Bsquare Corp (BSQR) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the BSQUARE Corporation Fourth Quarter 2011 Earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, February 23, 2012.

I would now like to turn the conference over to Scott Mahan, CFO. Please go ahead, sir.

Good afternoon, everyone.

Before I begin, 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 web site. I would also like to direct your attention to the Safe Harbor statement contained in our press release issued today and the Safe Harbor statement, which will be posted with these prepared remarks, both of which apply to the content of this call.

All per-share amounts discussed today are fully diluted numbers. We provided color in the release issued today on significant year-over-year trends. Therefore the focus of my discussion today will be on quarter-over-quarter trends.

That said, let me recap our results. We reported total revenue this quarter of $23.4 million, down 15% year over year from $27.6 million and down 3% quarter over quarter from $24.0 million. A decline in third party software sales drove both declines. Ford accounted for 11% of total revenue this quarter and in Q3 compared to 7% in the year-ago quarter. Total revenue for the year was $96.8 million, flat compared to 2010.

As previously disclosed, we acquired MPC Data Ltd, a UK-based engineering services company, in September. MPC contributed $1.1 million of revenue this quarter and $1.4 million for the year.

Third party software sales were $14.4 million this quarter, down 22% year over year from $18.5 million and down 8% quarter over quarter from $15.6 million. Year-over-year and quarter-over-quarter declines were driven by lower Microsoft General Embedded and Windows Mobile license sales, which were down a combined 27% year over year and 14% quarter over quarter. We had expected third party software sales to be up slightly this quarter on a sequential basis, but sales came in approximately $1.8 million short of expectations.

Third party software sales were $62.7 million for the year, down 2% from $63.9 million in 2010. Proprietary software revenue was $1.0 million this quarter, down 52% year over year from $2.1 million and down 29% quarter over quarter from $1.4 million. The quarter-over-quarter decline was due to the reclassification of Qualcomm devkit sales from proprietary to third party software revenue in the quarter. The year-over-year decline was driven by a large $723,000 TestQuest sale, which benefited the prior year, and a decline in revenue from a number of our other legacy products. Devkit revenue was $476,000 this quarter, $525,000 in Q3, and $79,000 in the year-ago quarter. Excluding the devkit reclass, proprietary software revenue came in slightly above expectations. Proprietary software revenue was $5.6 million for the year, up 8% from $5.2 million in 2010.

Service revenue was $7.9 million this quarter, up 14% year over year from $6.9 million and up 13% quarter over quarter from $7.0 million. Ford accounted for $2.5 million in service revenue both this quarter and in Q3 and $1.9 million in the year-ago quarter. MPC accounted for $760,000 of the sequential increase with the remainder coming from Asia. Service revenue came in roughly $200,000 below expectations based on unanticipated softness primarily in North America. Service revenue was $28.5 million for the year, up 3% from $27.7 million in 2010. Ford contributed $9.7 million in service revenue for the year compared to $12.9 million in 2010. The $3.2 million full-year decline in Ford revenue was offset by growth in North America outside of Ford, as well as growth in Asia and the MPC contribution.

Turning to gross profit margins, overall gross profit was $4.3 million this quarter or 18% of total revenue compared to $6.5 million or 24% of revenue in the year-ago quarter and $4.8 million or 20% of revenue in Q3.

During the quarter, we recognized a $518,000 impairment charge related to certain TestQuest intangible assets and classified this impairment charge as software cost of sales. This charge accounted for the entire quarter-over-quarter decline in gross profit and gross margin. The year-over-year decline was driven by this same charge, the large TestQuest sale, which benefited the year-ago quarter, and a fairly significant decline in third party software sales.

Third party software gross margin was 16% this quarter compared to 15% in both the year-ago quarter and in Q3. Proprietary software gross margin was 23% this quarter, 93% in the year-ago quarter, and 62% in Q3. The sequential decline was driven by the TestQuest impairment charge.

Service gross margin was 21% this quarter, 26% in the year-ago quarter, and 23% in Q3. The sequential and year-over-year margin declines were driven by lower utilization due to investment in engineering capacity coupled with the service revenue shortfall I mentioned.

Total gross profit was $19.4 million or 20% of total revenue for the year compared to $20.5 million or 21% of total revenue in 2010.

