Bsquare Corp (BSQR) 2014 Q3 法說會逐字稿

Good day and welcome to the BSQUARE Corporation third-quarter 2014 financial results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Jerry Chase, please go ahead.

Good afternoon, everyone. Before I begin, let me remind you that the call is being broadcast over the Internet and that a recording and the text of my prepared remarks will be available on our website.

During the call, I 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.

Before discussing our financial results, I'd like to take a moment to welcome Marty Heimbigner as the new CFO of BSQUARE. We announced Marty's new role via press release on October 28, and Marty's first official day with us was November 3. Marty brings an impressive array of experience and skills to BSQUARE, and we are very pleased to have him on the team. Next quarter Marty will be speaking to you about the financial aspects of our results.

With that said, let me recap our Q3 results. We reported total revenue this quarter of $24.5 million, up 4% year over year from $23.6 million and up 6% quarter over quarter from $23.1 million. Total revenue for the nine months was $70.3 million, up 6%.

Third-party software sales were $19.2 million this quarter, up 7% year-over-year wall-to-wall from $18 million and up 13% quarter over quarter from $17 million. The year-over-year quarter over quarter increases were driven by increases in sales of Microsoft Windows Mobile operating systems and partially offset by decrease in sales of Windows Embedded operating systems. The quarter-over-quarter increase in sales of Windows Mobile operating systems was primarily driven by sales to two customers.

Third-party software sales for the nine months were $53.9 million, up 8% due to an increase in Windows Embedded operating systems that was partially offset by a decline in sales of Adobe Flash.

Proprietary software revenue was $551,000 this quarter of 22% year over year from $452,000, and up 23% quarter over quarter from $448,000. Proprietary software revenue for the nine months was $1.8 million down 15%.

Service revenue was $4.8 million this quarter, down 7% year-over-year from $5.1 million and down 16% quarter over quarter from $5.6 million dollars. The quarter-over-quarter decrease was primarily driven by project revenue in Japan that benefited Q2. Service revenue in Q2 included the recognition of [$478,000] in revenue in gross profit resulting from the completion of one of two handheld terminal projects that was being accounted for under the zero profit percentage of completion accounting method. Under this method, revenue is recognized equal to delivery costs during the project, and the gross profit is recognized as revenue at completion.

We are also accounting for the second handheld terminal project using the zero profit percentage of completion accounting method and expect a similar revenue and gross profit pickup in Q4 upon completion of the second program.

The MyFord Touch program accounted for $655,000 of service revenue this quarter, $1.2 million in the year ago quarter, and $821,000 in Q2. MyFord Touch revenue for the nine months was $2.1 million compared to $3.7 million in the prior year. Service revenue for the nine months was $14.7 million, up 2%.

Turning to gross profit and margins, overall gross profit was $4 million this quarter or 15% of total revenue compared with $3.4 million or 14% of revenue in the year-ago quarter and $4.3 million or 18% of revenue in Q2. Gross profit for the nine months was $11.8 million or 17% of total revenue compared to $10.5 million or 16% of total revenue in the prior year.

Third-party software gross margin was 14% this quarter, 13% year ago quarter, and 13% in Q2. The year-over-year and quarter-over-quarter increases were due to higher sales of Microsoft Windows Mobile operating systems, which are a higher margin third-party product. Third-party software gross margin for the nine months was down 2 percentage points to higher sales of Microsoft Windows Embedded operating systems, which are a lower margin product.

Proprietary software gross margin was 74% this quarter, 42% in the year-ago quarter, and 58% in Q2. The year-over-year and quarter-over-quarter increase was driven by higher revenue compared to relatively fixed cost of sales.

Service gross margin was 20% this quarter, 17% in the year-ago quarter, and 31% in Q2. The year-over-year increase was due to improvements in utilization and our realized rate per hour. The quarter-over-quarter decrease was primarily driven by the previously mentioned Japan revenue recognition pickup without which service margin would have been 24%. The remainder of the decrease was driven by a decline in utilization, as well as an overall decline in our realized rate per hour.

Moving down the P&L, total OpEx was $3.2 million this quarter down 32% year-over-year from $4.8 million and down 10% quarter over quarter $3.6 million. The year-over-year decline largely resulted from cost reductions that occurred in Q4 of 2013. OpEx was $10.6 million for the nine months down 23%.

Now, I'll speak to our bottom line results. We reported net income for the quarter of $691,000 or $0.06 per share compared to a net loss of $3.6 million or $0.32 a share in the year-ago quarter and compared to a net income of $651,000 or $0.06 per share in Q2. Net income for the nine months was $949,000 or $0.08 per share compared to a net loss of $5.2 million or $0.47 per share in the prior-year.

