Bsquare Corp (BSQR) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen; thank you for standing by. Welcome to the Bsquare Corporation first-quarter 2014 earnings conference call. (Operator Instructions)

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

Good afternoon, everyone. Before I began, 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. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from what is described in those statements.

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. With that said, let me recap our results.

We reported total revenue this quarter of $22.7 million, up 9% year over year from $20.9 million, and down 12% quarter over quarter from $25.8 million. Third-party software sales were $17.7 million this quarter, up 14% year over year from $15.5 million, and down 16% quarter over quarter from $21.1 million.

The year-over-year increase was primarily driven by a large sale of Microsoft embedded operating systems in the amount of $2.6 million. The quarter-over-quarter decline was primarily driven by a $2.85 million Adobe Flash sale, which benefited Q4.

Proprietary software revenue was $755,000 this quarter, down 26% year over year from $1.0 million and up 70% quarter over quarter from $444,000. The year-over-year decline was driven by lower Texas Instruments OMAP royalty revenue, while the quarter-over-quarter increase was driven by the same product. Service revenue was $4.3 million this quarter, down 2% year over year from $4.4 million and up 1% quarter over quarter from $4.2 million.

The MyFord Touch program accounted for $670,000 of service revenue this quarter, $1.3 million in the year-ago quarter, and $728,000 in Q4. The year-over-year decline in MyFord Touch revenue was largely offset by growth in Japan resulting from several large handheld terminal projects.

Turning to gross profit margins, overall gross profit was $3.5 million this quarter or 16% of total revenue compared to $3.3 million or 16% of revenue in the year-ago quarter, and $4.5 million or 17% of revenue in Q4. The quarter-over-quarter decline in total gross profit and gross margin was primarily driven by the large higher-margin Adobe Flash sale, which benefited Q4.

Third-party software gross margin was 13% this quarter, 16% in the year-ago quarter, and 19% in Q4. The year-over-year decline was due to a number of factors, including lower sales of Microsoft Windows Mobile and other higher-margin third-party products, as well as a previously disclosed modification to our rebate accountant.

The quarter-over-quarter decline was driven by the significant higher-margin Adobe Flash sale, which benefited Q4. Proprietary software gross margin was 78% for the quarter, 83% in the year-ago quarter, and 56% in Q4. The quarter-over-quarter increase was driven by higher revenue compared to a relatively fixed cost of sales base.

Service gross margin was 15% this quarter, 0% in the year-ago quarter, and 7% in Q4. The year-over-year and quarter-over-quarter increases were driven by utilization improvements resulting from our Q4 headcount reduction.

Moving down the P&L, total OpEx was $3.7 million this quarter, down 13% year over year from $4.3 million and down 17% quarter over quarter from $4.5 million. The year-over-year and quarter-over-quarter declines largely resulted from our Q4 cost reductions. We currently expect OpEx to be roughly flat sequentially in Q2.

Now I will speak to our bottom-line results. We reported a net loss for the quarter of $393,000 or $0.03 per share compared to a net loss of $862,000 or $0.08 per share in the year-ago quarter and compared to a net loss of $23,000 or $0.00 per share in Q4.

We generated positive adjusted EBITDAS of $210,000 this quarter compared to negative adjusted EBITDAS of $485,000 in the year-ago quarter and positive adjusted EBITDAS of $345,000 in Q4.

Cash and investments increased $2.2 million to $23.2 million at quarter end from December 31, $250,000 of which is classified as long term. We commented in the last quarter's call that we expected cash to be down slightly during the quarter, but we experienced better-than-expected working capital effects and operating results.

CapEx ran $80,000 this quarter and we currently anticipate FY14 CapEx to run approximately $400,000. Cash and investments are currently expected to decline roughly $1.5 million at 6/30 compared to 3/31 due to negative working capital effects.

Headcount including contractors is currently 206 compared to 207 as of the date of our last call. Engineering services headcount is currently 137, up from 132.

Now I would like to turn the call over to Jerry Chase, Bsquare's Chief Executive Officer.