Moving down the P&L, total OpEx was $5.3 million this quarter, up 21% year over year from $4.4 million and flat from Q3. Of the increases, MPC accounted for $260,000 year over year and $42,000 quarter over quarter, including deal costs. We had expected OpEx to come in roughly $100,000 lower than it did, but we were impacted by some unanticipated staff reduction costs. Total OpEx of $20.5 million for the year compared to $16.2 million in 2010. The year-over-year increase was due to incremental MPC cost of $478,000, $1.0 million of incremental stock compensation expense, and investments we have made, primarily in sales and marketing, to support our international growth.

Now I'll speak to our bottom line results. We reported a net loss for the quarter of $502,000 or $0.05 per share compared to net income of $4.7 million or $0.42 per share in the year-ago quarter and compared to a net loss of $166,000 or $0.02 per share in Q3. For the year we reported a net loss of $463,000 or $0.04 compared to net income of $6.2 million or $0.56 share in 2010.

The quarter and full year were negatively affected by the TestQuest impairment charge of $518,000 or $0.05 and positively affected by auction-rate security-related gains in the amount of $317,000 or $0.03.

The year-ago quarter and full year were positively affected by $2.6 million or $0.23 per share deferred tax asset allowance reversal, as well as the large TestQuest sale in the amount of $723,000 or $0.07.

We generated EBITDAS of $338,000 or $0.03 per share this quarter compared to EBITDAS of $2.5 million or $0.23 per share in the year-ago quarter and EBITDAS of $297,000 or $0.03 per share in Q3. For the year we generated EBITDAS of $2.6 million or $0.24 per share compared to $5.9 million or $0.54 per share in 2010.

Cash and investments increased $1.3 million to $19.0 million at quarter-end, $875,000 of which is classified as long term, coming in better than our forecast of $1.0 million. We currently expect cash and investments to decline by approximately $500,000 in Q1 due to negative working capital shifts.

CapEx was $258,000 this quarter and ran $785,000 for the year. We currently expect 2012 CapEx to run approximately $600,000.

Headcount including contractors is currently 341 compared to 363 as of the date of our last call. Engineering services headcount is currently 235, down from 242.

Now I'd like to turn the call over to Brian Crowley, BSQUARE's Chief Executive Officer.

Thanks Scott. I'll start off with my perspective on Q4 and the full-year 2011 results and then I'll provide you with an update on our initiatives. Finally I'll provide an outlook for Q1 and in a few cases, I'll [discuss] 2012.

First let's look at third party software sales for the quarter. On the last call, I set the expectation that our third party sales would increase slightly as compared to the third quarter. Our actual results were disappointing and as Scott mentioned earlier came in roughly $1.8 million below expectations. Especially frustrating from my perspective was that sales were tracking to exceed expectations up until the last two weeks of the quarter when several orders valued at just under $2 million either pushed out of the fourth quarter or evaporated altogether for various reasons. Internally we have reviewed what happened in Q4. And we have implemented changes to our forecasting processes designed to avoid a repeat in the future.

Overall for 2011 our third party software results were mixed. Sales of Microsoft Embedded products were down 13% year over year primarily as a result of the change in customer ordering patterns that we have discussed in past calls. Sales of Windows Mobile and Adobe Flash licenses were up by 41% and 63% respectively year over year. The net of this is that our overall third party software sales were down slightly in 2011 as compared to 2010. As we look out to 2012, we are expecting a return to growth based on several factors. As we have discussed in previous calls, we expect that the customers whose purchase volumes declined in 2011 due to overstocking will return to their normal ordering patterns. We have won significant new Windows Embedded and Windows Mobile licensing business through our relationship with Future Electronics that I will discuss in more detail in a moment.

We expect growth in sales of the Qualcomm Snapdragon development platforms. And we expect to start selling several new third party products during the year. For example, yesterday we announced a new distribution agreement with SoftMaker for their office products. We have several other new third party products in our pipeline and will be making announcements as we begin sales of those products.

As it relates to our software sales, let me spend a little time on our new Future Electronics relationship. Last September we announced a global sales and marketing partnership with Future Electronics, a world-class innovator in the distribution and marketing or semiconductors, passive interconnect and electromechanical components.

