Bsquare Corp (BSQR) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the BSQUARE Corporation first quarter 2012 earnings conference call. Following the presentation, the conference will be open for questions. (Operator Instructions) I would now like to turn the conference over to Scott Mahan, CFO.

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 website. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary text regarding forward-looking statements contained in our earnings release issued today and post [terim] version of 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 our earnings release on significant year-over-year trends. Therefore, the focus of my discussion today will be on quarter-over-quarter trends. With that said, let me recap our results. We reported total revenue this quarter of $25.5 million, down 2% year-over-year from $26 million, and up 9% quarter-over-quarter from $23.4 million. The quarter-over-quarter increase was driven by improvement in third-party software sales.

Third-party software sales were $17.1 million this quarter, down 1% year-over-year from $17.3 million, and up 19% quarter-over-quarter from $14.4 million. The quarter-over-quarter increase was driven by improvement in both Microsoft Embedded and Windows Mobile license sales, with growth occurring across all customer segments, coupled with two large Microsoft licensing orders totaling $1.2 million, which would not be representative of run-rate business. Third-party software sales came in 10% above internal expectations for the quarter. Proprietary software revenue was $1.1 million this quarter, down 21% year-over-year from $1.4 million and up 10% quarter-over-quarter from $1 million.

The quarter-over-quarter improvement was driven by an increase in TI OMAP-related revenue. Proprietary software revenue was in line with internal expectations for the quarter. Service revenue was $7.3 million this quarter, flat year-over-year and down 8% quarter-over-quarter from $7.9 million. The MyFord Touch program accounted for $1.8 million in service revenue this quarter, $2.3 million in the year-ago quarter, and $2.5 million in Q4. MPC Data accounted for $1.3 million in service revenue this quarter, none in the year-ago quarter, and $1.1 million in Q4. Quarter-over-quarter decline was primarily the result of the decrease in MyFord Touch-related program revenue. Service revenue came in 9% below internal expectations for the quarter, driven by project delays in Japan.

Turning to gross profit and margins, overall gross profit was $4.8 million this quarter, or 19% of total revenue, compared to $5.3 million, or 20% of revenue, in the year-ago quarter and $4.3 million, or 18% of revenue, in Q4. The quarter-over-quarter improvement in total gross profit was the result of a $518,000 or $0.05 per share intangible asset impairment, which negatively affected cost of sales in Q4. Third-party software gross margin was 16% this quarter, compared to 13% in the year-ago quarter and 16% in Q4. Proprietary software gross margin was 78% this quarter, 82% in the year-ago quarter, and 23% in Q4.

Quarter-over-quarter improvement was driven by the intangible asset impairment, which negatively affected Q4. Service gross margin was 16% this quarter, 24% in the year-ago quarter, and 21% in Q4. The quarter-over-quarter decline was driven by a 6% decrease in our realized rate per hour, a 1% decline in utilization, and a $116,000 increase in fringe benefits expense, which spikes in the first quarter every year and then tails off throughout the remainder.

Moving down the P&L, total OpEx was $5.1 million this quarter, up 6% year-over-year from $4.8 million and down 4% from $5.3 million in Q4. Despite the fact that OpEx fringe benefits expense increased $151,000, our OpEx fell $201,000 sequentially, and we currently expect Q2 OpEx will be down sequentially, as well.

Now, I will speak to our bottom-line results. We reported net loss for the quarter of $188,000 or $0.02 per share, compared to net income of $184,000 or $0.02 per share in the year-ago quarter, and compared to a net loss of $502,000 or $0.05 per share in Q4. Q4 was negatively affected by the $518,000, or $0.05 per share intangible asset impairment, and was positively affected by a $317,000 or $0.03 per share gain on auction-rate securities. We generated EBITDAS of $448,000 or $0.04 per share this quarter, compared to EBITDAS of $1.1 million or $0.10 per share in year-ago quarter, and EBITDAS of $338,000 or $0.03 per share in Q4.

Cash and investments decreased $1.3 million to $17.7 million at quarter end, $875,000 of which is classified as long term. The $1.3 million decline compared to a forecasted decline of roughly $500,000 with the expectations missed, driven by the fact that a larger than usual percentage of sales incurred in -- occurred in the last month of the quarter.