Thanks, Scott, and good afternoon, everyone. As Scott described, in Q1 we saw the positive effects of the restructuring and refocusing effort we undertook in the second half of 2013. During the quarter, we made solid advances on our commitment to return Bsquare to profitability, as evidenced by a $562,000 reduction in OpEx and a $695,000 positive swing in adjusted EBITDAS compared to the year-ago quarter.

Though we are encouraged by what we are seeing as a result of the restructuring, we are under no illusions that we will be able to cut our way to prosperity. As we have stated previously, our top priority for 2014 is to execute cleanly on our existing business. In addition, we have embarked upon same adjacent, but new, growth initiatives, which I will discuss in a few moments.

But first, a few comments about each of Bsquare's three revenue lines: third-party software sales, engineering services, and proprietary products.

Third-party software sales is the main driver of our topline revenue, generating 78% of our revenue this quarter. Although our margin percentages were down this quarter, the underlying strength of our third-party software sales and the team supporting it are strong and healthy.

Our Bsquare licensing team maintains a very close relationship with our number one supplier and partner, Microsoft, and with our customers. With a healthy basis for doing so, we are selectively investing in this business.

Engineering services drove 19% of our topline number in Q1 and we saw better utilization rates and resulting margins in engineering services as a result of the restructuring we undertook in Q4. You may recall that during the fourth quarter, we consolidated responsibility for sales and delivery under the leadership of Mark Whiteside.

In his brief time in the leadership role, Mark has been focusing on deepening and expanding our relationships with existing customers, selectively growing our customer base, and upgrading the sales team. We expect to grow our topline and margins in engineering services on a longer-term basis by continuing in this direction.

Our proprietary product revenue represented 3% of our topline in Q1, but with very good margins. Some of the growth initiatives I will discuss in a moment are aimed at improving our products sales and margin profile.

To recap some additional activities and highlights from Q1, I am very pleased to have joined Bsquare as our permanent CEO in February. As Google recently announced, we partnered with them to provide engineering services for Project Tango, Google's exciting new initiative to give mobile devices a human scale understanding of space and motion. We have again increased our business with the Coca-Cola Company, our long-term customer.

We continue to support the MyFord Touch program in which Bsquare has played a significant role throughout its development. As we mentioned on our last call, estimates by Gartner Research indicate there will be between 50 and 200 billion points of connectivity by 2020 -- the foundation for a big market.

In January at CES, we previewed our emerging DataV family of Internet of Things products, applications, and services that will turn raw device data into useful, meaningful, actionable data. When implemented, DataV will help our customers lower operational costs, improve and enhance their operations, lower their risk, and enable new revenue opportunities for them and us. We currently anticipate revenue from this initiative beginning in 2015.

And, through the efforts of our third-party software sales team, we have aligned ourselves with Microsoft and Intel's tablet and handheld strategies to address an existing multi-hundred million dollar market in traditionally strong Microsoft verticals. We look forward to sharing news about this initiative in the coming quarters.

We continue to focus on and find ways to bring our three revenue lines together to mutually support and grow our overall business. For example, our salespeople, regardless of their primary focus, are newly incentivized to cross-sell one another's products. It is also clear that our ability to offer engineering services in conjunction with our new handheld and IoT initiatives is a significant advantage for Bsquare and key to achieving our objectives in these areas.

Turning to Q2, we currently expect that revenue will be between $21 million and $23 million and we also currently expect to be GAAP profitable.

Before turning to Q&A, and on behalf of the entire Bsquare team, I wish to thank our investors and our customers for your interest and for your business.

Lorenzo, please open the call for questions.

(Operator Instructions) Ryan Vardeman, Palogic.

Can you tell a little bit more about the initiatives on the proprietary product side of things? And how the data integration efforts are going?

Sure. The two initiatives that we talked about were the IoT initiative, and that's around our DataV product line, which we previewed at CES. And as we mentioned this year, it's at -- 2014 is a building year and we are expecting revenue in 2015. As we talked about previously, it's an effort to extend the work that we are already doing close to the network edge, close to the point of connectivity, with existing customers, so instead of declaring victory once we expose data from a device to business information systems or to transport, DataV will help our customers turn raw data into actual data.

And what I can say is that to date, it has been a lean forward experience for both us and our potential customers, but again, 2014 is a building year and 2015 is when we would expect revenue.

