Bsquare Corp (BSQR) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BSQUARE Corporation's Second Quarter 2009 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following their presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, August 6 of 2009.

At this time, I'd 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 press release issued today, which applies for the content of this call.

During the discussion today, references to 'this quarter', 'the quarter' or Q2 mean the second quarter of 2009, references to the 'first quarter' or Q1 mean the first quarter of 2009 and references to the 'third quarter' or Q3 mean the third quarter of 2009. Further, references to 'this year' or 'the year' mean 2009, while references to 'last year' mean 2008.

With that said, let me recap our financial results. We reported total revenue this quarter of $16.1 million, up 5% from $15.4 million in the year-ago quarter and down 4% from $16.7 million in Q1. Growth in service revenue primarily accounted for the year-over-year increase, whereas a decrease in third-party software sales accounted for the sequential decline. Our largest customer, the Ford Motor Company, accounted for 32% of total revenue this quarter. Total revenue for the first half of 2009 was $32.8 million, up 1% from $32.5 million in 2008.

Sales of third-party software were $6.6 million this quarter, down 27% from $9.0 million in the year-ago quarter and down 10% from $7.3 million in Q1. A decrease in Microsoft licensing sales drove both declines with poor economic conditions affecting sales across all customer segments. Third-party software sales were $14.0 million for the first half of 2009 compared to $19.1 million in 2008.

Proprietary software revenue was $1.2 million this quarter, up 78% compared to $676,000 in the year-ago quarter and up 25% from $961,000 in Q1. TestQuest product revenue of $741,000 this quarter compared to none in the prior year primarily drove the year-over-year increase, partially offset by a decline in service contract royalties. A $464,000 increase in TestQuest product revenue, partially offset by decreases in other product lines, accounted for the sequential increase. Proprietary software revenue was $2.1 million for the first half of 2009 compared to $1.5 million in 2008. Total TestQuest bookings were $952,000 this quarter, as compared to recognized revenue of $741,000 with the difference representing deferred revenue on support and maintenance contracts.

Under purchase price accounting rules, we were unable to record deferred revenue associated with existing support and maintenance contracts as of the TestQuest acquisition date. Consequently, it will take us some time to build up our TestQuest support and maintenance revenue run rate to hopefully something approximating and ultimately exceeding that generated by TestQuest prior to the acquisition. For the nine months ended September 30, 2008, TestQuest support and maintenance revenue was $1.2 million or roughly $400,000 per quarter, as compared to $87,000 this quarter.

Service revenue was $8.3 million this quarter, up 46% compared to $5.7 million in the year-ago quarter and down slightly from $8.4 million in Q1. Ford drove the year-over-year increase and accounted for $5.2 million or 63% of service revenue this quarter, $219,000 in the year-ago quarter and $5.2 million in Q1. As we stated in our release today, we modified our fee structure with Ford late in the quarter from straight time-and-materials to time-and-materials with a fee cap, and agreed to cap the fees associated with the remainder of the project at an amount less than would have been realized under the previous structure. This modification negatively affected service revenue by $721,000 this quarter as compared to the previous fee structure and also negatively affected this quarter's effective bill rate.

Ford revenue continued to mask disappointing service revenue performance out of APAC this quarter. APAC service revenue was down 94% year-over-year or $446,000, and 75% sequentially due largely to the effect of poor economic conditions. However, recent closed deals in APAC should improve revenue there in the near future, which should largely fall straight to the bottom line given we have not cut back on resource levels. Service revenue increased 42% to $16.7 million for the first half of 2009 compared to $11.8 million in 2008. This quarter's billable hours were up 56% year-over-year and 10% sequentially, driven by growth in North America. This quarter's effective bill rate fell 10% year-over-year and 8% sequentially due primarily to the Ford fee structure modification.

