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Edited Transcript of BSQR earnings conference call or presentation 24-Feb-20 10:00pm GMT

Q4 2019 Bsquare Corp Earnings Call

BELLEVUE Mar 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Bsquare Corp earnings conference call or presentation Monday, February 24, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris V. Wheaton

BSQUARE Corporation - CFO

* Ralph C. Derrickson

BSQUARE Corporation - President, CEO & Director

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Conference Call Participants

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* Leslie Phillips

The Blueshirt Group, LLC - Director of IR

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Bsquare Corporation Fourth Quarter and Full Year 2019 Financial Results Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Leslie Phillips, Investor Relations for Bsquare. Please go ahead.

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Leslie Phillips, The Blueshirt Group, LLC - Director of IR [2]

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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 and CEO.

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Ralph C. Derrickson, BSQUARE Corporation - President, CEO & Director [3]

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Thank you, Leslie. Good afternoon, investors. It is a pleasure to speak with you. I appreciate your time and attention, especially today, given the volatility in the broader market. I will keep my remarks at the outset brief so that Chris can take you through the financial results in detail.

Following Chris, I will share my perspective on 2020 and the opportunity ahead. The fourth quarter of 2019 saw our third sequential quarter of continued improvement in the business. Revenue was up in the Partner Solutions segment, margins were steady as a result of continued strength in the Edge to Cloud segment and operating losses, net of restructuring costs, were at their lowest level since Q4 2016.

While there is still work to be done, the One Bsquare initiatives and our focus on operating excellence are having an impact. Chris and I are looking forward to sharing the details about the quarter and our outlook for 2020. But before we do, I want to remind you of the reporting changes we announced last quarter. The Partner Solutions business segment, formerly Third-Party Software generates revenue from the resale of partners' software and the consulting services we provide to support them. The Edge to Cloud business segment formally and separately reported as Professional Engineering Services and proprietary software generates revenue from the sale and delivery of professional services as well as licensed proprietary software components.

Now let me turn things over to Chris to discuss our fourth quarter and our full year 2019 financial results in greater detail.

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Chris V. Wheaton, BSQUARE Corporation - CFO [4]

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Thank you, Ralph. It's a pleasure to join you for this, my second earnings call at Bsquare. As you said, we built an entrepreneurial team here. And I'm reminded every day of the value of that perspective. Our Q4 performance is a reflection of not only our focus and discipline but also of an increasingly entrepreneurial mindset.

Let's now turn our attention to the fourth quarter 2019 financial highlights. Revenue for the quarter was $15.4 million, up by $800,000 over the third quarter of 2019. These gains were driven primarily by higher sales of Microsoft operating system software in the Partner Solutions segment. This growth, coupled with essentially flat revenue in the Edge to Cloud segment is what allowed us to exceed our revenue guidance for the fourth quarter. Blended gross margins were 17%, which was a bit higher than expected. Continued strength in the Edge to Cloud business produced 35% margins for that segment, lifting overall gross margins higher than anticipated. GAAP net loss for the current quarter was $1.4 million or $0.10 per diluted share compared to a net loss of $1.1 million or $0.09 per diluted share in the third quarter of 2019. Excluding restructuring costs, fourth quarter net loss was $200,000 better than the prior quarter. Operating loss, net of restructuring costs, was $700,000 compared to $900,000 in the third quarter of 2019.

We incurred $700,000 in restructuring costs in the fourth quarter associated with closing our Taiwan office and selective headcount reductions in the U.S. Bsquare now operates out of 2 locations, Bellevue, Washington and Trowbridge in the United Kingdom. Adjusted EBITDA, a non-GAAP measure, also showed quarter-over-quarter improvement. The fourth quarter was negative $300,000 compared to negative $500,000 in the third quarter of 2019.

Cash, cash equivalents, restricted cash and short-term investments on December 31, 2019, totaled $10.6 million, a decrease of approximately $1 million from September 30, 2019. Our performance throughout 2019 demonstrates a renewed and dedicated focus on cost management and expense reduction. While 2019 revenue of $59.3 million was down compared to 2018 revenue of $73.4 million. 2019 operating expenses, excluding restructuring costs and goodwill impairment, were $17.1 million, a 34% decrease from 2018.

