Bsquare Reports Second Quarter 2009 Results

78% Increase in Proprietary Software Revenue and Net Income of $348,000, or $0.03 per Share

• Press Release
• Source: BSQUARE Corporation
• On 4:05 pm EDT, Thursday August 6, 2009

BELLEVUE, WA--(Marketwire - 08/06/09) - BSQUARE Corporation (NASDAQ:BSQR - News) today announced financial results for the second quarter and the six months ended June 30, 2009. Total revenue for the quarter was $16.1 million, up 5% from $15.4 million in the prior year due to a $2.5 million increase in engineering services revenue. Total revenue for the first half of 2009 was $32.8 million, up 1% from $32.5 million in 2008.

The Company reported net income for the quarter of $348,000, or $0.03 per diluted share, an increase of 36% from the prior year in which the Company reported net income of $255,000, or $0.02 per diluted share. For the first half of 2009, the Company reported net income of $258,000, or $0.03 per diluted share, compared to net income of $1.2 million, or $0.11 per diluted share, in 2008. The Company's acquisition of TestQuest negatively affected the bottom-line for the quarter in the amount of $51,000, or $0.01 per share, and $527,000, or $0.05 per share, for the first half of 2009 (no effect in prior year).

The Company's EBITDAS (earnings before interest, taxes, depreciation, amortization and stock compensation expense) was $833,000 for the quarter, its 11th consecutive positive quarter, compared to $660,000 in the prior year. The TestQuest acquisition was accretive on an EBITDAS basis for the quarter.

Brian Crowley, Bsquare's chief executive officer, commented on the second quarter's results, "Sales of TestQuest products were up 168% sequentially, slightly outperforming our expectations, resulting in a $1.2 million quarter in proprietary software revenue. I'm also happy to report that we closed our Windows Mobile agreement with Texas Instruments after quarter-end. The combination of our TestQuest products, the Texas Instruments initiatives, several significant royalty-bearing design wins and other product initiatives bode well for future proprietary software results."

Key Results, Achievements and Events

Recently, the Company:

�
--  Announced its collaboration with The Coca-Cola Company in developing
    the Coca-Cola Freestyle(TM), a proprietary, software-driven fountain
    dispenser. Over the past two years, Bsquare has provided engineering
    services and products to develop the dispenser and anticipates playing a
    role in future development;
--  Announced its new training course for the Microsoft Auto Platform,
    "Building Solutions with Microsoft Auto Platform," a five-day course for
    auto manufacturers, OEMs and infotainment suppliers. The training focuses
    on the fundamentals of developing on the Microsoft Auto Platform, which is
    based on the Windows Embedded CE 6.0 operating system. Bsquare is a
    designated training partner for the Microsoft Auto Platform;
--  Renewed its OEM distribution agreement with Microsoft Corporation
    under which Bsquare sells Microsoft's complete line of software products
    for embedded systems to OEMs in North America. The new agreement runs from
    July 1, 2009 to December 31, 2009, at which time Microsoft anticipates
    introducing updated agreements for its distributors;
--  Developed an Adobe� Flash� Platform technology browser plug-in for
    ARM-based devices running Google's Android 1.5 "Cupcake" platform, which
    will enable OEMs to provide a richer Web browsing and media experience on
    smartphones and netbooks. Bsquare has previously optimized ports on other
    embedded operating systems, but this is the first port available to OEMs
    that has been optimized for the Android platform; and
--  Announced its 3G Dev Kit for the Texas Instruments OMAP35xx evaluation
    module and Microsoft Windows� CE 6 operating system with support for
    UMTS/EDGE/GPRS/GSM embedded radios. With Bsquare's off-the-shelf solution,
    OEMs can immediately start developing data-based applications residing on
    devices such as digital signage, vending machines, point-of-service devices
    and data collection terminals with web browsing and seamless access to
    email, office or Internet.
    

Revenue Results

Sales of third-party software were $6.6 million for the quarter compared to $9.0 million in the prior year, representing a decrease of 27%. Third-party software sales were $14.0 million for the first half of 2009 compared to $19.1 million in 2008. A decrease in Microsoft license sales drove both decreases which resulted from a drop in customer order volumes attributable to the economic slowdown, and the effect of a one-time $1.3 million order that benefited the first quarter of 2008.

