BSQUARE Corporation

BSQUARE Corporation

$1.89
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NASDAQ Capital Market
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Software - Application

BSQUARE Corporation (BSQR) Q1 2020 Earnings Call Transcript

Published at 2020-05-11 22:00:17
Operator
Good day, and welcome to the BSQUARE Corporation First Quarter 2020 Financial Results Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Leslie Phillips, Investor Relations. Please go ahead, ma’am.
Leslie Phillips
Thank you, and good afternoon, everyone. Before we begin, we'd like to remind you that this call is being webcast and that 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 to comparable GAAP financial measures contained in BSQUARE’s earnings 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 President & CEO.
Ralph Derrickson
Thank you, Leslie. Good afternoon investors. I appreciate you taking the time to participate in our call today. And I hope that you and your family are healthy and safe. Q1 2020 was a good quarter for us at BSQUARE, marked by positive financial performance, improving operations, and traction helping our customers build and operate the next generation of intelligent devices and systems. We increased revenue for the third consecutive quarter, we decreased operating expenses, excluding restructuring costs, for the fifth consecutive quarter, and we essentially achieved break-even on an adjusted EBITDAS basis, allowing us to add to our cash balance. I attribute these results to a number of factors, including the One BSQUARE Initiatives we announced on our earnings call a year ago, shortly after my arrival. A combination of those initiatives, our focus on operating discipline, and the efforts of a committed entrepreneurial team made the results possible. But what really drove revenue growth was strong customer engagement. Chance favors the well prepared and I believe we were ready with the right combination of products and services in a market that is evolving from purpose built, often disconnected devices to systems of devices, often working together, what I refer to as Intelligent Devices and Systems. Our long history of providing system software combined with our recent experience building and operating IoT systems at scale are combining in a way that allows us to meet our customers where they are in the evolution of their business. In a moment, Chris Wheaton, our CFO, will take us through the Q1 2020 numbers in detail. Following his remarks, I will have additional comments about our business, the impacts of COVID-19, and our plans during these uncertain times. Let me now turn it over to Chris for more specifics on the business and our financial results.
Chris Wheaton
Thank you Ralph, and good afternoon investors. I share Ralph’s hope that you are safe and healthy during these challenging times and that you have settled into a work routine that at least somewhat resembles normal. The first quarter of 2020 delivered a solid set of financial results for BSQUARE. Here are some highlights. Total Revenue for the quarter was $16.7 million, up $1.4 million over the fourth quarter of 2019, and above the high end of the revenue guidance we provided on our last call. We were well prepared to deliver on a number of unique customer requirements that were not readily apparent when we developed our revenue plans for Q1. Partner Solutions segment revenue was $15.9 million, up by $2.6 million over the fourth quarter of 2019. s always, revenue in this segment was driven primarily by higher sales of Microsoft embedded operating systems. However, this quarter we also saw significant traction from sales of other embedded software and, importantly, we see signs of additional growth from the SquareOne OS utility that we launched in April. Revenue in the Edge-to-Cloud segment was lower in the quarter because we were focused on retooling our solutions and preparing two of our largest customers for future growth. We are in a quiet moment in the growth of this segment, unrelated to COVID-19. The blended gross margin across both segments was 15%, which was higher than our guidance and expectations. There were several bright spots in our gross margin story that bode well for the future and that create some flexibility for us as we maneuver through the rapidly changing economic environment created by COVID-19. Partner Solutions gross margins in Q1 were 17%, up from the prior quarter’s margins of 14%, due primarily to higher than average margins on the previously mentioned sale of other embedded software. Edge-to-Cloud gross margins were negative in Q1. We expected lower margins in this segment this quarter, as we absorbed costs of improving our software to address scale and code quality issues and transitioned to our B2IQ suite. We believe these investments will pay off with enhanced relationships with these large IoT customers. We continue to improve our B2IQ software components as we work to exceed our customers’ expectations, gaining experience building and operating intelligent systems at scale. Our activities in the first