Bsquare Corp (BSQR) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BSQUARE Corporation's second quarter 2012 earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions.)

I would now like to turn the conference over to Scott Mahan, BSQUARE's Chief Financial Officer. Please go ahead.

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 in the posted 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 where applicable. We provided color in our earnings release on significant year-over-year trends, and 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 $24.5 million, up 5% year-over-year from $23.4 million and down 4% quarter-over-quarter from $25.5 million.

The quarter-over-quarter decline was driven by anticipated decreases in all three revenue lines, although we did come in near the higher end of our $23 million to $25 million guidance due to stronger than expected third party software sales.

Total revenue for the six months was $50.1 million, up 1%.

Third party software sales were $17.0 million this quarter, up 11% year-over-year from $15.3 million and flat quarter-over-quarter. Total third party software sales for the six months were $34.1 million, up 4%.

Proprietary software revenue was $788,000 this quarter, down 54% year-over-year from $1.7 million and down 31% quarter-over-quarter from $1.1 million. The quarter-over-quarter decrease was driven by declines in TestQuest and TI OMAP revenue.

Proprietary software revenue for the six months was $1.9 million, down 39%.

Service revenue was $6.7 million this quarter, up 5% year-over-year from $6.4 million and down 8% quarter-over-quarter from $7.3 million. The quarter-over-quarter decrease was the result of declines in North America and EMEA.

The MyFord Touch program accounted for $1.7 million in service revenue this quarter, $2.4 million in the year ago quarter, and $1.8 million in Q1.

MPC Data accounted for $1.1 million in service revenue this quarter, none in the year ago quarter, and $1.3 million in Q1.

Service revenue for the six months was $14.0 million, up 3%.

Turning to gross profit and margins, overall gross profit was $4.4 million this quarter, or 18% of total revenue, compared to $5.1 million, or 22% of revenue, in the year ago quarter and $4.8 million, or 19% of revenue, in Q1.

The quarter-over-quarter decline in total gross profit and gross margin was primarily the result of the decrease in high margin proprietary software revenue. Total gross profit for the six months was $9.2 million, down 11%.

Third party software gross margin was 15% this quarter, 17% in the year ago quarter, and 16% in Q1. Proprietary software gross margin was 61% this quarter, 80% in the year ago quarter, and 78% in Q1.

The quarter-over-quarter decrease was driven by the decline in proprietary software revenue compared to a relatively fixed cost of sales base.

Service gross margin was 20% this quarter, 18% in the year ago quarter, and 16% in Q1. The quarter-over-quarter improvement was primarily driven by a 3% increase in our realized rate per hour and a 3% decline in our cost per billable per hour.

Moving down the P&L, total OpEx was $4.7 million this quarter, down 9% from $5.1 million in both the year ago quarter and Q1. The quarter-over-quarter decline was driven by a reduction in all spend components with the exception of R&D, with most of the decline resulting from sales cost cuts made in Q1.

R&D was up $168,000 sequentially due to higher spend on our TI Instruments BSP efforts.

Total OpEx was $9.7 million for the six months, down 2%.

Now I'll speak to our bottom line results. We reported a net loss for the quarter of $202,000, or $0.02 per share, compared to net income of $21,000, or zero cents per share, in the year ago quarter and compared to a net loss of $188,000, or $0.02 per share, in Q1.

We reported a net loss for the six months of $390,000, or $0.04 per share, compared to net income of $205,000, or $0.02 per share, in the year ago period.

We generated EBITDAS of $380,000, or $0.03 per share, this quarter, compared to EBITDAS of $809,000, or $0.07 per share, in the year ago quarter and EBITDA of $448,000, or $0.04 per share, in Q1.

We generated EBITDAS for $828,000, or $0.08 per share, for the six months compared to $1.9 million, or $0.17 per share, in the year ago period.

As a reminder, we emphasize EBITDAS because it represents a fairly good proxy of our free cash flow, given we don't pay significant income taxes, have no debt, and aren't a heavy CapEx Company.

Over the last six years, we have been EBITDAS positive every quarter but three and have generated EBITDAS of $16.6 million and added $17.8 million of cash to the balance sheet, exclusive of net cash paid for acquisitions.

Cash and investments increased $3.1 million to $20.8 million at quarter end from March 31, $875,000 of which is classified as long term.