We currently expect cash investments to increase by approximately $1.75 million in Q2 due to positive working capital shifts. CapEx was $99,000 this quarter, and we still currently expect FY 2012 CapEx to run approximately $600,000. Head count, including contractors, is currently 322 compared to 341 as of the date of our last call. Engineering services head count is currently 217, down from 235.

Now, I would like to turn the call over to Brian Crowley, BSQUARE's CEO.

Thanks, Scott.

I will give my perspective on Q1 results and, along the way, I will provide an update on our initiatives. First, let's discuss our results in efforts around third-party software sales. Sales increased substantially over the fourth quarter, driven by the large increases in both Microsoft general embedded and Windows Mobile. The general embedded increase was driven by a single large order from a long-time customer that we don't expect to be repeated in the second quarter, as well as increased order volume from our breadth customers, that is, customers whose revenue levels fall below those of our top ten customers. The Windows Mobile increase was driven primarily by large orders from two existing customers, and we don't expect orders at this level from these customers again in the second quarter.

On our last call, I discussed our new relationship with Future Electronics and an agreement we signed for a Fortune 100 manufacturer to purchase Windows Embedded and Windows Mobile products throughout 2012. This manufacturer has not yet begun to take product from us in any volume, as they are clearing out their existing inventories and changing their ordering over to BSQUARE. Therefore, we expect the full impact of this relationship will not begin to show in our revenue run rate until the second half of 2012.

Overall, I think we are on the right track with third-party software sales. Our quarter-to-quarter results can be a little lumpy because of occasional large orders. For example, because of the large nonrecurring orders I just discussed, I currently expect third-party revenue to be down in Q2 as compared to Q1 but still higher than our Q4 revenue. Looking past the quarter-to-quarter variations, I'm currently expecting that year-over-year third-party software growth will be north of 10%.

Next, I will discuss the status of our proprietary products efforts, TestQuest 10, the handset certification platform, and new work we are doing in conjunction with Texas Instruments. Late last year, we released the newest version of our TestQuest product, TestQuest 10, and I discussed on the last call that we had kicked off a new sales campaign for the product. This campaign is still underway, but I can report that the product is receiving a positive reception, and we are progressing opportunities through our sales pipeline.

We have received feedback in a couple areas where the product needs strengthening, and the development team is moving to correct those issues. I'm always impatient for results, but on a practical basis, we have always known that the sales cycle for TestQuest is not short, and therefore the second half of the year is when we expect to begin reaping results.

I talked last quarter about how we revamped our pricing and approach to selling our handset certification platform, or HCP, subscriptions to OEMs who are delivering handsets to China Mobile. We currently have commitments for $600,000 in subscription revenue over the next year, and we are working with several other OEMs to close additional subscriptions. We are also working to broaden our HCP program with China Mobile. For example, one of our Chinese silicon vendor customers has asked us to consider creating a BSQUARE-run HCP testing service for those Chinese OEMs that provide locally branded, low-cost handsets to China Mobile.

These OEMs tend to be small and operate on low margins, which makes it difficult for them to afford the cost of a full HCP license. Therefore, by creating a pay-as-you-go service for this class of OEM, we believe that we can broaden our market opportunity with China Mobile, create further product stickiness, while building another recurring revenue stream. Overall, I currently believe that we are on track to recognize around $1 million in license and service revenue from our China Mobile HCP program over the next year.

Next, I would like to discuss a program we are executing in conjunction with Texas Instruments, or TI, to build production-quality reference software for the TI Jacinto 4 processor family. We are building a windows CE7 board support package that will be co-sold with TI, primarily to OEMs building in-vehicle infotainment solutions. Of course, we are very familiar with this market from our work on the MyFord Touch program. We will receive guaranteed revenue on this product to cover our development costs. But our overall outlook is that by the end of 2014, we will have earned an incremental $1 million to $2 million in high-margin royalties for this product.

Overall in products, I'm happy with our China Mobile HCP progress. I'm anxious for faster progress on TestQuest 10 sales. I believe that the TI program I just described is an opportunity to add additional high-margin product revenue for low risk. And I intend to look for other ways to duplicate this program with other TI processor families and possibly with other silicon vendors.

Next, I will discuss the results and activities of our services group. Our service revenue came in under expectations, primarily because of project delays outside of our control from two automotive customers in Japan. These customers asked us to delay work, one for hardware availability reasons and the other for general project reasons. Without these delays, our service revenue would have been about flat with Q4, as we had expected. We believe that this revenue is not lost but will be recognized over the next two to three quarters, as the customers get back on track and we execute the work.