quarter produced a GAAP net loss of $500,000, or $0.04 per diluted share. When compared to a net loss of $1.4 million, or $0.10 per diluted share in the fourth quarter of 2019, the progress we’ve been making is clear. Operating loss, net of restructuring, was $400,000 compared to $600,000 in the fourth quarter of 2019. That $200,000 improvement arises from the completion of important cost-containment projects, such as the full closure of our Taiwan office, and from ongoing attention, at all levels of the organization, to smart spending. I believe we are finding the right balance between frugality and intelligent investment in the business. Adjusted EBITDAS, a non-GAAP measure, also continues to show quarter-over-quarter improvement. Q1 2020 was essentially break-even in that important measure, compared to negative $300,000 in the fourth quarter of 2019. Much of the difference between our GAAP net loss and adjusted EBITDAS arose from a charge for stock-based compensation for all BSQUARE employees. Ralph will provide further thoughts on that program later. Finally, our cash balance, which includes restricted cash and short-term investments, reached $10.6 million on March 31, 2020, an increase over December 31, 2019, of approximately $100,000. To put the quarter in historical context, the last time BSQUARE grew revenue three quarters in a row was the second quarter of 2015. In addition, the Q1 net loss of $500,000 was our smallest loss since the first quarter of 2017. And finally, while our quarter-over-quarter cash increase was modest, seeing an increase at all is something that hasn’t happened since the fourth quarter of 2016. Of course, these positive Q1 results were produced in the context of the emergence of COVID-19, which we now know to be the dominant economic challenge for virtually every business in the world. In mid-March, in response to local mandates, BSQUARE temporarily suspended onsite operations in our offices in Trowbridge in the United Kingdom and stopped all non-essential activities in our Bellevue, Washington facility. Immediately after the mandates were announced, BSQUARE was notified by a number of our customers that their businesses were considered essential under applicable guidelines, and they notified us that we were, in turn, essential suppliers to their businesses. They specifically asked us to make accommodations to continue to serve them without interruption. We have been meeting our customers’ needs through our very limited and appropriately socially distanced Bellevue operations. As the scope and depth of the effects of COVID-19 became clearer, we began a series of contingency planning exercises. We modeled a variety of scenarios, with particular emphasis on liquidity. We knew that we needed to be prepared for a situation when our use of cash once again surpassed our sources of cash. Further, we began to plan the cost-cutting steps that would be taken if the economic downturn become prolonged. The majority of our costs are salaries and personnel expenses. Shortly after our contingency planning efforts began identifying options for cost reduction, the availability of the Paycheck Protection Program was announced. We applied for and received a $1.57 million loan through this program. These funds have forestalled any immediate cost cutting measures and have allowed us to support our ongoing operations. Importantly, our employees can focus on fulfilling our obligations as an essential supplier to essential businesses around the country. The effects of COVID-19 on our customers has varied by segment. In the Edge-to-Cloud segment, the effects are less pronounced. Minor project delays among some customers have been at least partially offset by the initiation of new projects by other customers. However, by the end of March, we had started to see a significant decrease in ordering activity in our Partner Solutions segment. I believe that our most immediate term challenge will be a reduced customer demand for product in that segment. The slowdown in Partner Solutions arises from a variety of factors, all of which appear related directly or indirectly to the pandemic. Most directly, our customers are likely experiencing a slow-down in demand for their products, which in turn reduces the need for our products. More indirectly, demand for our customer’s products may not have changed, but disruptions in global supply chains may prevent them meeting that demand. Regardless of cause, we have already started to see the effects ripple into the Partner Solutions segment. Notably, whether or not a customer is essential or non-essential appears to have no effect on their ordering patterns thus far. We continue to work closely with our customers as they struggle to predict their business. We believe the lack of visibility into demand and availability of components is going to be a factor in the Partner Solutions segment for the near term. The duration of this challenge, and its financial implications, are unknown at this time. As a result, we have decided not to provide guidance. With that, let me turn the call back over to Ralph.