CapEx was $65,000 this quarter and $164,000 for the six months. We currently anticipate FY '12 CapEx to come in around $500,000, down from our previous estimate of $600,000.

Headcount, including contractors, is currently 301 compared to 322 as of the date of our last call. Engineering services headcount is currently 200, down from 217. These headcount numbers do not reflect the effect of the recent R&D restructuring referenced in our earnings release.

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

Thanks, Scott. I'll give my perspective on Q2 results and will also provide an update on our initiatives and our outlook for the third quarter.

First let's discuss third party software sales. While sales were basically flat from the first quarter, we did perform a little better than expected. We received a larger than normal order from a longtime Microsoft embedded licensing customer as well as a large order from a Fortune 100 customer that we won in conjunction with our Future Electronics partnership, both of which boosted our results.

Looking forward, the focus of our third party team is to grow sales in conjunction with Microsoft and our partnership with Future. In particular, we have several sales initiatives underway to mine the Future customer base in both North America and Europe for third party and service opportunities.

Keeping in mind that our third party software sales can be lumpy due to large orders shifting from one quarter to the next, I still expect that third party sales will increase sequentially in the third quarter and that we are on track to grow third party sales year-over-year by over 10% based upon our sales pipeline, our relationship with Future, and the work we have undertaken with Microsoft to grow embedded software sales in Europe.

Next I will discuss the status of TestQuest, the Handset Certification Platform, and our HTML5 Rendering Engine. Unfortunately, sales of our TestQuest 10 product are not growing as rapidly as we expected. Factors impacting sales growth include competition from internally developed tools, low cost and open source test automation tools.

Given the trajectory of TestQuest sales, we made several decisions after quarter end. First, we decided to scale back spending on TestQuest and have already taken actions that will reduce our R&D and support spending by approximately $1.3 million per year, which we expect to be fully realized beginning in Q4.

Second, we are phasing out support for the older TestQuest Pro and CountDown products and will focus all our efforts on TestQuest 10. We still believe in the market for test automation products, and we intend to continue marketing and selling TestQuest into that market.

Given the slow sales of the product to date and the resulting drag on our bottom line, we feel that reducing our investment and harvesting revenue from the product line is prudent. We will evaluate our marketing and selling efforts over the coming quarters in order to determine when it might make sense to increase our investment level again.

Moving on to our Handset Certification Platform, we are continuing to maximize our partnership with China Mobile. We closed a new HCP license during the quarter and are working with several new Chinese OEMs to move their handset through the HCP testing service that I described in our last call.

We started a paid evaluation with a new North American operator, and we will work over the next few months to convert this evaluation into an HCP installation.

I talked last time about investments we were making in developing an HTML5 Rendering Engine based on the open source Webkit technology. Our engine enables HTML5 application development on top of Windows CE. We see growing interest in this solution, as it fills a hole in Microsoft's Windows CE offering and provides our customers a potential application bridge to Windows 8.

Our solution sells for $25,000 for the base engine plus royalties, and we also offering corresponding services to help our customers integrate the engine into their device and develop their HTML5 applications.

We have designed the solution into an in-vehicle infotainment system for one of tier one automotive customers, and we currently have over a dozen other opportunities in our sales pipeline.

Next I'll discuss the results and activities of our services group. As expected, revenue was down compared to the first quarter, primarily due to sequential declines in North America and Europe.

In North America, we had a large project for an industrial device manufacturer wrap up in the quarter and we have not yet deployed all those resources onto other projects.

Our Europe drop was not related to any one project. Rather, it was more of a quarterly variation. We currently expect Europe's service revenue will improve in the third quarter.

Overall, we expect a small decline in service revenue again in the third quarter due to projects wrapping up and a slow start to replacement programs, especially in Japan. We currently believe that service revenue will grow in the fourth quarter.

As I have mentioned on previous calls, we are focused on improving service margins by balancing resources against anticipated sales. Service margins did improve to 20% in the second quarter as compared to 16% in the first. And we expect them to be in about the same range in the third quarter, as we are still tuning the right skill set and staff balance against our sales pipeline.

We currently expect further improvement in the first quarter -- in the fourth quarter, and our goal remains to get our service margins back over 30% over the next few quarters.

I talked in past quarters about service growth opportunities we have been pursuing around Windows 8 and Windows Phone 8, and I'd like to update you briefly on our progress.