Proprietary software revenue was $1.2 million for the quarter compared to $676,000 in the prior year, representing an increase of 78%. TestQuest product revenue of $741,000, compared to none in the prior year, primarily drove the increase, partially offset by a $254,000 decline in service contract royalties. Proprietary software revenue was $2.1 million for the first half of 2009 compared to $1.5 million in 2008.

Commenting on software sales for the quarter, Mr. Crowley said, "Our third-party software sales were down again sequentially as we expected. This continues to be the area of our business most affected by current economic conditions. We still expect that third-party software sales will begin to rebound later this year or in early 2010. On the other hand, I was very happy with the sequential increase in proprietary software revenue, especially our TestQuest product revenue. We believe that device software testing is a growing need for our customers as devices become more connected and more complicated, and that TestQuest products will play a key role in filling that need. As we expected, TestQuest was accretive on an EBITDAS basis for the quarter, and we still believe TestQuest will be EBITDAS accretive for the full year."

Service revenue was $8.3 million for the quarter, up 46% compared to $5.7 million in the prior year driven by strong growth in North America and a project with the Ford Motor Company, partially offset by a decline in Asia Pacific (APAC) service revenue. The Ford project accounted for $5.2 million in service revenue in the quarter, compared to $219,000 in the prior year. APAC service revenue declined $446,000, or 94%, year-over-year due largely to poor economic conditions. Billable hours increased 56% this quarter driven by higher activity levels in North America, whereas the effective bill rate declined 10% due to the Ford project. During the quarter, Bsquare and Ford agreed to modify the project fee structure from straight time-and-materials to time-and-materials with a fee cap, and to cap the total fees for the remainder of the project, exclusive of non-BSQUARE related overruns and scope changes, at a lower amount than would have been realized under the previous structure. This fee structure modification negatively affected service revenue this quarter by $721,000 compared to what would have been recognized under the previous structure, and also negatively affected the resulting effective bill rate. Service revenue increased 42% to $16.7 million for the first half of 2009 compared to $11.8 million in 2008.

"Despite the unexpected impact of the Ford fee structure modification, service revenue was off only 1% sequentially, essentially in-line with expectations provided on last quarter's call," continued Mr. Crowley. "We have learned much in our first large-scale initiative with Ford, which has strengthened our team and our processes. We believe that Bsquare will benefit from the trend toward smarter automobiles that increasingly rely on embedded technology and we are continuing our active pursuit of additional automotive service opportunities. Overall, we are focused on growing our book of service business outside of Ford, which is challenging given current economic conditions. Our Asia-Pacific service revenue has been especially hard hit in the current downturn. However, late in the quarter we closed new APAC service business which should drive sequential improvement in APAC service revenue in the third quarter."

Gross Profit and Gross Margin Results

Overall gross profit was $4.4 million for the quarter, or 27% of total revenue, as compared to $3.7 million, or 24% of revenue, in the prior year, with the increase driven by increases in both service and proprietary software gross profit, partially offset by lower third-party software gross profit. Third-party software margin was 16% for the quarter compared to 15% in the prior year. Proprietary software gross margin was 88% this quarter, down from 90% in the prior year due to amortization of intangible assets associated with the TestQuest acquisition. Service gross margin was 28% for the quarter, compared to 31% in the prior year. The decrease was driven by the year-over-year bill rate decline, which had the effect of reducing service margin by six percentage points. Overall gross profit was $8.8 million, or 27% of total revenue, for the first half of 2009 compared to $8.4 million, or 25% of total revenue, in 2008.

Operating Expenses

Total operating expenses were $4.0 million for the quarter compared to $3.5 million in the prior year. The TestQuest acquisition increased operating expenses by $671,000, compared to no related expense in the prior year, and drove the year-over-year increase. Total operating expenses were $8.7 million for the first half of 2009 as compared to $7.2 million in 2008. Scott Mahan, Bsquare's chief financial officer, commented on operating expense trends, "The TestQuest acquisition and other new product initiatives have certainly increased our operating expense run rate as compared to the prior year. However, actions we took in Q1, including targeted headcount reductions and other steps, have generally had the desired effect of reducing our run rate in the range we targeted earlier in the year of $300,000 to $400,000 per quarter. In fact, operating expenses were down sequentially this quarter by $655,000 due to lower payroll and related expenses, primarily R&D-related, and lower professional fees."

