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BSQUARE Corporation (NASDAQ:BSQR)

Q4 2013 Results Earnings Conference Call

February 25, 2014, 05:00 PM ET

Executives

Scott C. Mahan - Senior Vice President, Operations and Chief Financial Officer

Jerry Chase - President and Chief Executive Officer

Analysts

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the BSQUARE Corporation 2013 Fourth Quarter 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, Tuesday, February 25th, 2014

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

Scott C. Mahan

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. 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. Our focus today will be on sequential trends, and with that said, let me recap our results.

We reported total revenue this quarter of $25.8 million, flat year-over-year and up 10% quarter-over-quarter from $23.6 million. Total revenue for the year was $92.1 million, down 9% from a $101.4 million.

Third-party software sales were $21.1 million this quarter, up 13% year-over-year from $18.7 million, and up 17% quarter-over-quarter from $18.0 million. The quarter-over-quarter increase resulted from higher Microsoft Windows Mobile sale and a $2.9 million Adobe Flash sale.

The increased Windows Mobile sales resulted from a U.S. customer which bought out their annual volume pricing commitment at year-end resulting in $2.7 million of revenue. Third-party software sales for the year were $70.9 million, flat year-over-year.

Proprietary software revenue was $444,000 this quarter, down 17% year-over-year from $1.5 million and flat quarter-over-quarter. Proprietary software revenue for the year was $2.5 million, down 47% due to declines in TestQuest and HTML 5 rendering into revenue.

Service revenue was $4.2 million this quarter, down 25% year-over-year from $5.7 million, and down 17% quarter-over-quarter from $5.1 million. The quarter-over-quarter decline was largely the result of a decrease in MyFord Touch revenue and smaller decreases in other customers.

The MyFord Touch program accounted for $728,000 of service revenue this quarter, $1.3 million in year ago quarter and $1.2 million in Q3. Service revenue for the year $18.7 million, down $6.9 million or 27% from $25.6 million.

Softness in the North America was the primary driver accounting for $3.8 million of the decline with MyFord Touch accounting for $1.9 million of that.

Turning to gross profit and margins; overall gross profit was $4.5 million this quarter, or 17% of total revenue, compared to $5.0 million, or 19% of revenue in the year ago quarter and $3.4 million or 14% of revenue in Q3.

The quarter-over-quarter improvement in total gross profit was primarily driven by the large Adobe Flash sale. Total gross profit for the year was $15.0 million, down 21%.

Third-party software gross margin was 19% this quarter compared to 16% in the year ago quarter, 13% in Q3. The improvement was driven by the large Adobe Flash sale. Proprietary software gross margin was 56% this quarter, 86% in the year ago quarter and 42% in Q3.

The quarter-over-quarter increase was driven by lower cost resulting from our Q4 restructuring. Service gross margin was 7% this quarter, 15% in the year ago quarter, 17% in Q3.

Quarter-over-quarter decline was driven primarily by an 8% decline in our realized rate per hour. [Late] decline was primarily due to shipment service revenue from U.S. to Asia, which is running at a lower rate per hour.

Moving down to P&L, total OpEx was $4.5 million this quarter, up 2% year-over-year from $4.4 million and down 6% quarter-over-quarter from $4.8 million. The quarter-over-quarter decrease was primarily driven by the Q4 restructuring coupled with lower marketing program cost.

Q3 OpEx did include $225,000 of severance costs associated with the year-end departure of our former Sales SVP. As a reminder, we have affected restructuring in early Q4, the goal of which was to reduce our cost of sales and OpEx by $4 million annual. Our restructuring and other savings are on track and will be full realized by Q2 2014.

We currently expect OpEx to decline sequentially in both Q1 and Q2 of 2014 and that's plateauing the $3.5 million to $3.6 million range per quarter in the second half of 2014.

This assumes of course that our spending plans do not change and we will update you as [warrants] in our future calls. Total OpEx was $18.1 million for the year, up 1%.

Now, I’ll speak to our bottom-line results. We reported a net loss for the quarter of $23,000 or $0.00 per share compared to net income of $696,000 or $0.06 per share in the year ago quarter and a net loss of $3.6 million or $0.32 per share in Q3.

We reported a net loss for the year of $5.3 million or $0.47 per share, compared to net income of $916,000 or $0.08 per share in 2012.

Third quarter and full year 2013 results included the negative effect of a $2.2 million increase in our differed tax asset valuation allowance, which represented a $0.19 per share effect for the three months and $0.20 per share for the year.