Currently, we have quite a few engineers deployed with various silicon vendors and OEMs, helping them to port their products to Windows 8 and Windows Phone 8. This brings us direct revenue and, in the process, our staff gains real world technology and project experience.

We have undertaken the next step to expand our sales efforts to bring this experience to other silicon vendors, OEMs, and peripheral makers who want to port their devices to Windows 8 and Windows Phone 8.

We are also working on a new Windows 8 application development service that I will describe more fully in future quarters. We believe that Windows 8 and Windows Phone 8 is a large growth opportunity for our services, and our goal is to be the preeminent supplier of services both at the chipset and application level to customers building devices on these technologies.

Before I leave services, I'd like to comment on the status of our work with Microsoft on the MyFord Touch system. We successfully renewed our contract with Microsoft through the end of 2012 and are currently discussing 2013 plans. We have positive indications that our work will continue next year, however no agreement has been reached as of today.

Finally, let me discuss expenses. You'll remember that back in the first quarter we made the decision to reduce our sales and cost of service expenses by about $1.6 million per year. I just discussed our decision to adjust R&D and support expenses down by approximately $1.3 million per year.

Recognizing that our revenue has been flat for multiple quarters, our goal is be solidly profitable at our current revenue levels and margin profile while we continue to work on growth initiatives and improvement of our service margin. We believe that these expense reductions, once the impact is fully realized, will achieve that goal.

I will finish our call today with expectations for the third quarter. I currently expect that Q3 revenue will be in the $24 million to $26 million range. I expect our third party and proprietary software revenue to be up compared to the second quarter, and our service revenues to be down for the reasons I described earlier.

I expect OpEx to be down compared to the second quarter. However, the full impact of our latest expense reductions will not be realized until the fourth quarter.

We're in a period of economic uncertainty and our customers continue to be cautious in starting new projects. There has also been uncertainty around Microsoft's roadmap for Windows CE, the replacement for Windows Mobile, and Windows 8 into the embedded market.

There is not much we can do about economic uncertainty outside of making sure that our operations are properly sized for profitability, and we have taken the necessary steps to address this.

Over the past months, Microsoft has been clarifying their product roadmaps, and we believe this is giving our customers confidence to stay with Microsoft technologies for the new device designs.

As we have discussed in past quarters, we have diversified our offerings in order to expand our addressable market and serve customers who build products on non-Microsoft technologies such as Android and QNX. We will continue our efforts to expand our diversified revenues, and we view the more recent clarity around Microsoft's plans very positively.

Taken together, the continued Windows CE roadmap, coupled with the upcoming Windows 8 release and the offerings we have developed around diversified operating systems, puts us in a good position for future growth.

With that, I will wrap up the prepared portion of our call. I wish to thank you for your interest in BSQUARE and will now take questions.

Thank you, sir. (Operator instructions.) Ryan Vardeman with Palogic Capital.

Hey, guys. Thanks for taking my question. You guys do such a great job of detailing your performance it's almost silly to ask questions, but here's a couple.

The MPC revenue that you said was in the quarter was what, $1.1 million?

Yes, the service. There's a little bit of -- Ryan, this is Scott. There's a little bit of revenue on top of that, but that $1.1 million is basically all service revenue.

It is? Okay. And so, then the balance of the services revenue was on the order of, I guess, $5.6 million or so?

Yes.

Okay. The R&D cut, is that mainly coming from the TestQuest, or are there other projects and other initiatives that are going to be cut there?

It's mainly from TestQuest, Ryan.

Okay. And at what point -- so, looking at what you paid for MPC and the revenue that it's generating and looking at the balance of your -- just looking at your services organization, the -- I mean, you paid, what, $4 million and change for MPC? I mean, the entire rest of your business, using that as a kind of valuation metric, looks to be priced, backing out your net cash, well less than what would be implied by the MPC valuation.

At what point would you consider doing a share repurchase? It looks like you're going to be kind of generating cash over the next, let's call it, year or so with these expense reductions. At what point does that make sense, buying your own shares back versus maybe making acquisitions that have integration risk, etc.?

Well, I think share repurchase is something that has been an ongoing conversation amongst the Board, Ryan. And, I mean, I think there is a point where it makes sense. I don't think that I know exactly, where I sit here today, where exactly that point is. And I think that the Board is monitoring it very closely. And when there's consensus among the Board that it's the right time, that's when we'll do it.