Turning to gross profit and margins, overall gross profit was $4.4 million this quarter or 27% of total revenue, as compared to $3.7 million or 24% of revenue in the year-ago quarter, and $4.4 million or 27% of revenue in Q1. The year-over-year gross profit improvement was driven by an increase in service and proprietary software gross profit. Third-party software margin was 16% this quarter compared to 15% in the year-ago quarter and 16% in Q1. Proprietary software gross margin was 88% this quarter, compared to 90% in the year-ago quarter and 87% in Q1. Service gross margin was 28% this quarter, compared to 31% in the year-ago quarter and 29% in Q1. The year-over-year and sequential service margin declines were primarily driven by the bill rate decreases I mentioned without which service margin would have run approximately 34% this quarter. Service margins were also negatively affected by the decline in APAC service revenue. Overall gross profit was $8.8 million or 27% of total revenue for the first half of 2009 compared to $8.3 million or 25% of total revenue in 2008.

Moving down the P&L, operating expenses were $4.0 million for the quarter compared to $3.5 million in the year-ago quarter and $4.7 million in Q1. The TestQuest acquisition increased operating expenses by $671,000 this quarter as compared to the prior year and accounted for the year-over-year increase. Of the $655,000 sequential decrease in total OpEx, $460,000 was R&D related and $202,000 was G&A related, with sales and marketing expense running basically flat from Q1 to Q2. The sequential decline in R&D was largely labor driven and related to targeted headcount reductions in Q1, some TestQuest transition expenses not present in Q2 and reductions in spend on several product initiatives. The sequential decline in G&A was driven by lower labor costs and lower restatement-related expenses. Total operating expenses were $8.7 million for the first half of 2009 as compared to $7.2 million in 2008.

Now, I'll speak to our bottom line results. We reported net income for the quarter of $348,000 or $0.03 per diluted share, up from net income of $255,000 or $0.02 per diluted share in the year-ago quarter, and up from a net loss of $90,000 or $0.01 per share in Q1. This quarter's bottom line was negatively affected by the TestQuest acquisition in the amount of $51,000 or $0.01 per share, compared to none in the year-ago quarter and $476,000 or $0.05 per share in Q1. For the first half of 2009, we reported net income of $258,000 or $0.03 per diluted share, compared to net income of $1.2 million or $0.11 per diluted share in 2008. We generated EBITDAS of $833,000 this quarter, our eleventh consecutive quarter, compared to $660,000 in the year-ago quarter and $227,000 in Q1. We incurred $449,000 of non-cash expenses this quarter, including $109,000 in TestQuest-related amortization. As we mentioned in our earnings release, TestQuest was accretive on an EBITDAS basis for the quarter.

Cash and investments decreased $3.0 million to $11.8 million at June 30. The June 30 balance includes $900,000 of restricted cash and $4.7 million of auction rate securities, both classified as long term. The auction rate amount is net of a valuation allowance of $758,000, such that our gross cash and investments were $12.6 million at June 30. The cash decline was driven by a $4.2 million increase in accounts receivable compared to March 31 related to payment delays with Ford. As of quarter-end, we had $7.7 million in accounts receivable outstanding from Ford, $4.1 million of which was past due. Subsequent to quarter-end, Ford did become largely current on its accounts receivable. CapEx was $23,000 this quarter and $100,000 on a year-to-date basis. We have been cutting back on planned CapEx expenditures and currently expect FY '09 CapEx to be approximately $300,000 to $350,000, down from our original estimate of $500,000 provided at the beginning of the year.

At quarter-end, we had $5.5 million in auction rate securities at par value, which was down $50,000 from March 31 due to issuer redemptions. An additional $150,000 in auction rates were redeemed at par subsequent to quarter-end. Headcount, including contractors, is currently 284 compared to 286 as of the date of our last call. Engineering services headcount is currently 195, down from 199. Before I finish, I would like to comment on one item, which could positively impact Q3. As we have disclosed previously, we are defendants in a class action lawsuit filed in 2001 related to IPO laddering, in which roughly 300 companies and a number of underwriters are also defendants. The parties to the lawsuit have preliminarily agreed on a settlement and the court is expected to rule in September whether the settlement will be made final. In the event the settlement is finalized, we would likely reverse a legal reserve of $534,000 in Q3, which will positively impact the bottom line.

