognizing service revenue on this contract in Q4 and record related engineering costs as R&D expense. We did not record $685,000 in service revenue on this project this quarter, and $670,000 in Q4. Further, the resulting R&D expense impacted the bottom line negatively by $265,000 or $0.03 per share this quarter and $350,000 or $0.04 per share in Q4. If we do not reach agreement on a modified business structure, we will recognize it as service revenue, which would positively impact the bottom line by $1.3 million.

We did generate positive EBITDAS this quarter of $227,000, our tenth consecutive quarter, compared to $1.4 million in the year-ago quarter and $393,000 in Q4. We incurred $471,000 in non-cash expenses this quarter, including $103,000 in TestQuest-related amortization.

Given that our stock comp expense is running under forecast, non-cash expenses will likely come in under the $2.5 million forecast for FY09 provided on last quarter's call.

Cash and investments, both short and long term, increased $1.5 million to $14.8 million at March 31. The March 31 balance includes $900,000 of restricted cash and $4.6 million of auction rate securities, both (inaudible) long term. The auction rate amount is net of evaluation allowance, such that our gross cash and investments were $15.7 million at March 31.

This quarter's cash increase was driven by our positive EBITDAS and positive working capital effects. CapEx was $777,000 this quarter. We have been cutting back on planned CapEx and now currently expect our FY09 CapEx to be approximately $400,000, down from the $500,000 estimate provided on last quarter's call.

At quarter end, we had $5.5 million in auction rate securities at par value, which was down from $5.6 million at December 31, due to $125,000 issuer redemptions. We also received $50,000 in redemptions after quarter end. Currently 75% of our ARS portfolio is invested in student loan auction rates.

Head count, including contractors, is currently 286 compared to 292 as of the date of our last conference call. Engineering services headcount is currently 199, up from 197.

Now I'd like to turn the call over to Brian.

Thanks, Scott. Today I'll review our results from Q1, provide an update of our key initiatives and then discuss our outlook on Q2.

This was a mixed quarter for us. On one hand, our third-party software sales struggled the entire quarter, while on the other, our service revenue increased for the third straight quarter. Proprietary software sales also increased over Q4, but not to the level that we were looking for. I'll discuss each of these revenue components next.

Third-party software sales, particularly sales of Microsoft licenses, are facing a very difficult environment right now. Because these licenses are sold into shipping devices and customers are shipping fewer devices, this is the area of our business that is feeling the most immediate impact of the weak economic conditions. Our discussions with Microsoft lead us to believe that BSQUARE's licensing slowdown is not unique and that we are maintaining or even gaining market share. The second quarter is also off to a slow start, and in talking with our customers, we don't foresee any pickup in our Microsoft licensing revenue until later this year.

On a more positive note, sales of Adobe Flash Lite licenses were strong in Q1, coming in a little under $400,000, and we are projecting strong sales for the remainder of the year. Our customers are using Adobe Flash Lite technology in their devices in one of two ways, to enhance the Web browsing experience on their device, or to create the device-user interface. We recently announced a port of the Adobe Flash Player onto the Android platform, and this announcement has generated considerable interest from potential customers. We are working hard to turn this interest into license and service revenue.

Flash is one of the several initiatives we have underway that fit into our strategic goal of becoming a significant software solutions provider to those building Android-based devices, which we believe can be a multi-million-dollar opportunity for BSQUARE products and services.

We also turned in another strong quarter in services, thanks to our continued success on the Ford Sync program. The Ford program is going well, and we still expect that the second quarter will be the peak quarter for this program, with resources and revenue ramping down during the third and fourth quarters. We expect that there will be a support and maintenance revenue tail continuing throughout 2010. We are talking to Ford about follow-on programs; however, nothing has been solidified as of yet.

Since our last update, we have been engaged in several new automotive opportunities, and we expect to win our next engagement with an Asian automotive manufacturer shortly. While this program is nowhere near the size of the Ford program, we think that this win validates our strategy to enter into the automotive services space.