In this partnership, BSQUARE and Future have agreed to cooperate in the sales and marketing of each other's products and services to each Company's respective customer base. I'm happy to say that our relationship has born first fruit in the form of an agreement from a Fortune 100 manufacturer to purchase over $10 million of Windows Embedded and Windows Mobile licenses throughout 2012. This manufacturer is a current customer for BSQUARE services. We performed over $1 million of services for the customer in 2011. As part of the purchase agreement, we agreed to jointly look for other opportunities for BSQUARE to leverage its service expertise across the customer's other operating divisions. We hope to capitalize on an opportunity to triple or quadruple the amount of service revenue we do with this customer in 2012.

We believe that this is a great example of the power of the Future Electronics relationship. Future has tremendous sales reach into a large number of customers that we don't always have access to. And we hope that this is just the beginning of what will be a long-term, mutually-beneficial relationship.

Next I will discuss the results and activities of our service group. As expected, our service revenue increased by just under $900,000 sequentially, but still did come in under our expectations. This increase was driven primarily by our acquisition of MPC Data in Q3 and to a lesser extent by an increase in our APAC service revenue.

Our utilization was softer than we expected, which is reflected in the lower service margins for the quarter as compared to Q3. This softness was the result of additional headcount we hired in Asia that were not fully utilized in Q4 due to ramp-up time and project timing issues. We also experienced softness in our UK utilization related to heavy vacation usage by the UK team. And we carried excess capacity in North America due to project mix.

Our Asia and UK utilization are improving in Q1 and we have been managing our excess capacity down. Our overall service headcount is down by 19 heads as compared to the peak in Q4. Continuous service margin improvement throughout the upcoming year is an important component for us to improve our profitability and is a key focus for the entire management team.

Just after the end of the quarter, we announced that we had entered into a new statement of work under our Microsoft master vendor agreement extending the majority of our MyFord Touch engineering team through June 30, 2012. This agreement replaces and extends the direct agreement with Ford that we had been working on -- that we had been working under since 2008. As Microsoft and Ford collaborated together on their roadmap for MyFord Touch, they agreed that it would be better for BSQUARE to work as part of the Microsoft development team, which is why our contract now rests with Microsoft. Our contract is timed to end with the end of Microsoft's fiscal year. And while we certainly expect to continue working with Microsoft and Ford after the end of June, we do not currently have a contract to do so.

As we stated in an 8-K we released in January, we currently expect MyFord Touch-related service revenue to be at approximately $3.3 million for the first half of 2012, which would represent a roughly $1.8 million drop from the second half of 2011.

A forward-looking initiative for our service team is to gain Windows 8 experience, especially Windows 8 for ARM architectures. Given our long history of providing products and services around Microsoft technologies and our view that Windows 8 will be a -- will be successful on a variety of interesting form factors, we began augmenting our Windows 8 capabilities during Q4 and expect to continue that process over the coming quarters.

We also began seeking long-term engagements with leading silicon vendors and OEMs who are developing new products and technologies for Windows 8. We have won several initial Windows 8 engagements and we believe that as Windows 8 -- as the Windows 8 ecosystem grows, we can leverage our initial efforts across many more OEMs, representing a nice growth opportunity for BSQUARE.

Last year we made investments in our Taiwan operation, opened our China operation, acquired MPC Data in the UK, built Android and Windows 8 skills. This coming year will be about harvesting what we have sown -- driving improvements in service margin, but most importantly growing service revenues by bringing to bear all of the new capabilities that we have developed.

We have several large opportunities in our pipeline that we would never have had access to if we had not made the investments we did in 2011. We are very excited about how we are positioned and I hope to discuss some nice wins in future quarters.

Finally, let me update the status of our proprietary products efforts, TestQuest 10 and the Handset Certification Platform.

In December we released the newest version of our TestQuest product, TestQuest 10. Until now, there had been two versions of the TestQuest product, TestQuest Pro, the original and industrial strength product, and CountDown, a graphical and distributed version of the product. From a customer perspective, each product had its own strengths and weaknesses and we often had customers ask if we could add a feature from one product to the other. From an internal perspective, trying to maintain both product versions put a strain on our R&D staff and limited how much we could invest in either. Therefore we have had a long goal of combining TestQuest Pro and CountDown into a single product, which we have done with TestQuest 10. TestQuest 10 reduces the cost and complexity of test case development by integrating with the most popular commercial software development environment, Microsoft Visual Studio, as well as popular software version control systems. TestQuest 10 also integrates the scalable test integration -- or the scalable test execution framework from CountDown, which allows test cases to be used across many devices, enhancing the productivity of the test teams. We also incorporated a number of other features and functions requested by our TestQuest Pro and CountDown customers.