Ralph Derrickson
Thank you, Chris. I’d like to expand on how we have been coping with the rapidly changing situation. Even before the effects of COVID-19 became apparent, we had been reconsidering how and where we work as well as how we collaborate. With our engineering team in the UK and customers all over the globe, collaborating over long distances and time zones was an operating imperative. Locally, in the Seattle-Bellevue area, we had to contend with a commute that meant wherever we put our new office someone on the team would be facing a difficult commute. From the outset, we conceived of our new location as a collaboration space, not a traditional office. We then adopted a work anywhere approach for our operations in both Seattle and Trowbridge. We invested in an integrated voice-over-IP phone and virtual meeting system for all employees in all locations, including the UK, which meant they could collaborate from anywhere. At the time we were making these plans, we had no idea how meaningful our decisions would prove to be when the COVID-19 pandemic arrived in February. We are still planning to locate to our new collaboration space, our corporate headquarters, in Seattle in June. Local construction moratoriums related to COVID-19 have eased such that our tenant improvement project is back on track. We expect to be using the space regularly starting in June as allowed by local social distancing requirements. We will also start reusing – we will also restart using the existing Trowbridge facility when guidelines in the UK allow. I want to thank the BSQUARE team members, in the UK and in the U.S., for how they have adjusted to the changes; we have been virtual since early March. I would especially like to thank and acknowledge our BSQUARE families for how they have adapted. Our original model of working from home did not include running a day-care, running a school, and all the other challenges our team and their families have had to navigate. To a person they have responded, and we have continued to serve our customers without interruption. Since I joined BSQUARE, I have been working to build an entrepreneurial culture. In an effort to reinforce that culture, we modeled new equity incentives for our team members after options plans typically found in start-up companies. In January and February, we collaborated with our Compensation Committee to prepare a recommendation for option grants that was approved by the full board in early March. Using the existing pool of employee stock options, the option grants align the incentives of everyone at BSQUARE with you, our shareholders and investors. The potential to build and share in the creation of long-term value is what drew me, Chris, Steven, and the other entrepreneurs to BSQUARE. I believe this plan and this team will help me build value for you and their grit and perseverance will help us weather the storm brought to us by the COVID-19 pandemic. As we close out the call, I want to speak to the promise of technology to help us adapt and change. The intelligent devices and systems we are building – we are helping to build will be part of how the world adapts to health care challenges, energy challenges, and resource management challenges. Our customers, whether they started at with a device and are building up to the cloud, or if they started from the cloud and are reaching down to a device, face a growing software challenge made more complicated by different hardware, operating systems, and cloud providers. These systems also require new operations skills managing cloud instances and activities over large diverse networks. I believe BSQUARE is uniquely positioned to meet this need and I am optimistic about our future. For now, however, we have a storm to manage through and that is where we are focused. Q2 will no doubt test our resolve, but I am confident that we have the team, the contingency plans, and the resources necessary to weather that storm. No matter what happens, we will look back on this time and say that we acted with decisiveness, with dignity, and with compassion. Thank you for your time and your attention. We’ll see you for the Q2 earnings call. Moderator please open the line for questions now.
Operator
[Operator Instructions] We will hear first from [indiscernible]. Please go ahead. We’re unable to hear you, please check the mute function. Hello, Rich. Are you there?
Unidentified Analyst
Sorry. Yes, I'm here. Can you hear me?
Operator
Yes, sir. We can hear you now.
Unidentified Analyst
Yes, we can. Yes. Hi. I'd like to ask where the $1.6 million appears in the financials. First of all, did you receive it in the quarter completed?
Chris Wheaton
Yes. We – I can answer that question. We did not receive it in Q1. We received it in Q1. And therefore, it is not reflected in the Q1 financial statements.
Unidentified Analyst
I see. So this is the kind of loan that under some circumstances you don't have to pay back, is that correct? And if so, are you going to meet those circumstances?
Chris Wheaton
It is a part of the SBA Paycheck Protection Program loan and a function of those of that program is when certain criteria are met that a portions of the loan up to the entire amount of the loan can be forgiven. The guidance has been a little thin so far from the SBA as to how exactly those calculations will be performed. But we'll be addressing that as the program itself winds to a conclusion, which we expect to be sometime in June.
Unidentified Analyst
So as of now, you actually have more cash by a significant amount including the proceeds of that loan. Then as of March 31st is that a reasonable guess on my part?
Chris Wheaton
I didn't check our cash balance this morning, but we – those – that $1.6 million is definitely in the accounts as of today and will be reflected in the Q2 results when we present them in about three minutes.
Unidentified Analyst
And more importantly than all of that, the quarter just completed, you reported positive cash flow, not counting the loan proceeds. And if that's really the case, that is quite an accomplishment and you should be congratulated for that.
Chris Wheaton
Thank you. That is indeed the case.
Unidentified Analyst
But other than that, I'm personally troubled by the complete lack of guidance for Q2 because there's nowhere else to get it, any information at all. Maybe you could comment on if that's likely to change or anything you can provide that would help those of us who are not insiders.
Ralph Derrickson
Yes. Hi, Richard. This is Ralph.
Unidentified Analyst
I will take that offline here. I'm done.
Ralph Derrickson
Okay. Well, we’ll be happy to speak to you offline, but yes, if you want to take it off, we'll do that later. Thanks.
Unidentified Analyst
No, no. I can take it now, but I'm going to turn off my mic.
Ralph Derrickson
Oh, okay. I was confused. Yes, yes. So, yes, with regard to that, as Chris mentioned in his remarks, we're seeing ordering activity changing in the Partner Solutions segment. We saw that start to happen near the end of the month of March. We saw that continue into April and we've seen that into May. It's unclear exactly what that means just yet, whether how that will stabilize and how the quarter will end up. So the choice of having a very wide margin for revenue guidance or waiting and seeing where things come out, we chose the latter.
Operator
Thank you. [Operator Instructions] That does conclude today's question-and-answer session. It also concludes today's conference. Thank you all for your participation. You may now disconnect.