BSQUARE Corporation
Q3 2020 Earnings Call Transcript

Published: 13 Nov 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to the BSQUARE Corporation Third Quarter 2020 Financial Results Call. This conference is being recorded. At this time, I would 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 the recording of the call and the text of our prepared remarks will be available on BSQUARE’s Web site. 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 containing 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.

[Ralph Derrickson:]

Thank you, Steven. Good afternoon, and welcome to the Bsquare Q3 2020 Earnings Call. Thank you for taking the time to participate in today's review of Bsquare's Q3 financial results. Joining me on today's call is Chris Wheaton, Fellow Entrepreneur and Bsquare Chief Financial Officer. The plan, as usual, is to take you through the Q3 2020 financial results, provide our perspectives on the business and answer any questions you may have for us today. For those who would like to arrange a follow-up conversation, please contact Steven Gottlieb, VP of Corporate Affairs, who is responsible for Investor Relations and let off our call today. You can reach Steven by e-mail at [e-mail]. Let's turn our attention to Bsquare's Q3 results. Starting with revenue, we saw healthy increases over Q2 2020 in both the Partner Solutions and Edge-to-Cloud business segments. Total revenue was up 17% over last quarter. It is not clear if this is the beginning of a sustained recovery. We have over 600 active Partner Solutions customers, who in turn, sell their products into a diverse set of markets. Clearly, some of our customers' end markets have thrived in the current environment, while others have faltered. We continue to work closely with all our customers as they seek to adapt to the changing market conditions. Edge-to-Cloud revenue improved as well during the quarter. The heavy investments we made to address issues with prior deliveries to our large customers are easy, and as a result, billable activity has increased. In addition to improving our customer relationships, this work is helping us improve our product offering. I'm confident these investments in our large customers will pay dividends as we look to grow the business in 2021. In both business segments, we benefited from our renewed commitment to partnerships. I firmly believe that we win by serving our customers. Their success is our success. And I'm proud of the progress we've made, restoring our customers' confidence in Bsquare. Turning next to operations. I'm pleased to share that we saw continued improvement this quarter. As you know, I have been laser-focused on managing costs and shifting the company to a more appropriate expense structure. That effort played a significant role in delivering the smallest net quarterly loss since I joined the company and in keeping our cash utilization to break even. While I realize there is more to making Bsquare successful than managing expense, without careful and deliberate attention to it, we would not have created the breathing room we need to pursue new opportunities for financial upside. That is why I have placed such a heavy emphasis rather on it, especially during this early phases of our business rebuilding. Let me turn things over to Chris now to take us through the quarter's financial results in detail.

[Chris Wheaton:]

Thank you, Ralph, and good afternoon, investors. As Ralph noted, our third quarter results contain relatively good news, and I'd be here to share the highlights with you. I believe these financial results represent both great progress and a stable basis from which we can turn our attention to profitable growth. Perhaps most importantly, our cash and cash equivalents, including restricted cash, totaled $12.6 million on September 30, 2020, an amount virtually unchanged from June 30, 2020. Ongoing cash management, a now well-established discipline throughout the company, has allowed us to migrate our operations to a more sustainable balance between cash inflows and outflows. Importantly, our more sustainable stance gives us room to maneuver and a degree of freedom to invest that has not been present for Bsquare for quite some time. Turning to revenue performance. We recognized $10.4 million in revenue in Q3 2020, an amount up $1.5 million or 17% over the second quarter of 2020. What's notable is that this overall revenue increase was driven by higher sales in both the Partner Solutions segment and the Edge-to-Cloud segment. Partner Solutions revenue in Q3 was $9.1 million compared to $8.1 million in Q2. While it's not clear that the shock delivered by the initial days of the COVID-19 pandemic has fully dissipated, we are noticing generally more stable ordering patterns. Furthermore, Partner Solutions gross margins in Q3 2020 were 19%, up from 14% in the second quarter. An unusually favorable mix of product SKUs, combined with changes in key rebate programs that have always been present in our Microsoft partnership, reduced our cost of revenue significantly. We're not counting on the rebates to continue to Q3 levels. The ongoing value we deliver for our customers in this segment is reflected in the relatively stable gross margins we've enjoyed in 2020. In Edge to Cloud, the customer investments we made throughout 2020 are now winding down and providing a return. Segment revenue in Q3 was $1.3 million, an increase of more than 57% compared to last quarter. Gross margins for Q3 turned positive, a result we've not posted since the fourth quarter of last year. We'll continue to seek and drive growth in this segment using the positive outcomes we deliver for our customers as a springboard for deeper and even more valuable relationships. Net loss for the current quarter was only $100,000 or $0.01 per diluted share compared to a net loss of $1.1 million or $0.08 per diluted share in the second quarter of 2020. As Ralph said, the last time Bsquare delivered such a small net loss was well before his time with the company. In fact, it was the first quarter of 2017, nearly four years ago, when the company delivered better net income results than those we provided today.

[Ralph Derrickson:]

Thank you for those remarks, Chris. Since my arrival at Bsquare, we have pursued a series of initiatives designed to rebuild the business. