BSQUARE Corporation (BSQR) Q4 2022 Earnings Call Transcript

BSQUARE Corporation (NASDAQ:BSQR) Q4 2022 Earnings Conference Call March 7, 2023 5:00 PM ET

Company Participants

Ralph Derrickson - President, CEO & Director

Cheryl Wynne - CFO

Conference Call Participants

Operator

Ladies and gentlemen, greetings. And welcome to the BSQUARE Corporation Fourth Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to Ralph C Derrickson, President and CEO. Please go ahead.

Ralph Derrickson

Thank you. Good afternoon, investors and welcome to the Q4 2022 Bsquare quarterly earnings call. Joining me on today for the first time is Cheryl Wynne, Bsquare's Chief Financial Officer. Though, this is the first time you’ll actually hear from Cheryl, you have heard her words as she played a significant role in drafting our prepared remarks in prior period. Cheryl joined us our Senior Director of Financial and Controller in November 2020. Since joining Cheryl has significantly improved our accounting systems as well as our internal reporting and analysis. Chris’ departure and her transition to this new role has been natural and without any issues. I look forward to working closing with Cheryl as we strive for breakeven operations in 2023. Cheryl and I appreciate your interest in Bsquare, and thank you for taking the time to be with us this afternoon.

Before we go any further, we'd like to remind you that this call is being webcast and the recording of the call and the text of our prepared remarks will be available on the Bsquare website. During today’s call, we'll 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. In our commentary, we may also refer to GAAP and non-GAAP financial measures. Please refer to the cautionary text regarding forward-looking statements contained in Bsquare's earnings release issued today and on our website at www.bsquare.com under Investors.

All per share amounts discussed today are fully diluted numbers where applicable. We will be taking questions after our prepared remarks. For anyone who would like to arrange a follow-up conversation with us, please send an e-mail to [e-mail]. The mailbox is monitored regularly and you will get a response within one business day.

Okay. With that out of the way, let's get started. Q4 was really a mixed bag, Partners Solutions revenue was down and SquareOne revenue did not materialize as we had hoped. On the plus side, improved margins and interest income from our investments helped to reduce our net loss. But those were offset by one-time restructuring charges associated with the workforce reduction we implemented in December 2022. The 20% workforce reduction in December was difficult was an important part of our preparation to achieve breakeven operations in 2023. I will talk more about our plans for 2023 after Cheryl takes us through the fourth quarter results. Cheryl, over to you.

Cheryl Wynne

Thank you, Ralph and good afternoon investors. Today, I'll be providing an overview of our financial results for the fourth quarter of 2022. Most of my comparisons will be to the third quarter. I'll let you know when I'm comparing to other periods. I'll start with a review of our income statement and then move to a discussion of our balance sheet. Total revenue for the fourth quarter was approximately $8 million, which was a decrease of $500,000 or 5% from the third quarter. The Partner Solutions segment drove the decrease as revenue from the Edge to Cloud segment was up slightly quarter-over-quarter. Despite the revenue decreased, total gross profit was up $100,000 as compared to the previous quarter driven by gross margin rate improvement in both segments.

Let's take a look at our revenue and gross profit results at a segment level. Starting first with Partner Solutions. Partner Solutions revenue decreased $500,000 or 6% quarter-over-quarter, continued supply chain disruptions and other macroeconomic factors affected the ordering patterns of this segment’s customers. In spite of the revenue decrease gross profit dollars in the segment increase just over $60,000 driven by 180 basis point improvement in gross margin rate. This rate improvement was primarily due to higher quarter-over-quarter recognition of rebates stemming from Microsoft's distributor incentive program. A portion of these rebates are recorded as a reduction of cost of goods sold and accordingly impact our gross margin rate in the Partner Solutions segment.