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

Thanks, Scott. Today I'll review our results from Q2, provide an update on our key initiatives and then discuss our outlook for Q3. In summary, this was a better quarter for us, as compared to the previous two. Third-party software sales, particularly sales of Microsoft licenses, continue to face a difficult selling environment. Because these licenses are sold for use in shipping devices and customers are shipping fewer devices, this is the area of our business that is feeling the most immediate impact of weak economic conditions. As we expected, sales of Microsoft licenses were down slightly sequentially, however we are beginning to see signs of stabilization in demand. Several of our larger customers have recently increased their order pace, and in the quarter we more than doubled the number of customers who were willing to sign up for annual license purchase contracts. We currently expect that Q3 Microsoft license sales will be up slightly sequentially.

We announced during the quarter the development of an Adobe Flash Platform technology browser plug-in for ARM-based devices running Google's Android 1.5 platform. This port is significant in that it will enable OEMs to provide a richer web browsing and media experience on a variety of connected devices. BSQUARE has previously optimized ports on other embedded operating systems, but this is the first port available to OEMs that has been optimized for the Adobe platform. We have seen significant interest in this port and are currently engaged at various levels with almost a dozen customers.

Sales of proprietary products were up sequentially in Q2, driven by an expected increase in our TestQuest product and support revenue. The increase in TestQuest revenue offset sequential declines in SDIO, Schema and service contract royalties. While the dollar amount of these declines was relatively modest, about $165,000, it represents another indication of the weakness in the current economic environment for shipping devices. As the economy recovers and our customer's shipment volumes increase, we expect our royalty revenue from SDIO and Schema will return to their typical historical run rates. We believe that our overall proprietary product revenue will grow throughout the remainder of 2009, driven primarily by increases in TestQuest license and support revenue and, to a lesser extent, by increases in our TI OMAP Windows CE revenue and the SDIO and Schema royalty revenue that I just discussed.

We turned in another solid quarter in services, primarily due to our Ford project. As expected, Q2 was the peak quarter for the Ford program and we have started ramping down resources in Q3, as the current work schedule dictates. The resources rolling off the Ford program in Q3 are contractors who will not be reallocated to other projects, thus lowering our overall headcount and cost of sales. Our current estimate is that the revenue from the Ford project will decline in the second half of 2009 to approximately $3.6 million for Q3 and approximately $1.4 million for Q4 2009, as compared to $5.2 million in the current quarter, lacking any scope increases in the current project or follow-on program work.

We are talking to Ford about follow-on programs, however nothing has been solidified as of yet and while we are hopeful to win follow-on business at Ford, it is premature to predict the outcome one way or another. Just after the end of the quarter, we announced our collaboration with The Coca-Cola Company, whereby we provided consulting and development services, as well as royalty-bearing BSQUARE IP for the new Coca-Cola Freestyle beverage dispensers. Currently in testing in the United States, Coca-Cola Freestyle brings innovative technology to consumers by offering upwards of 100 sparkling and still branded beverage selections from one machine. Rich graphical user interfaces make the dispenser attractive for all types of users, including consumers, restaurant operators and field service technicians. BSQUARE is proud to play a role in this cutting-edge program and is looking forward to a long and mutually beneficial relationship with The Coca-Cola Company.

Our services bid activity, a forward-looking indicator of our service revenue, increased significantly in Q1 as compared to Q4, and bid activity remained strong during Q2. While it appears that customers are once again looking to start new projects, our close ratio on these bids is still not high enough to backfill the expected decline in Ford revenue. While our non-Ford backlog increased sequentially from Q1, we do expect our overall service revenue to decline sequentially in Q3, as the Ford program ramps down. This decline will be offset somewhat by an expected increase in service revenue out of Asia. During Q2, we won new service projects in Asia, including a new automotive project, and revenue from these projects is expected to begin flowing in Q3.

