BSQUARE Corporation's (BSQR) CEO Ralph Derrickson on Q3 2021 Results - Earnings Call Transcript

Nov. 10, 2021 7:16 PM ETBSQUARE Corporation (BSQR)
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BSQUARE Corporation (NASDAQ:BSQR) Q3 2021 Earnings Conference Call November 10, 2021 5:00 PM ET

Company Participants

Steven Gottlieb – Vice President-Corporate Affairs

Ralph Derrickson – President and Chief Executive Officer

Chris Wheaton – Chief Financial Officer and Chief Operating Officer

Conference Call Participants

Operator

Good day, and welcome to the BSQUARE Corporation Third Quarter 2021 Financial Results Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Steven Gottlieb, Vice President, Corporate Affairs. Please go ahead, sir.

Steven Gottlieb

Thank you, and good afternoon, everyone. Before we begin, we’d like to remind you that this call is being webcast and a recording of the call and the text of our prepared remarks will be available on BSQUARE’s 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.

During this call, management will also refer to GAAP and non-GAAP financial measures. Please refer to the cautionary text regarding forward-looking statements as well as the non-GAAP reconciliation comparable GAAP financial measures contained in BSQUARE’s press release issued today on our website at www.BSQUARE.com under Investors. All per-share amounts discussed today are fully diluted numbers where applicable.

Now I’d like to turn the call over to Ralph Derrickson, BSQUARE’s President and CEO.

Ralph Derrickson

Thank you, Steven. Good afternoon, investors, and welcome to the Q3 2021 BSQUARE quarterly earnings call.

As a reminder, for anyone who would like to arrange a follow-up conversation please contact Steven Gottlieb, VP of Corporate Affairs, who is responsible for Investor Relations. You can reach Steven by e-mail at investorrelations@BSQUARE.com. This e-mail address is monitored for inquiries and you will get a response within one business day. We did recently discover a problem with the forwarding of messages sent to this address, but this has been corrected. Okay. Let’s get started.

Joining me on today’s call is fellow entrepreneur, Chris Wheaton, BSQUARE’s CFO and COO. Chris and I appreciate your interest in BSQUARE, and thank you for taking the time to be with us this afternoon. If this is your first call, welcome. We’re glad to have you. If you’ve been following us for any length of time, today’s call is going to be a little different.

As you well know, Chris and I have been heavily engaged in business building over the last two years. It’s been an unglamorous period of time during which we’ve been internally focused on business fundamentals. The work, however, is paying off, and I am pleased with our progress. Today, we are a substantially smaller and more entrepreneurial team with a rational and stable expense structure. Additionally, we worked hard to restore our reputation with our customers and partners. Through that work, we’ve learned a lot about our customers and their needs. These critical insights are driving our strategy and plans for a return to growth.

I will share more about those plans today. But before I go there, let me turn things over to Chris to take us through the details of our third quarter results. Chris, over to you.

Chris Wheaton

Thank you, Ralph, and good evening, investors. Today’s call is something I’ve been looking forward to as it represents an important inflection point for BSQUARE. We’re openly sharing plans for growth, which we’ve been investing in for some time now. Ralph will go even further into that after my remarks, but let me start by looking at where we’ve been.

The third quarter of 2021 marked the sixth full quarter since the effects of the pandemic on our business became apparent. Over those six quarters, we’ve seen soft demand for our Partner Solutions products in important verticals and such as hospitality, gaming and point-of-sale systems. Supply chain disruptions have continued to hamper our customers’ plans and alter their buying behaviors. As is the case for many companies, we’ve been forced to adapt to new ways of doing business and to find new ways to grow. And yet, throughout this period, our financial results have shown steady though in consistent improvement.