In the Edge to Cloud segment revenue was up very slightly $29,000 or 3%. This increase was driven by the timing of feature completion for one of our key customers. Cost of revenue in this segment is relatively fixed and accordingly was essentially flat quarter-over-quarter. Thus the increase in revenue drove an increase in gross profit dollars. Turning our attention now to expenses. As we've noted before our cost structure is stable and well managed. Nevertheless, there is some seasonality to our expenses, which causes fluctuations quarter-to-quarter. We saw this in our fourth quarter selling, general and administrative or SG&A expenses, which were $250,000 higher than the third quarter. A portion of the increase was due to professional fees related to Q4 activities. Specifically the once a year expenses that we incur related to our annual shareholder meeting. The rest of the SG&A increase was driven by marketing spend primarily related to an overhaul and upgrade of our website. We knew this was a critical investment to make and are pleased with the changes. Research and development expenses, which consists primarily of labor and benefits are flat quarter-over-quarter. As Ralph noted earlier, during the fourth quarter, we executed a reduction in force as part of broader efforts to align our cost base with our 2023 strategic priorities, which include breakeven operations, we reduced our headcount by nearly 20% and recorded expenses of $200,000 related to the onetime termination benefits provided to impacted employees. These restructuring charges are presented as a separate line item within operating expenses on our income statement. As you may recall, during the third quarter, we implemented an investment strategy intended to take advantage of rising interest rates while maintaining a focus on liquidity. Our Q4 results include $300,000 of interest income, reflecting a full quarter of strategy execution.

We intend to continue investing our cash reserves for the foreseeable future until there is an alternative use of the reserves that will produce a higher return. We are utilizing a laddered investment strategy, staggering maturity dates so that portions of our portfolio mature at regular intervals. This strategy ensures that our liquidity is readily accessible and available to fund strategic growth investments. Overall loss from operations for the quarter was $1.5 million, compared to the third quarter loss from operations of $1.2 million. About half of this deterioration was driven by the onetime restructuring charges and the other half was driven by the increased SG&A expenses. Net loss for the quarter was $1.2 million, or $0.06 per diluted share compared to a net loss of $1.1 million, or $0.05 per diluted share in the third quarter of 2022. The quarter-over-quarter decline was driven by loss from operations, partially offset by an improvement in interest income.

Turning now to the balance sheet. In total cash, cash equivalents, restricted cash and short term investments totaled $35.6 million at yearend. This reflects a net cash use of $4.5 million during 2022, which was primarily driven by loss from operations. A small portion of our cash use however, did relate to the share repurchase program that we announced in November. As a reminder, we announced a plan to repurchase up to $5 million worth of our common stock. The plan is intended to return value to our shareholders without compromising our ability to pursue organic growth for strategic alternatives. During the fourth quarter, we repurchase nearly 180,000 shares for approximately $200,000. Despite the cash decrease during 2022, we continue to have a strong financial position with healthy reserves, current receivables and no debt.

I'll turn it back to Ralph now for more color on our operations and plans for 2023.

Ralph Derrickson

Thank you, Cheryl. The decline in Partner Solutions revenue was a continuation of what we've experienced since the onset of the COVID pandemic. While we continue to add new customers with new product designs. The reality is new customers are generally buying lower priced licenses, and their order activity typically start small and increases over time. In 2022, the win simply didn't grow fast enough to make up for the decay of revenue from existing customers whose product lines were reaching the end of life or were disrupted by supply chain issues. Total revenue from our Top 20 customers didn't change much between 2021 and 2022, where we saw the decay was in the middle of our book of business. Same time the SquareOne launch didn't go as we had hoped. Our 2022 plan assume that we would acquire some customers with existing fleets of devices, that would ramp revenue in the second half of the year. And that didn't happen. We encountered two problems. Potential customers had a solution that was in their words, good enough, or that SquareOne didn't provide a specific feature they require. Where we did find opportunity was with new Partner Solutions customers, but again, they are early in their lifecycle, and their per device revenue potential is low initially.

For 2023, we knew we had to make some changes, we knew it would be unwise to assume revenue growth. So we did our planning based on flat Partner Solutions revenue, predictable revenue from our Edge to Cloud customers, and a very small amount of revenue from SquareOne or related projects. With those assumptions, we knew we would need to reduce expenses. So in early December, we implemented a reduction in the team. The timing wasn't ideal. But we didn't like the idea of not telling our team what was happening. And in hindsight, I'm glad we did it ahead of the onslaught of tech industry layoffs that occurred in January and February. For 2023, we established three initiatives that drove our planning and budgeting. Our first initiative is to achieve breakeven operations. The first step towards this was the reduction I discussed earlier. We also eliminated in our 2023 budget, any spending that wasn't generating revenue, or wasn't vital to our other initiatives. Achieving breakeven operations also requires us to maximize the existing business assets for reinvestment in revenue growth, which is our second 2023 initiative.