And then on our handheld and tablet initiative, as I mentioned, we look forward to updating everyone on that. What I can say in the short term is that we have aligned ourselves with Microsoft's efforts to extend their strength in their traditionally strong verticals of retail manufacturing and medical.

Okay. And then insofar as services utilization, how are we doing there? And what are you -- I don't think you are where you want to be, but how are we doing there? What do the trends look like on the services side of the business and utilization and margins?

Ryan, Scott. Utilization was up in Q1, as you can imagine, because of the headcount reductions in Q4. Still not where we -- it needs to be. We are anticipating an increase in service revenue in Q2, which should stoke up more of that capacity.

Okay. Thank you very much and congrats on what seems to be a great result in Q1.

Kevin Lyons, Moloco Capital Partners

A couple of quick questions. One is how do I reconcile the increase in headcount and services from 132 to 137 with the utilization still being subpar and the margin being about half of what it should be? Thinking of 30% as a benchmark there for gross margin.

I'm sorry, say that again?

So I am trying to understand how the -- why the headcount increased in services with the utilization low and with the gross margin at 15% instead of a benchmark at about 30%. Which would be more indicative of the capacity. So what is going on there?

And maybe the related question there is where are these building costs being put booked for the DataV?

To get at your margin question, and I am not trying to dodge the question, Kevin, I'm still not sure I am clear on it. But so we have a couple of things going on here in terms of margin and why it is not running where we would like it to be as well.

And one is we have got a couple of large projects going on right now that are depressing our bill rate. So obviously your margin is a function of whatever your bill rate is and your cost per hour, and your cost per hour is a function of the cost of your resources and your utilization.

So utilization wasn't -- still in Q1 isn't where we want it to be. And we have got -- right now, we have got a somewhat lower bill rate than you would normally see because we have got a couple of projects going on in Asia that are depressing that.

Plus at a relatively low revenue run rate, with still our fixed cost against facilities, the cost of our overhead individuals is still too high for that overhead run rate. But, as I mentioned, we are projecting a sequential increase in service revenue in Q2. So you will see a margin improvement in Q2.

Okay. So what about the headcount, then? Unless I misunderstood, the headcount went up by five during the quarter, is that right?

Yes. So I am -- off the top of my head, and your question, if I understand it is, how did headcount go up but utilization (multiple speakers)

[Seems] not, yes, exactly.

So I am guessing, Kevin, without going back and looking at the numbers in more detail, it had to do with the timing of when we were giving you these headcount figures. So for the utilization in Q2, we still had a number of headcount on the books, or we had the call in mid-November and the restructuring -- I am guessing it is a timing affect, Kevin, without going through and reconciling it.

Okay. Maybe we can follow up with that offline.

Got it.

It is unclear to me how that would work even if it is a timing issue. So last -- so maybe this is a related question. What is the $1.1 million increase in equipment, furniture, and leasehold improvements from the end of the year?

That is the build out of our new headquarters location. So in March, we moved from the second floor of our building up to the third floor. So we went from about 44,000 square feet to about 26,000 square feet.

As part of that deal, we -- there was about $1.2 million spent on tenet improvements. Virtually all of that was paid for by the landlord. So you will also notice that there's a big increase in our deferred rent on the other (multiple speakers)

Yes, $1.2 million there. I saw. Yes, okay. So how much are you saving on the rent now going forward?

About [$20,000] a month or [$60,000] a quarter.

Okay, great.

Yes, so space went down. Our space went down pretty significantly. We've got a little over 100 people, 100 in Bellevue, but the problem is between when we did the original lease way back in 2004, the cost of space in Bellevue has increased significantly. So you'd think that going from 44,000 square feet to 26,000 square feet would be a much bigger savings, but unfortunately, it wasn't.

Understand. Okay. Thanks a lot.

(Operator Instructions) We have no additional questions at this time. I would like to pass the call back to management for closing remarks.

Thank you, Lorenzo. On the half of the Bsquare team, we would like to thank you again to our investors, our customers, for your attention on the call. We look forward to reporting our progress in the coming quarters. Thank you.

Ladies and gentlemen, this does conclude the Bsquare Corporation first-quarter 2014 earnings conference call. Thank you for your participation. You may now disconnect.