Cash Flows

The Company's cash, cash equivalents and investments, both short and long-term, decreased by $3.0 million to $11.8 million at June 30, 2009, as compared to $14.8 million at March 31, 2009 ($900,000 of the June 30 and March 31 balances were restricted). The decrease was driven by a $4.2 million increase in accounts receivable, as compared to March 31, 2009, related to payment delays with Ford. As of June 30, 2009, the Company had $7.7 million in accounts receivable outstanding from Ford, $4.1 million of which was past due. Subsequent to quarter-end, Ford became largely current on its accounts receivable.

Conference Call

Management will host a conference call today, August 6, 2009, at 5 p.m. Eastern Time (2 p.m. Pacific Time). To access the call, please dial 877-941-7133, or 480-629-9786 for international callers, and reference "Bsquare Corporation Second Quarter 2009 Earnings Conference Call." A replay will be available for one week following the call by dialing 800-406-7325 or 303-590-3030 for international callers; reference pin number 4118183. A live and replay webcast of the call will be available at www.bsquare.com in the investor relations section.

About Bsquare

Bsquare is an industry leader with a proven track record in providing production-ready software products and engineering services to the smart device market. For more information, visit www.bsquare.com.

BSQUARE is a registered trademark of BSQUARE Corporation. All other product and company names herein may be trademarks of their respective owners.

This release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements relating to our projected financial results, future and potential customer and partner projects, the expected impact of the TestQuest acquisition, and proprietary products strategy. All of the statements contained herein that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from such statements. There can be no assurance that forward-looking statements will be achieved. Important factors that could cause actual results to differ materially from those indicated in forward-looking statements include: whether we are able to maintain our existing favorable relationships with Microsoft Corporation and Ford Motor Company; risks, uncertainties and changes in financial condition; intellectual property risks; and risks associated with our international operations. Therefore, all forward-looking statements should be considered in light of various important factors including, but not limited to, the risks and uncertainties listed above. The Company makes no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made. Please also refer to the Company's most recent Quarterly Report on Form 10-Q, Annual Report on Form 10-K and other filings with the SEC for other important risk factors that could cause actual results to differ materially from those indicated in any forward-looking statements.

�
                            BSQUARE CORPORATION
                  CONDENSED CONSOLIDATED BALANCE SHEETS
                   (In thousands, except share amounts)



                                                   June  30,   December 31,
                                                      2009        2008
                                                  -----------  -----------
                                                  (Unaudited)
                             ASSETS
Current assets:
  Cash and cash equivalents                       $     6,210  $     7,703
  Accounts receivable, net of allowance for
   doubtful accounts of $198 at September 30, 2008
   and $199 at December 31, 2007                       14,285       10,726
  Prepaid expenses and other current assets               562          703
                                                  -----------  -----------
     Total current assets                              21,057       19,132
Long-term investments                                   4,692        4,679
Equipment, furniture and leasehold improvements,
 net                                                      854          981
Intangible assets, net                                  1,761        1,975
Restricted cash                                           900          900
Other non-current assets                                   91           91
                                                  -----------  -----------
     Total assets                                 $    29,355  $    27,758
                                                  ===========  ===========


                LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                $     2,184  $     2,925
  Other accrued expenses                                3,942        3,057
  Accrued compensation                                  1,795        1,636
  Accrued legal fees                                      534          534
  Deferred revenue                                        716          355
                                                  -----------  -----------
     Total current liabilities                          9,171        8,507

Deferred rent                                             323          309

Shareholders' equity:
Preferred stock, no par value: 10,000,000 shares
 authorized; no shares issued and outstanding              --           --
Common stock, no par value: 37,500,000 shares
 authorized; 10,051,800 shares issued and
 outstanding at September 30, 2008 and 9,967,618
 shares issued and outstanding at December 31,
 2007                                                 123,105      122,660
Accumulated other comprehensive loss                     (832)      (1,048)
Accumulated deficit                                  (102,412)    (102,670)
                                                  -----------  -----------
     Total shareholders' equity                        19,861       18,942
                                                  -----------  -----------
     Total liabilities and shareholders' equity   $    29,355  $    27,758
                                                  ===========  ===========



                            BSQUARE CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF INCOME
           (In thousands, except per share amounts) (Unaudited)