Q3’s total revenue of $10.6 million represents a 3.6% compounded quarterly growth rate since Q2 2020 when the effects of the pandemic really took hold. Our third quarter operating results improved by more than $400,000 over the second quarter of 2021. We’ve kept expenses under control with a quarter-over-quarter decrease of 17% in selling, general and administrative costs. And early in Q3, we raised a significant amount of cash through our previously announced at-the-market or ATM common stock selling program.

This cash puts BSQUARE in a stronger financial position now than we’ve been in years. Let’s take a look at the details behind these results. The third quarter’s $10.6 million in revenue is in line with the second quarter’s results. Edge to Cloud revenue was up $300,000 or 42%, driven by the completion of a device management project for one of our larger customers. This increase was offset by a $300,000 or 3% decrease in Partner Solutions revenue. Despite the small decrease, the $9.6 million in total revenue for the Partner Solutions segment was the second highest quarterly result since the onset of the pandemic. While Partner Solutions revenue is generally trending upward, our customers’ ordering patterns remain unpredictable as they continue to be affected to varying degrees by both COVID and global supply chain issues.

Moving to gross profit. Third quarter Partner Solutions gross profit decreased from the second quarter by about $200,000. Less than $100,000 of the decrease was due to lower sales volume, while the balance of the decline was driven by shifts in customer mix and product mix and a reduction in rebates for Microsoft.

As a reminder, Microsoft makes these rebates available to distributors according to achievement of certain volume and product mix targets and are partially recorded as an offset to our cost of goods sold. As to cloud gross profit increased $400,000 compared to Q2 2021 as our labor expenses, which are the dominant factor in this segment’s gross profit were favorable across periods. With this favorability and an increase in recognized revenue for the segment, both gross profit and gross margin rate improved.

Selling, general and administrative expenses decreased $400,000 quarter-over-quarter. About 1/3 of this decrease was due to the capitalization of previously expensed stock issuance costs related to our ATM program. The rest of the decrease was driven by a reduction in personnel costs and professional services fees. Our efforts to align our SG&A expenses with the overall performance of the business were largely successful.

Research and development expenses were up slightly in the third quarter of 2021 compared to Q2 2021. Variations in this P&L line item are driven by the rate at which labor costs are capitalized for product development and a portion of our engineering team resources that we point to R&D efforts rather than to current customer projects.

As you’ll hear from Ralph shortly, we’ve made advances in product development, and we’re in a position to begin to show progress from our investment in this area. We’ve done this work without expanding our engineering head count, which is something we expect to remain true in the near term. Overall, our third quarter loss from operations was $900,000 compared to a loss of $1.3 million in the second quarter.

Moving to the balance sheet. The dominant story here is our available cash and restricted cash, which totaled $41.4 million on September 30, 2021. This is an increase of $32.1 million over the June 30 balance of $9.2 million. The majority of this increase are $31.6 million was driven by the July sales of 6.8 million shares of the company’s common stock through our ATM program. This important cash inflow was supplemented by $500,000 in cash from operations, which resulted primarily from strong customer collections during the third quarter. The ATM proceeds have created an important turning point for BSQUARE.

At the same moment in our history where we’ve stabilized our business after a long period of decline, we have already access to capital that can help us grow and, in due course, return us to profitability. We have entered the phase of BSQUARE’s turnaround that will require thoughtful and measured investments, and we now have the means to make those investments. We’ll seek new opportunities while continuing to drive efficiency in our operations.

Let me now turn things back over to Ralph to provide additional perspective on where those opportunities lie and how we will go after them.

Ralph Derrickson

Thank you, Chris. Q3 was another example of the disciplined and deliberate approach that Chris and I utilize in our management of BSQUARE.

Let’s switch gears now and turn our attention to our plans for growth. I’d like to start with a discussion of our customers. BSQUARE’s customers generally fall into two categories: businesses that design and sell purpose-built devices and businesses that rely on a system of devices. First category of customers we refer to as device makers. Historically, our work with device makers has been limited to selling them Microsoft operating system licenses for their devices. Our revenue has been a function of their success. If they sell more devices, they need more licenses and our revenue grows. However, as we’ve seen with the pandemic, if they sell less devices, they need less licenses and our revenue slows.