Beyond the Ford program, our services bid activity, a forward-looking indicator of service revenue, increased significantly in Q1 as compared to Q4. It appears that customers are once again looking to start new projects. However, it is still taking longer to actually close the underlying contracts than it did a year ago, as customers remain cautious in actually committing large dollars in this environment. Overall, we still expect our service revenue to decline in the second half of the year as the Ford program ramps down.

Sales of proprietary products were up in this quarter versus the fourth quarter, due to sequential increases in almost every product line. In particular, we have seen a recent pick-up in activity for our SDIO middleware software package, which we attribute to customers looking for higher performance memory and wireless throughput in their devices.

TestQuest license and support revenues were also up sequentially but not nearly to the level we had expected. We believe that our proprietary product revenue will continue to increase throughout the remainder of 2009, driven primarily by increases in TestQuest license and support revenue, which I will discuss in more detail in a moment.

Now, to update you on the status of key initiatives for the Company. In previous quarters, I have discussed our Texas Instruments OMAP-based Windows CE and Windows Mobile Board Support Package, or BSP, initiatives. There's not a lot of new news to discuss since our last update. Development work on both the BSPs is progressing generally to our expectations. In order to reduce the level of R&D expense, we have transitioned much of the Windows Mobile BSP development work over to our Taiwan engineering team during the quarter. This shift will have an added post-development benefit in that many of our Windows Mobile customers are expected to be located in Asia, and we will have an Asia-based development team ramped and ready to support those customers.

We expect to release the first production version of our Windows CE BSP in the second quarter. We have seen strong interest from customers who are evaluating early versions of this BSP, and we are actively engaged with more than 20 customers who are interested in adopting the BSP for their devices.

As we expected, the evaluation process opens up the opportunity for us to engage with potential customers regarding BSQUARE's other software and service offerings. Our Windows CE BSP program has already generated over $150,000 of direct BSP revenue since the third quarter of 2008, and we are engaged in several service projects and achieve sales of our other products to these customers. While the numbers so far are relatively small, we believe that once the production BSP is released, our direct BSP revenue and the revenue attached from sales of products and services will increase.

We expect the first release of our Windows Mobile BSP later this year. This BSP will support Windows Mobile 6.5 and Windows Mobile 7.0 when 7.0 is released by Microsoft. We also expect that in addition to licensing this BSP to customers directly and receiving a per-unit fee from other accounts we won't be directly engaged with, we will also have the opportunity to cross-sell our full range of products and services to customers who adopt the OMAP Windows Mobile BSP in their designs.

Between our Windows CE and Windows Mobile BSP efforts, we believe that there is an opportunity for $4 million to $6 million in licensing and royalty revenue from 2010 to 2013. On top of the licensing revenue, we think that we will sell additional BSQUARE products and services; however, the additional amount is difficult to quantify.

Now to update you on the status of our TestQuest acquisition. We acquired the assets of TestQuest in mid-November 2008, which consisted mainly of their two testing automation products, TestQuest Pro and Countdown. These products are aimed at the embedded and mobile device testing space and help OEMs and others accelerate and automate their testing process. As part of this acquisition, we also hired a number of the TestQuest staff located in Minnesota and sales personnel located around the US, India and China.

As we mentioned in our press release, sales of TestQuest products in Q1 came in lower than we expected. We had several large, $100,000-plus orders push out during the last month of the quarter. Some of these orders pushed out due to economic and budget issues; however, we had several customers who chose not to purchase in the quarter due to product issues, which were resolved too late in the quarter for those customers to complete their evaluation and purchase process.

The good news is that most of these opportunities are still in the pipeline, and our development team has worked proactively with our customers to fix numerous problems that were blocking the closing of sales. These product fixes, plus several significant new features, were included in our Countdown 2.0 release that shipped in mid March. In addition to the Countdown release, we also worked with a number of TestQuest Pro customers who are eager for a new release of the TestQuest Pro product. These customers helped us develop a product roadmap, and we are ready to start work on the next release of TestQuest Pro, which we are targeting to take place in the third quarter. Maintaining and enhancing TestQuest Pro is important to ensure that existing and new customers continue to order new licenses and renew their support and maintenance agreements.