I discussed last quarter softness and utilization and the resulting drag on our service margins. This softness has generally continued in the first quarter. Overall, we are facing timing issues right now, as we have several projects winding down, and new projects are not kicking off as quickly as we need them to. One cause of this has been the ambiguity in Microsoft's road map around Windows CE and the replacement for Windows Mobile in the industrial hand-held market, both of which have always been strong service markets for us. This has caused several of our long-time customers to delay decisions on starting new projects or to look at switching to alternate operating systems, such as Linux and Android, where our service capabilities and reputation are growing, but are not as strong and differentiated as around Microsoft technologies.

Two things have happened recently that we think will start to rectify these issues. First, Microsoft has clarified their technology road map and has stated that they are committed to Windows CE and to a successor to Windows Mobile in the industrial hand-held market. This is positive news for our service, third-party, and proprietary products efforts. Second, during the quarter, we made the decision to reduce our overall service capacity to better match the demand we see in the market, which will improve our service margins in future quarters.

There are two other potential services growth opportunities that I want to highlight. First, we see an opportunity for growing our service revenue by supporting silicon vendors and OEMs in their Windows 8 efforts. I discussed on our last call the investments we were making in building our Windows 8 engineering skills, especially for Windows 8 on ARM architectures. Over the past quarter, we have seen more demand for engineers who have Windows 8 skills than we have been able to supply. We have developed internal training classes, and are investing in ramping up engineers as quickly as we can.

Overall, we have dozens of engineers, either working on Windows 8 projects or who have been trained on Windows 8 technologies, and I expect that this number will grow. Our belief is that as Microsoft opens up Windows 8 to additional silicon vendors and peripheral makers, our addressable market will expand, and we will have the potential to generate millions of dollars of incremental service revenue in 2012 and beyond.

Second, we have an opportunity that we are pursuing to provide HTML5 and JavaScript products and services to Window CE and Windows Mobile customers. You may have heard of HTML5 and JavaScript as the emerging standard for UI development for devices of all types. The heavyweights in the industry, including Apple, Google and Microsoft, have all embraced the HTML5 standard. It is open, well supported with development tools, and theoretically provides portability between devices.

Windows CE and Windows Mobile do not provide HTML5 support today. And on behalf of our -- on behalf of certain service customers, BSQUARE has been engaged to enable HTML5 by porting the open source web kit rendering engine to Windows CE. The web kit rendering engine is the core of the Apple Safari and Google Chrome browsers, and provides state-of-the-art support for HTML5 and JavaScript development.

During this porting effort, we have developed proprietary IP know-how -- proprietary IP and know-how, and we believe that there is a multi-million dollar opportunity over the next two years to sell this IP and related services to other customers who develop devices and applications on existing Microsoft operating systems and need a bridge to the latest UI technologies. Microsoft agrees with this approach, and we have been jointly conducting sales seminars to OEMs located in Asia, and the interest in our solution has been very positive.

While this has been a difficult several quarters for our services team, we are responding by building skills in high-demand areas like Windows 8 and HTML5. As we build more skills in these areas, we believe our results will improve. In the meantime, we continue to carefully balance capacity as needed.

Before I leave services, I would like to comment on the status of our work with Microsoft on the MyFord Touch system. As we have discussed previously, our contract with Microsoft runs through the end of June. We have received positive indications that our contract will be renewed past June. However, we cannot be any more specific at this time.

Finally, let me discuss expenses. Based on our current sales pipeline, we made the decision during Q1 to reduce our sales and cost of service expenses by about $400,000 per quarter. Some impact of these reductions will be seen in Q2, but the full impact will be seen in Q3 and beyond.

I will finish our call with expectations for the second quarter. I currently expect that Q2 revenue will be in the $23 million to $25 million range. I expect our revenue growth to pick up again in the second half of the year, based on the items I just discussed, such as expected demand for our third-party products, success in our TestQuest sales campaign, and new service opportunities around Windows 8 and HTML5. We continue to drive positive EBITDAs and will not be satisfied until we are driving positive net income again. 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.

We will now begin the question-and-answer session. (Operator Instructions) And there are no questions in queue. I would like to turn the call back over for closing remarks.

Okay, thank you, operator. And thank you very much for listening to our call today. We will talk to you again next quarter.

Operator. Thank you, ladies and gentlemen, that does conclude our conference for today.