                                    Three Months Ended   Six Months Ended
                                         June 30,            June 30,
                                    ------------------  -------------------
                                      2009    2008 (2)    2009    2008 (2)
                                    --------  --------  --------- --------
Revenue:
   Software                         $  7,825  $  9,680  $  16,123 $ 20,676
   Service                             8,289     5,746     16,668   11,808
                                    --------  --------  --------- --------

      Total revenue                   16,114    15,426     32,791   32,484
                                    --------  --------  --------- --------

Cost of revenue:
   Software                            5,730     7,730     12,037   16,236
   Service (1)                         5,979     3,975     11,917    7,986
                                    --------  --------  --------- --------

      Total cost of revenue           11,709    11,705     23,954   24,222
                                    --------  --------  --------- --------

         Gross profit                  4,405     3,721      8,837    8,262
Operating expenses:
   Selling, general and
    administrative (1)                 3,100     2,983      6,395    5,992
   Research and development (1)          921       561      2,302    1,205
                                    --------  --------  --------- --------

      Total operating expenses         4,021     3,544      8,697    7,197
                                    --------  --------  --------- --------

Income from operations                   384       177        140    1,065
Interest and other income
 (expense), net                          (10)       88        104      248
                                    --------  --------  --------- --------

Income before income taxes               374       265        244    1,313
Income tax benefit (expense)             (26)      (10)        14     (127)
                                    --------  --------  --------- --------

Net income                          $    348  $    255  $     258 $  1,186
                                    ========  ========  ========= ========

Basic income per share              $   0.03  $   0.03  $    0.03 $   0.12
                                    ========  ========  ========= ========

Diluted income per share            $   0.03  $   0.02  $    0.03 $   0.11
                                    ========  ========  ========= ========

Shares used in calculation of
 income per share:
   Basic                              10,110    10,011     10,098    9,994
                                    ========  ========  ========= ========

   Diluted                            10,191    10,253     10,214   10,284
                                    ========  ========  ========= ========

(1) Includes the following amounts related to non-cash stock-based
    compensation expense:



Cost of revenue - service           $     68  $    102  $     142 $    227
Selling, general and administrative      128       227        282      467
Research and development                  14        26         13       45
                                    --------  --------  --------- --------
Total stock-based compensation
 expense                            $    210  $    355  $    437  $    739


(2) Restated. See Item 1 of Part I, "Financial Statements -
    Note 8 - Restatement of Financial Information (Unaudited) of our
    June 30, 2009 Quarterly Report on Form 10-Q, for related discussion.



                             BSQUARE CORPORATION
                 NON-GAAP INFORMATION AND RECONCILIATION TO
                     COMPARABLE GAAP FINANCIAL MEASURES
                         (In thousands) (Unaudited)



                                    Three Months Ended    Six Months Ended
                                         June 30,            June 30,
                                    ------------------  ------------------
                                      2009    2008 (2)    2009    2008 (2)
                                    --------  --------  --------  --------
EBITDAS:
    Net income as reported          $    348  $    255  $    258  $  1,186
    Income tax (benefit) expense          26        10       (14)      127
    Interest and other (income)
     expense, net                         10       (88)     (104)     (248)
    Depreciation and amortization        239       128       483       265
    Stock-based compensation expense     210       355       437       739
                                    --------  --------  --------  --------

        EBITDAS (1)                 $    833  $    660  $  1,060  $  2,069
                                    ========  ========  ========  ========



(1) EBITDAS is a non-GAAP financial measure.  Generally, a non-GAAP
    financial measure is a numerical measure of a company's performance,
    financial position or cash flow that either excludes or includes
    amounts that are not normally excluded or included in the most directly
    comparable measure calculated and presented in accordance with GAAP.
    EBITDAS is defined as net income (loss) before income taxes, interest
    income, depreciation and amortization, and stock-based compensation.
    EBITDAS should not be construed as a substitute for net income (loss)
    or net cash provided by (used in) operating activities (all as
    determined in accordance with GAAP) for the purpose of analyzing our
    operating performance, financial position and cash flows, as EBITDAS is
    not defined by GAAP. However, the Company regards EBITDAS as a
    complement to net income and other GAAP financial performance measures,
    including an indirect measure of operating cash flow.

(2) Restated. See Item 1 of Part I, "Financial Statements -
    Note 8 - Restatement of Financial Information (Unaudited) of our
    June 30, 2009 Quarterly Report on Form 10-Q, for related discussion.