We generated positive adjusted EBITDAS of $1.1 million this quarter compared to negative adjusted EBITDAS of $994,000 in the year ago quarter and positive adjusted EBITDAS of $1.1 million in Q2. We generated adjusted EBITDAS of $2.4 million for the nine months compared to negative adjusted EBITDAS of $1.8 million in the prior year. As a reminder, adjusted EBITDAS is our operating income or loss with add backs for depreciation, amortization, and stock compensation expense.

Cash and investments increased $1.1 million to $25.5 million at quarter end from June 30. Because we do not have significant capital expenditures, over time adjusted EBITDAS is a close proxy for expected increases or decreases in cash net of working capital changes.

Now, I'd like to discuss what these numbers mean to BSQUARE and our investors. In Q3 by focusing and executing cleanly on our existing business, BSQUARE made solid progress on our commitment to return to sustained profitability, as evidenced by a $4.3 million positive swing in net income, $2.1 million positive swing in EBITDAS, and $1.5 million reduction in OpEx from the year-ago quarter.

Going forward, we will continue to focus on profitability and cash flow. And though we are encouraged by Q3 results, there's additional work we need to do to grow shareholder value.

Within that framework, a few comments about each of BSQUARE's three revenue lines -- third-party software sales, engineering services, and proprietary products. Third-party software sales are the main driver of our top-line revenue, generating 78% of our total Q3 revenue and operated at a 14% gross margin.

Under the leadership of VP of Worldwide OEM Sales, Scott Caldwell, the underlying strength of our third-party software sales and the team supporting it remains strong. This is the team responsible for the launch of MobileV announced in October. I'll talk more about MobileV in a few moments.

Engineering services drove 19% of our top line in Q3 and operated at a 20% gross margin.

Under VP Solutions Sales and Engineering Mark Whiteside's leadership, we continue to focus on deepening and expanding our relationships with existing customers, selectively growing our customer base, and adding to the sales team.

And finally, our proprietary product revenue represented only 3% of our top line in Q3 but with a 74% gross margin. DataV our IoT solution is targeted to grow this portion of our business with first product revenues expected in 2015. Once unit volume ramps up in 2015, MobileV will also contribute to our product revenue.

To recap some activities and highlights from Q3, Coca-Cola continues to be a key account for us. Google continues to grow in importance for us, and we continue to work with Google to explore new opportunities to help achieve their objectives. The Ford SYNC project continues to be a steady engagement for us. We continue to build our DataV Internet of Things products, applications, and services solution that will turn raw device data into useful, meaningful, actionable data.

When fully implemented, DataV will help our customers improve equipment uptime, automate their field support forces, lower operational costs, lower their time to market risk, and enable new revenue opportunities for them and us. We currently anticipate revenue from this initiative beginning in 2015.

Over the last year as Scott Caldwell and his third-party software team engaged with OEMs, they identified a need for new and differentiated handheld device in tablet form factors to deliver new applications. With the recent trend towards industrial tablets, OEMs are looking for a single silicon and operating system environment in which to create a portfolio of devices that share common applications, user interfaces, device management and security.

To address that need in October, we concurrently announced our partnership with Aava Mobile and the release of MobileV, a common reference platform for OEMs building multiple device form factors to include durable and rugged class handhelds and industrial tablets. MobileV combines Windows Embedded 8.1 with cutting edge Intel board reference designs from Aava Mobile along with BSQUARE's proprietary software.

MobileV offers a robust, production-ready platform running on an Intel Atom processor and Windows Embedded 8.1, Reducing time to market, development risk and cost while allowing OEMs to focus on their value-added features and functionality. MobileV is sold as a package of production-ready reference designs and licenses. MobileV is also capable of supporting the Android operating system. MobileV is now available and we expect first revenues this quarter.

We are continuing to bring our three revenue lines together to mutually support and grow our business. For example, we believe that both MobileV and DataV will offer opportunities for BSQUARE to offer licensing, engineering services, and products as part of a bundled solution. The teamwork amongst Scott Caldwell, Mark Whiteside, and Chief Architect Dave Wagstaff is a competitive advantage for BSQUARE and is a key to achieving our long-term objectives.

Turning to Q4, we currently expect that revenue will be between $24.5 million and $26.5 million. And we expect to be GAAP profitable. And, just as a reminder from our last earnings call, the second of two handheld terminal projects for a customer in Japan will be completed in Q4. Using the zero profit percent complete accounting method, revenue and gross margin will be positively impacted by a similar amount as Q2. Under the zero profit percent complete method, revenue is recognized equal to delivery costs during the project and the gross profit is recognized as revenue at the completion.

That concludes our prepared remarks. Moderator, please open the call for questions.

(Operator Instructions) [David Cannon, Aegis Capital].

Good afternoon. Jerry, first congratulations. Congratulations, excellent job.