Our other set of customers are what we call system builders. They rely on a collection of devices to run their business. Historically, we’ve engaged with them to develop custom software to build the glue between existing systems and to manage and operate their business systems. Our dealings with these customers have helped us to develop a deep expertise in the IoT space, but revenue growth has been constrained given the custom nature of that work. It is clear to us that the way we currently interact with and serve device makers and system builders does not provide the profitability or scalability that will drive a healthy growing business. So our focus has become how do we leverage the knowledge and expertise that we possess to provide new and different value to our customers.

All our customers operate in a world where value is created from the technology-enabled connections between people, devices, organizations and ideas. However, the number of connections, the speed of their operation and the complexity of these connected systems are challenging traditional people-centric approaches to building, deploying and operating these systems and devices. The fact is the devices themselves have to participate in the management and security of the system, and that is where BSQUARE has been focused.

Moving forward, our product solutions will be based on a set of five pillars or requirements that were derived from work with our customers. They also captured the opportunities we’ve identified to use technology to create unique and compelling solutions. At the core of these pillars is the concept that devices can and must be part of the solution, not the problem.

Today’s security and management challenges require a new approach that is captured in our pillars of scale, speed, always on, always learning and shared intelligence. That is to say the solutions need to scale effortlessly. They must operate at the speed of the devices. They must always be on. They must always be learning and adapting and they need to share information such that the intelligence of the many informs the individual and the intelligence of the individual informs the many.

This month, we will induce two solutions that meet the critical requirements outlined in these pillars. The first is Square One, a system for developing, operating and managing systems devices. Square One’s capabilities grew out of our experience, successfully building and operating large IoT systems. We’ll be starting with an early adopter program, or EAP. The EAP is an opportunity for system builders to evaluate the product before it is widely available and for us to get feedback on Square One’s initial feature set.

Later this month, we’ll introduce a system hardening solution for device makers that will ensure the operating system is configured securely and is recoverable in the event of a hardware failure or breach. Like Square One, our system Harding Solution is rooted in the expertise gained through our previous work with customers.

One important note about both of these products, our customers have shared that running multi-OS environments is critical. As a result, both Square One and our System Harding Solution will support any combination of Windows, Linux and Android devices. We believe the solution pillars and related products that we discuss today form the basis for growing our business and returning BSQUARE to relevance in the rapidly evolving technology market.

The products we’ve described derived from our experience serving customers. They play to our core engineering competencies. They create cross-selling opportunities that can expand our relationship with current customers, and they are relevant to new customers. Taking these products to market will require investing in sales and marketing at higher levels than we have recently.

That said, we will continue to manage our expense structure carefully, making rational investments as necessary to grow the business. We will manage our cash prudently, tapping into our reserves if and when opportunities arise to substantially accelerate or bend our growth curve.

We are anxious to begin executing our plans. We have products that are relevant for our customers today and in the future. We have a strong entrepreneurial and disciplined leadership team. We have the financial resources to succeed. Like a coach on Sunday morning, we can’t predict the score of the game, but we have a plan and the confidence that we can win.

Chris and I look forward to sharing more with you as we move forward. Thank you for your time today. Operator, would you please open the line for questions. And while that is happening, let remind you that you’d like to arrange a follow-up discussion with Chris and me, please contact Steven Gottlieb. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

It appears that we have no questions in the queue at this time. I’d like to turn the conference back over to management for any addition or closing remarks.

Ralph Derrickson

No additional remarks. Just to remind people, if they’d like to arrange a conversation, please e-mail investorrelations@BSQUARE.com. And I’d like to thank everybody for their time and their attention today.

Operator

Thank you. That does conclude today’s conference. We do thank you all for your participation, and you may now disconnect.

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