To do this, we are changing how we're going to market and managing our business assets. In Partner Solutions, we will emphasize our reputation as the premium provider of technical support and business services. In an effort to improve our ability to attract new customers, we have simplified and repackaged our OS consulting services, creating a starter bundle of services for customers with new product designs. Early experience with this approach has been positive. We believe the repackaging has the potential to increase the initial value of a new customer, and improve our ability to upsell our OS consulting services. It also gives us visibility into the nature of their business model, and the potential opportunity for SquareOne, our device operations and management solution. If their business model is simply to sell devices to their customers, SquareOne isn't likely relevant. If their business model is to change, charge their customers a monthly fee for the service provided by the device, some form of digital transformation, then SquareOne could be highly relevant. I'll say more about SquareOne in a moment. But I want to call out the importance of being able to understand how and if companies are evolving their business models to a recurring revenue model. It would be easy to assume the Partner Solutions segment is just a low margin, commodity business. And for a portion of it that is true. But for the portion that is evolving their business model it has the potential to provide valuable information that could inform our product and strategic decisions.

Maximizing business in the Edge to Cloud segment means continuing to provide great service while we look for opportunities to expand our relationships with those customers. And when possible, replicating the success we've had using SquareOne as a solution accelerant. For SquareOne maximizing the business means dialing back heavy investment in general marketing, and instead working closely with our customers and technology partners to understand where there is opportunity and where development is needed. We are modularizing the SquareOne design, making it easier to configure or plug in new capabilities that support our customer requirements and/or potential business partners. In 2022, we positioned SquareOne as a complete solution. In 2023, we are positioning it as a solution accelerator that can be valuable to customers and other players in the IoT ecosystem. We see potential selling partnerships with our customers and other technology players, especially in the building and facilities management, healthcare, point of sale and energy verticals. We believe this approach has the potential for generating revenue albeit at a much slower pace than we assumed in 2022. And it can provide valuable input into our third initiative.

Our last initiative is to identify and pursue strategic opportunities with the potential for high growth revenue and margin. This effort will be informed by the first two initiative, as well as other efforts to find strategic opportunities. So to summarize, we are entering 2023 with an operating plan and a cost structure that aligns with reality. We will seek every avenue for organic growth within our means, but we will only invest in repeatable success. We are running and will continue to run the business as efficiently as possible while we aggressively consider a range of strategic options. We believe our understanding of our business assets; our operating discipline and our cash reserves provide a strong foundation for building value for our shareholders in 2023 and beyond. Before we close out the call, I want to remind shareholders that we are planning to put for the plan to declassify the board of directors in a phased manner over three years, ultimately resulting in one year terms for all directors. We intend to present this plan at the annual shareholder meeting that will take place in June of this year, which is back on our historical cadence. Declassification of the board will bring us in line with governance best practices and reflects the input of several of our shareholders. Okay with that, operator, please open the line for questions. Because we don't often get many questions on our call. I will remind you that if you'd like to arrange a follow up conversation, please send an email to Investor Relations at bsquare.com. Operator, please open the line.

Question-and-Answer Session

Operator

[Operator Instructions]

First question comes from the line of Jacobson Pido, an individual investor.

Unidentified Analyst

Yes. Hi. Good afternoon. Can you hear me? Thank you. I was wondering, given the declining revenue and increasing expenses, has the company given any consideration to simply spinning the company down and paying the cash out to their business?

Ralph Derrickson

Great question. I will tell you that the board and I have looked at and will continue to consider all strategic options.

Unidentified Analyst

Okay, have you specifically considered this option is one of them?

Ralph Derrickson

We are always looking at the right thing to do for building shareholder value. And so that among others is something that we absolutely have looked at.

Unidentified Analyst

Okay. Because just speaking for myself as an individual investor here, what I'm seeing is a declining balance sheet and declining revenue. And not a great situation and the company does have cash assets and it does have intellectual property and so forth. I would urge the board of directors to consider this as an option, please.

Ralph Derrickson

Yes, that's it. I appreciate your question. Appreciate your point of view. And absolutely understand, and thank you.

Operator

Our next question comes from the line of Steve Bailey, from an individual investor.

Unidentified Analyst

Hey, Ralph. Well, first off, I would completely disagree with what the last caller just asked you. I don't think you guys are nearly at that point. But that's obvious for you guys to decide. What I really would like to know, obviously, the hot button right now is artificial intelligence. It's been around forever, or at least a long time as has Internet of Things. Is there a potential correlation between the two that could create some additional revenue for you guys?