Thanks, Dave.

First question is going forward into Q4, is there anything anomalous in terms of operating expenses that we should expect where sequentially expenses are going to increase, or we can more or less maintain these levels?

We're going to have a little bit of an increase because annual salary increases take effect as of November 1. So, we would expect that probably Q3 was a little bit under normal OpEx rate, and in Q4 we'll be returning to something a little bit closer to normal. But nothing unusual driving it, in this case just an annual expectation of salary increases.

So, we'll go back to more or less OpEx of Q2 or somewhere between Q2 and Q3?

I wouldn't be surprised to see us between Q2 in Q3.

Okay and then in your guidance for the increase in revenue sequentially, will that be spread out across the three different revenue lines, or will it be more heavily skewed towards third-party software?

It would be primarily skewed towards third-party software.

Okay and then the margins that we saw in third-party software, is that sustainable in terms of mix going forward or that was anomalous? We got a boost in Q3 that is not really sustainable.

I think you're right. It's mix driven on a quarterly basis. We run that business very leanly. So on a quarter-to-quarter basis, it might move around a little bit depending on what's flowing through what we sell, but we are not significantly increasing our costs.

I mean it looks like based on the guidance and with the Japan handheld services business coming back in Q4, it seems like we're pretty well positioned to potentially even -- I know you're not going to comment on this but what I come up with is we're going to do even better in Q4 versus Q3.

But here's just a comment like for yourself for the rest of the Board. It seems you've done such a wonderful job, Jerry. You tend to under promise and over deliver, and I really appreciate that. At this point the Company is so over capitalized having $25 million plus in cash and with CapEx running at just a few hundred thousand dollars a year. It seems to me that would be a good move -- I would certainly be happy as a shareholder if the Company paid a recurring dividend. I mean if you paid out $3 million year you would still be generating excess cash flow and be even more over capitalized. And this is -- the performance that you are putting out is impressive without even some of the growth initiatives that you're hoping to monetize in 2015. So that's really my comment for yourself and the Board, something that I would like to see and that you guys should really contemplate.

So good observations. We're -- the Board definitely has shareholder priorities first of mind. Nothing is off the table. I would say they Q2 and Q3 represent our return to profitability, and before we would entertain anything we would want to make sure that profitability and cash flow are first and foremost. But point is well taken. And as far as we're concerned, there's no sacred cows, there's nothing off the table, and we're running the Company for the shareholders.

Okay, thanks, good luck.

Thanks, Dave.

(Operator Instructions) Kevin Lyons, Moloco Capital Partners.

Hi, Jerry, yes, nice quarter and 2 points is starting to look like a line. That's nice, so good job.

Hey, Kevin, thanks, good to hear from you.

Good to talk to you guys. So my question is actually drilling down on the engineering services, which you know I like to ask about. So if the normalized is dropping from the 24% last quarter to the 20% this quarter, when and what is the plan to really drill down on that problem? Is now the time finally to get that fixed?

So, I think last quarter, the gross margin without the Japan contract for engineering services I think was around 30%. And then if we normalized and took out the Japan contract, it was 24%. And I was asked at the time is that the new normal? And my comment was: it's directionally correct because of our focus on fewer customers, more marquee customers, and pursuing what VP of the Professional Services business Mark Whiteside calls land and expand.

So, we believe we are on a good path. It's not going to necessarily be linear, but as we have also said in the past, we think it's incumbent upon us to grow the product side of our business which we are targeting with DataV in 2015 as well as MobileV. So, we believe that we've got a good handle on that, maybe not a perfect handle but we still believe it's directionally correct. And if we don't, as we demonstrated, we'll take actions to fix it. No plans in that regard right now, and we do believe we are on a positive trend line.

Could you sort of qualify that statement then? I think the trends certainly in the Q1 to Q2 is positive. The trend from Q2 to Q3 just to clarify my question, the 24% going down to 20% was what I wanted you to talk about if you could. Does that mean the [next random range] there still like you said not linear, which is fine, or is the land -- are we paying for the land part and hoping for the expand still?

So, yes, I think you can point to customers such as Ford, Coca-Cola, Google as examples of customer where we are expecting to serve them better, to be more efficient, to have a lower cost of sales. But even though the 20% was down from the 24%, we still believe we're doing the right things, and we believe that trending over quarters is in the right direction.

Okay, well, obviously wish you luck in that regard, and look forward to seeing it improve. Thanks a lot.

Thanks, Kevin.

There are no further questions at this time. I will turn the conference back over for closing remarks.

Thank you before concluding the call, on behalf of the entire BSQUARE team I'd like to thank our investors and our customers for your interest and for your business. We look forward to reporting back to you next quarter. Thank you for joining us.

This does conclude today's conference. Thank you for your participation.