Certainly we are keenly interested in other acquisitions. MPC so far is working out very nicely for us. And if we can find other acquisitions like MPC or other technologies that are complementary, I think it would be a good deal for us to bring those on board.

Okay. And then, the Crank Storyboard announcement that you made, what does that mean insofar as the financials over the next couple of years, anyway?

We didn't disclose the financials around Crank. It's a third party product that we resell. And I would expect it to be somewhat on par with some of the other third party products that we sell.

It's not going to be a huge driver of our top line. It's more to round out our solution set that we offer to our customers.

Okay. Okay, thank you. And then, what about the Snapdragon? How is that, I guess, development platform going? And what about services surrounding that?

The Snapdragon sales are very steady for us. And we actually have gotten several service referrals based on Snapdragon. It's useful to have a relationship at that level with Qualcomm.

Okay. Well, thank you, guys, very much for your hard work. Best of luck. Thank you.

Thanks, Ryan.

(Operator instructions.) And I am showing no further questions at this time. I will turn it back over to Mr. Crowley for any closing remarks.

Okay. Well, we'll wrap up now. Thanks again for attending our call today. And we'll look forward to talking to you again next quarter.

Operator?

Yes, we do have one last question if you would like to take it.

Sure.

Okay. We have a question from the line of Gene Weber with Weber Capital Management. Please go ahead.

Hi, guys. Boy, that's the first time that's ever happened to me. I'm glad the operator picked up on it.

Could -- Brian and Scott, could you give us just a little more detail on the expense reductions you've done already in terms of how many heads that involved and where it focused? And you already outlined about this new plan you have and where that's coming, but I'd like to get refresh on the prior plan.

Okay. We're not exactly sure what you're asking for as far as new plan and prior plan.

Well, today you announced in the press release that you're reducing expenses by about $1.3 million.

Correct.

And in Brian's remarks, he said that you had previously announced a program that reduced expenses by -- I think he said $1.5 million.

$1.6 million. Yes, we talked about --.

$1.6 million.

Yes, we talked about that in our last call.

Okay. Could you refresh us what that was about?

Sure. So, that was focused mostly around sales and a little bit out of cost of service of expense that we took out in the first quarter. And as I mentioned --.

And any --?

Go ahead.

No. No, you go ahead, Scott. Sorry.

This is Brian. As I mentioned --.

Oh, Brian. Sorry.

As I mentioned, in the first quarter -- or in this most recent quarter, just after quarter end we reduced R&D and support expenses by about $1.3 million per year. And the full impact of that will be seen in Q4.

Gene, this is Scott. The Q1 cuts are a major reason why you saw OpEx decline about $400,000 from Q1 to Q2.

And to be clear, on the R&D cuts and why we say both R&D and support is about $200,000 of that $1.3 million will roll through the software cost of sales line. And the other $1.1 million will show up in the OpEx piece of R&D. But, again, to Brian's comments earlier, we won't get the full quarter effect of that until Q4.

Okay. So, have you gotten the full effect of the $1.6 million?

Pretty close. There was a little tail in Q2, but pretty close.

Okay. And does the $1.6 million -- just like this new $1.3 million primarily relates to TestQuest, did the $1.6 million relate to any particular product area?

No, that was more focused on -- we had made some sales investments that frankly weren't paying off, and so we backed off them. And we did some adjustments on cost of service as well. So, it was pretty much spread across everything.

If you remember, Gene, our OpEx is due -- in fact, I think we talked about this. If you looked at our '11 versus '10 full year results, our OpEx, off the top of my head, was up $4.3 million, I think. And $2.5 million of that was sales.

Right. I remember you did make that investment. Okay.

And then, just -- Scott, I'm sorry. I joined the call a little bit late and I was rushing to get stuff done. What did you say the -- did you say the headcount's now 301 versus 322?

Yes. Yes.

And what were the engineering numbers?

Engineering is currently 200, down from 217.

Okay. Now, is there any geographic split? In other words, when you -- as you brought down your headcount, has it been mostly domestic or is it O-US or whatever?

Most of it's domestic.

Okay. Well, thanks, and congrats on working the cash the way you should be working it. That's obviously very important in this economy. So, good luck with that.

Thanks, Gene.

Thank you. There are no further questions at this time. Ladies and gentlemen, this does conclude the conference call. You may now disconnect, and thank you for your participation.