Net loss in 2019 was $9.2 million, a $4.6 million improvement over 2018. These numbers all show that our concerted focus on operational excellence is delivering results. We've stabilized the business and reversing the trends. We're actively setting a foundation that will allow Bsquare to more readily take advantage of growth opportunities as they become apparent. Our Partner Solutions business is no longer an afterthought, rather it's a core business that is generating cash and strong customer relationships. Our Edge to Cloud segment is better positioned to leverage our deep technical expertise in IoT and to produce value for our customers, and our margins are showing it. All of this is clear evidence that the progress Ralph spoke of in his opening remarks, but we recognize that there is much more work to be done.

Moving on to guidance. Our revenue guidance for the first quarter of 2020 is $13 million to $14 million, a similar but narrower range than recent quarter's guidance. While we were pleased with the Q4 numbers, given our visibility, we believe it would be premature to raise revenue guidance at this time. We anticipate blended gross margins for the first quarter to be in the 11.5% to 13.5% range. Our lower blended margin guidance is driven by planned investments in our customer solutions during the first half of the year, particularly in the Edge to Cloud segment.

Before I turn the call back to Ralph, I want to cover an item we reported in today's earnings release. Bsquare's shares will now be designated as part of the NASDAQ Capital Market. We initiated this change to be consistent with NASDAQ's shareholder equity requirements. The change in designation will have no impact on trading of our shares. We'll maintain the same BSQR ticker symbol and our reporting disclosure and compliance requirements will not change. It is, in our view, a largely administrative matter, and my mentioning it here as part of our efforts to be proactive and transparent as we continue to rebuild the business.

Let's turn now to Ralph for his closing remarks.

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Ralph C. Derrickson, BSQUARE Corporation - President, CEO & Director [5]

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Thank you, Chris. Looking ahead, I expect our business building efforts will continue to accelerate in 2020. We have an entrepreneurial leadership team and an operating plan that will allow us to create value and sustain progress. With focus and operating discipline, we will build a growing, predictable business in 2020. I would like to highlight some of the 2020 plan elements that give me confidence. As Chris mentioned, the Partner Solutions business will be getting a lot of attention in 2020. It is a strong source of both cash and important relationships moving forward. We are uniquely positioned as a software-only Microsoft distributor because we sell OS software decoupled from hardware, we can partner with a wide range of customers, especially those who are concerned about procuring their software from a potential hardware competitor. Further, every customer that has been buying OS software is now contemplating their IoT strategy and our OS relationships create an opportunity to cross-sell our Edge to Cloud products and services. The distribution business is also changing dramatically. Our customers' products, essentially hardware and associated software can no longer be sold, installed and simply forgotten. Today, our customers are required to maintain and optimize the operating system, firmware and software in their products. Further, these devices are increasingly becoming part of complex data-rich networks or what is often referred to as IoT. This evolution is creating new opportunities for our business. Our software and edge expertise, combined with our position as an OS distribution partner makes us uniquely suited to address these evolving requirements.

Looking to our Edge to Cloud business segment, we have been working hard to deliver results for our largest customers and gaining valuable experience by operating IoT solutions at scale. The work we've done on our software components and the improvements we've made to our engineering methodologies are bearing fruit and creating a foundation we can build upon to grow this business segment. We have been and will continue to invest in creating an agile and quality-oriented customer service function, as we have seen with our early IoT customers, who come to rely on Bsquare for operations of their systems. Our future customers will also be able to rely on Bsquare to ensure that their products and systems are well designed and can operate securely at scale. We will press for revenue growth in both segments and seek to exploit what we believe to be the obvious synergies between our 2 core businesses.

We look forward to sharing more with you as our progress continues. After our last earnings call, several investors ask me about taking questions during this call. Please know that we welcome and encourage your questions now or in scheduled conversations.

Thank you for your attention. Moderator, please open the call for questions.

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Operator [6]

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(Operator Instructions) Ladies and gentlemen, with no questions in the queue, we will now conclude today's conference. We thank you for your participation. You may now disconnect.