Now that TestQuest 10 has been released, we have kicked off a focused sales campaign for the product. For our initial sales push, we identified over 60 existing key BSQUARE customers that we believe can benefit from the power of TestQuest 10. Our sales and product teams are working through these initial customers. And while they are still early in the process, we have several qualified opportunities that we are pushing towards closure.

We announced in Q3 our first Handset Certification Platform or HCP installation at China Mobile, the world's largest mobile network operator. We are working with China Mobile's smartphone OEM partners, who must certify their smartphones for sale and use on China Mobile's network. Our HCP installation is designed to primarily assess the stability of smartphones before China Mobile offers these phones to their customers. We have shown China Mobile and our OEM customers that HCP is able to expose problem areas that must be remedied before phones are offered for sale.

Our HCP sales to OEMs in 2011 were disappointing. We achieved early momentum and sold HCP licenses to a number of handset OEMs. But our HCP success model was based on OEMs ordering additional licenses and purchasing support services. And this only happened in a couple of instances.

Part of the problem was related to China Mobile and the expectations they put on the OEMs and part of the problem was related to how we licensed and priced HCP to our OEM customers.

The initial subscriptions we sold last year all expire at the end of Q1. And in conjunction with China Mobile, we have substantially revamped the licensing, support, and pricing model for HCP. Now we are selling a site license subscription covering HCP testing enterprise-wide for a particular network operator and we have included a nominal set of initial support hours. To cover these changes, we raised our subscription price to be 4 to 6 times the old price. Our goal is to make acquiring and implementing HCP as painless as possible for the OEM while still providing a good revenue stream to BSQUARE.

We worked with China Mobile to roll our new model out to OEMs and have had a very positive reception. We now have signed or written commitments from five OEMs for new HCP subscriptions and we are working to get commitments from several other OEMs over the next two quarters. Based on this momentum, we are expecting to recognize approximately 7 times the revenue from our China Mobile HCP installation in 2012 as compared to 2011.

We are still working to begin am HCP production trial with a second operator located in North America. You will remember that we completed a successful proof of concept with this operator in 2011 and we're driving to move to a production trial before the end of the year, eventually leading to a full production deployment. Unfortunately, due to internal organization changes at this operator, we have not made a lot of new progress. They're still interested and we are still engaged. However, the sales process is taking frustratingly longer than expected.

We remain excited about our HCP opportunity in general and our initial relationship with China Mobile's OEMs in particular. Our goals for 2012 are to expand our engagement with China Mobile, move our second HCP installation along, and engage with two other operators that we have held initial discussions with.

I will finish our call today with expectations for the first quarter. I currently expect that our revenue in Q1 will be up from Q4 in the $24 million to $26 million range. I expect that our third party sales will increase from Q4 based on the factors that I described earlier. I expect service and product revenue to be flat or slightly up from Q4. As I stated earlier, the key focuses for the remainder of 2012 are service margin improvement, growing revenue by reaping the investments we made in 2011, and controlling operating expenses.

Overall while 2011 was a challenging year for us, it's important to look a little deeper on what's actually going on at the Company. We still funded new investments in Asia, HCP, TestQuest 10, Android and Windows 8, and the acquisition of MPC Data. We are able to grow our service revenue year over year despite a $3.2 million sequential decline in our Ford service revenue run rate. We generated $2.6 million of EBITDAS and we finished the year with $19 million of cash and no debt.

Taken as a whole, I believe that we have positioned BSQUARE to return to growth in 2012. We operate in a number of growing markets for connected devices of all kinds, but these markets are characterized by rapid change, which requires us to recognize new trends and opportunities and reposition our Company in response. I believe that through our actions in 2011 we have reinforced BSQUARE's strategic position for the future.

I thank you for your interest in our Company and with that I will wrap up by ending the prepared portion of our call and opening up the call for questions.

Operator?

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). One moment, please. (Operator Instructions). One moment for our first question.

At this time I'm showing no questions in the queue. You may continue with any closing remarks.

No closing remarks at this point. Thank you for attending the call and we'll talk to you again next quarter.

Thank you, Operator.

Thank you, sir. Ladies and gentlemen, this concludes the BSQUARE Corporation Fourth Quarter 2011 Earnings conference call. Thank you for your participation. You may now disconnect.