We generated adjusted EBITDA for $345,000 this quarter, compared to adjusted EBITDA of $1.1 million in the year ago quarter, and negative adjusted EBITDA to $1.0 million in Q3. We generated negative adjusted EBITDA to $1.5 million for the year compared to positive adjusted EBITDA of $3.1 million in 2012.

Cash and investments declined $484,000, to $21.1 million at quarter end from September 30, $250,000 of which is classified as long-term. While we did burn cash this quarter, the amount came in well below the $1.8 million forecasted last quarter due to better than expected results, and positive working capital effect.

CapEx was $11,000 for the quarter and $194,000 for the year. We currently expect FY 2014 CapEx to run approximately $400,000 and cash in investments to be down slightly at $331,000 compared to year-end.

Headcount, including contractors is currently 207, compared to 210 as of the date of our last call. Engineering Services headcount is currently 132, down from 134.

Now, I’d like to turn the call over to Jerry Chase, BSQUARE's Chief Executive Officer.

Jerry Chase

Thanks Scott, good afternoon everyone. You may have noted the press release earlier today announcing my appointment as President and CEO here at BSQUARE. As Interim CEO, I was very fortunate to have had the opportunity over the last five months to work closely with the Board of Directors, management team and many BSQUARE team members as we restructured the company to achieve a more sound financial pudding and determine and our new strategic focus.

During last earnings call I was asked, if there've been any surprises since joining? My answer was that despite our challenges there's so many things that are right with BSQUARE. Today I feel even more strongly this is the case.

I feel privileged to have the opportunity to lead BSQUARE's in such an exciting time in its history, and look forward to continue to work closely with Board and the management team to achieve and maintain sustained profitability and positive cash flow in our existing business.

Now, turning to the business and our Q4 results. As Scott mentioned in his remarks, we have three revenue lines, third-party software sales, engineering services and proprietary software. The main driver of our revenue today, our third-party software sales, did quite well during the quarter thanks in part to a large year-end Adobe Flash quarter.

Regarding Engineering Services, during the fourth quarter we consolidated responsibility for sales and deliveries under the leadership of Mark Whiteside. Going forward, Mark will focus on deepening and expanding our relationships with existing customers and selectively growing our customer base.

Regarding our Proprietary Products, we believe BSQUARE is well-positioned to build on our existing market position and technical strengths to expand our participation in the rapidly growing Internet of Things market, starting with our world-class customers. I'll speak more about that in a few moments.

First, to recap some of our activities and highlights from Q4, as Google recently announced, we partnered with them to provide engineering services for Project Tango. Google's exciting new initiatives to give mobile devices a human-scale understanding of space and motion.

We engage with the major provider of handheld terminals to provide professional engineering services to develop and deploy both the Windows and Android solutions.

Coca Cola and Ford continued to be strong partners. We were honored by Microsoft as an OED Americas Channel Sales & Marketing Awards recipient for distributor sales excellence for 2013. And 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.

As I mentioned, we believe BSQUARE is well-positioned to increase its participation in the rapidly growing Internet of Things market. Recent estimates by Gartner Research indicate there will be between 50 billion and 200 billion point of connectivity by 2020 generating trillions of [inaudible] data, foundation for a big market by anybody's estimation.

The Internet of Things is an adjacent space for BSQUARE and an expansion of our existing experience. Today, most of the value BSQUARE provide is at the device level. From the chip level to the application layer BSQUARE helps our customers bring useful devices into the connected world.

DataV will enable BSQUARE to provide repeatable solutions to help our customers turn their raw data at the device or center level into actionable data that will make their connected devices more valuable. With DataV we will help our customers lower operational cost, improve and enhance their operations, lower their risk and enable new revenue opportunities for them and us.

As we pursue this market we will initially seek to decent and broaden our relationships with our existing world-class customers. We also believe there are more opportunities for BSQUARE team members to cross-sell and work together all for our customers' more complete solutions. And we are breaking down internal barriers in establishing incentives to do so.

We believe by working together we will be uniquely positioned to combine our third-party licensing activities and our engineering services with our DataV product offering to grow revenues in our existing business and to help our customers realize the value of their data.

In keeping with our focus on profitability of positive cash flow, it's important to note that we are investing in DataV within the parameters of our existing operating expense burn rate. From the timing perspective, we expected to get realizing DataV product revenue in 2015.

We look forward to reporting our progress to you and forge these goals in the coming quarters. Turning to Q1, we expect that revenue will be between $20 million and $22 million.

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.

Moderator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Mr. Chase, we have no questions at this time.

Jerry Chase

Okay. Thank you very much. We just want to again on behalf of BSQUARE thank our investors and customers, and we look forward to continuing to update you on BSQUARE progress in the coming months and quarters. Thank you very much.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.

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