Ralph Derrickson

That's a great question, Steve. That's actually something that we've looked at, as you know, artificial intelligence, machine learning, and the models of that are absolutely part of the things that we get involved in with, with our customers with SquareOne some of the larger Edge to Cloud customers. So, yes, we do see there's opportunity for that. I think Chad GPT is getting a lot of buzz right now. And that's really in AI and putting together words and phrases and sort of answering questions. But absolutely the use of AI, machine learning, and that kind of, those kinds of models are things that we're involved in, and we'll continue to look for ways to take advantage of that, that isn't lost on us. And that's a great point. And. Steve, thanks, it's great to get a question, especially from you. And also, I want to kind of address your point about we're not at that point, and what the other caller had said is that. We're constantly looking at ways to evaluate, and to create value. And I think we've shown that discipline and using our cash, and we're transparent with things, we're going to look at everything, sometimes those options are more appealing than others, but we're not going to stop looking for ways to build value and appreciate your support.

Unidentified Analyst

Good, I appreciate well, that's kind of what I want to hear, because you guys aren't exactly burning cash, like a biotech, or as the joke is always in my house. So I'm like my daughters and wife would if I left them. So that would seem to me like a desperate move from a company that had doesn't, is not doing $24 million in revenue in hemorrhaging, which you guys are not, to me, there's just too much potential. Particularly now, things we are in a recession, and it's a tough one because expenses are going up for everybody as revenue is stagnant or declining. And it's not just you guys, it's a tough environment. But as we all know; it's not going to stay that way forever and with crisis is going to become opportunity. And as I said to you before, those that have the cash at the end are going to win. And you might be able to buy somebody that you can implement what they have into what you have for pennies on the dollar. And I guess that's always the dream with Bsquare. So anyway, I'm glad that that's still alive. And I say that there is an opportunity, you guys will pull the trigger at some point so.

Ralph Derrickson

Yes, and I'll just close by saying that our plan for ‘23 is we've got an expense structure that works within the revenue that we planned. We're going to maximize the assets of our business, we've got a history of eating to expense, and we're going to continue to look for ways to use our assets to create opportunities for us. And that's our commitment. We'll continue that into 2023.

Operator

Our next question comes from the line of Jacobson Pido, an individual investor.

Unidentified Analyst

Yes, thank you. Just a follow up question. I understand the realignment of the cost structure. Does that mean that you expect to be cash flow positive or EBITDA positive or anything like that in the next coming quarters? Or when do you expect to see this breakeven?

Ralph Derrickson

Yes, that's great. So I'll feel this and I'll turn it over to Cheryl for more color. But getting to breakeven won't happen immediately. We believe that it'll happen, things will improve in the first quarter, but the big improvement will come second quarter, and then the second half of the year. We, it will take a certain amount of time for the adjustments that we've made to flow through and take full advantage of those. And that won't be realized until the second half. Cheryl, is there anything you want to add to that?

Cheryl Wynne

Just that also we have some revenue recognition that will occur more in the second half of the year based on the pattern of how our customers utilize our software. So when we talk about breakeven operations, it's a 2023 in its entirety goal, and we look forward to reporting out on it each quarter, but it won't be until the end of 2023 that we'll really be able to say we're at breakeven operations.

Unidentified Analyst

Yes, I appreciate that. I mean, I don't have access to the backlog. So I don't have an understanding of the backlog of course. But I just, again, want to urge you to look at all alternatives and to the formal call us point, I appreciate that as opportunities out there, but at the end of the day, our job is to maximize our return on the investment. So I appreciate what you guys are doing. I'm just asking you to take a good look. And if you do not expect that you can return to profitability in a timely manner, then I would urge the board of directors to consider an alternative plan. Thank you.

Ralph Derrickson

Thank you for that. I appreciate that input, and we'll be sure to relay that to our board.

Operator

Since there are no further questions, I would like to turn the conference over to Ralph Derrickson, President and CEO for closing comments.

Ralph Derrickson

Thank you. Thank you, investors. I really appreciate the questions and the dialogue. Thank you for taking the time for participating with us today. And we appreciate your interest in Bsquare. Have a nice day.

Operator

Thank you, sir. The conference of BSQUARE Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.