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. I'm happy to report that we signed our Windows Mobile BSP contract with Texas Instruments after quarter-end. We expect the production release of the Windows Mobile BSP to take place later this year, although we have already provided pre-release code drops to several customers who are working on new devices. We have been working with TI on securing new design wins for the OMAP platform, and we are engaged in several smartphone and handheld terminal opportunities. We expect to receive royalties from the TI Windows Mobile BSP project beginning in the first quarter of 2010 and continuing for several years.

Since our last update, development work on the Windows CE BSP has been completed and the BSP has been released in production form. Additionally, TI has released the production version of the OMAP 35XX silicon. Therefore, we expect our OMAP Windows CE revenue to increase in the coming quarters, as more customers adopt TI's silicon and our BSP. We are now engaged in discussions with TI on extending our Windows CE BSP efforts to new silicon designs, which are expected to come to market later this year and in 2010.

Between our Windows CE and Windows Mobile BSP efforts, we believe that there is an opportunity for $4 million to more than $6 million in licensing and royalty revenue from 2010 to 2013, which should run close to 100% margin. On top of this revenue, we believe that we will sell additional BSQUARE products and services, however that 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 I mentioned earlier, sales of the TestQuest products increased significantly this quarter, as we expected. There are several reasons for this increase. First, now that the TestQuest sales and support teams are fully integrated into BSQUARE, we have a much better feel for the entire sales process from customer targeting to close, and have been able to refine that process. Second, our product development team has worked hard to release new versions of both the CountDown and TestQuest PRO products by adding new features, such as support for the RIM BlackBerry and Android platforms, and they have fixed product quality issues that were hampering our customer's ability to deploy the product.

We have several TestQuest initiatives underway. First, we will continue to invest in further product quality, performance and feature sets. In addition to our organic efforts, we are actively looking for complementary technology that we can acquire to accelerate our efforts to expand the scope and functionality of the TestQuest products and generally broaden our offerings in the device testing space. We believe that mobile and embedded device and application testing is a growing segment, as customers struggle with ways to effectively test complicated devices containing sophisticated applications. We expect TestQuest sales to be up sequentially in Q3 based on continuing strong sales, as well as our growing backlog of support and maintenance revenue.

In summary, our key initiatives are just beginning to deliver incremental high-margin proprietary software revenue. Moving into 2010, we expect our TI royalty streams and other royalty-bearing design wins to begin bearing fruit. If we are successful in our TI and TestQuest initiatives, the result should be a substantial increase in high-margin product revenue in 2010 and 2011, as we have discussed earlier. The development expenses associated with the TI revenue is largely being incurred in 2008 and 2009. Our third-party software and our professional engineering service sales remain very important to us and we will continue our effort to increase both these revenue lines, but the biggest impact to our bottom line will come from increasing our proprietary software revenue.

I will finish our call today with expectations for the third quarter. Based on our current sales outlook, we expect overall revenue to be roughly flat sequentially or possibly down slightly. We expect that third-party software sales will increase sequentially, as we see some firming in Microsoft licensing demand. We also expect sales of Adobe Flash licenses to be up sequentially in Q3. Service revenue is expected to be down sequentially, as the Ford program ramps down, somewhat offset by an increase in service revenue coming from Asia. We expect our proprietary product revenue to be up sequentially, driven primarily by an increase in TestQuest license and support revenue and increased TI OMAP Windows CE 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. We will now begin the question-and answer-session. (Operator Instructions).

Operator, if there's no questions, we'll go ahead and end the call now and just say thank you all very much for attending and we will talk to you again next quarter.

Thank you, sir. Ladies and gentlemen, that does conclude today's BSQUARE conference call. Thank you for your participation and for using conferencing center. You may now disconnect.