With a full quarter of TestQuest experience under our belt, I remain very happy with the acquisition and the fit of this product into BSQUARE's overall business. TestQuest products provide compelling value to customers, and are very complementary to our sales channel and our other offerings. We believe that testing and quality assurance is a growth area for BSQUARE, and that the TestQuest products provide our customers with the framework and tools necessary to build repeatable test solutions using fewer resources.

With the slow start to TestQuest sales, our current FY09 forecast will fall short of previously provided forecasts. Specifically, we are now expecting TestQuest products and services to deliver $3 million to $4 million in product and service revenue during 2009. From December to the end of March, our potential sales pipeline for TestQuest products grew by more than $1.5 million, and we expect that as we expand our feature set and fine tune our sales and marketing processes, we will become much more efficient at turning pipeline deals into revenue.

Our overall strategy for the past couple of years has been to develop complementary offerings that provide ongoing licensing and royalty revenue streams as well as pull through for our service and third-party software offerings. We have discussed in the past design wins for our Media Plus, Productivity Plus and SDIO middleware products that have been deployed into a variety of devices. Our SDIO products generated over $80,000 in royalty revenue last quarter, and we secured new design wins that should keep those royalties flowing into the future. Our Productivity Plus and Media Plus middleware, which had been designed into a highly secure Smartphone and a retail device for a Fortune 100 customer, respectively, have the potential to generate well over $2 million in royalty revenue over the next few years if our customers are successful with their products.

Coupled with the investments in the TI OMAP BSPs and the TestQuest products that I just discussed, we believe that we are setting ourselves up to generate significant licensing and royalty revenue as devices based on our products begin shipment in volume during 2010.

While the first quarter results were mixed and economic conditions were about as bad as you could expect, we still managed to generate cash and were EBITDAS positive, even while making the significant product investments that I just discussed. We believe that now, while many competitors are pulling back, represents a good opportunity to invest so that when economic conditions do improve, we are well positioned to increase the contribution from our products, royalty streams and services.

I will finish our call today with our expectations for the second quarter. Based on our current sales outlook, we expect overall revenue to be flat sequentially. We expect our third-party revenue will be down again sequentially as we don't see any recovery in this revenue line until Q4 at the earliest. Service revenue is expected to be flat sequentially. We expect our proprietary product revenue to be up sequentially, driven primarily by an increase in TestQuest license and support revenue.

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) We do have a question coming from the line of Chris Lahiji with LD Micro. Please go ahead.

Hi, you guys.

Hi, Chris.

I had a quick question. You guys have approximately $15 million in cash, correct?

Correct.

And what is the main goal for this cash on the balance sheet? Is it something that we're going to utilize with other acquisitions? Is it just there to make us feel really comfortable when things get bad? I mean, what is the main purpose of that cash?

Well, the main reason we keep the cash on the balance sheet, Chris, is to have drive power for acquisitions. Certainly we always want to keep some cash on the balance sheet in case things should go bad in a fast way, but we certainly don't need $15 million for that.

I see.

Chris, also you have to remember that of the $15.7 million growth in cash and investments, $5.5 million of that is sitting in auction rates, which are tied up, which are illiquid right now. And we've got another roughly just under $1 million restricted under our corporate headquarters lease.

And how many customers do you guys have that are over 10% of your revenue?

One.

One. Okay. Well, thank you guys so much, and I look forward to speaking with you soon.

You're quite welcome. Thank you for your questions.

Thank you. (Operator Instructions) Management, it looks like there are no further questions. I'll turn the conference back over to you for any closing comments you might have.

Okay. Well, our closing comments are to thank everybody for listening today and for your interest in BSQUARE Corporation, and we look forward to talking 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.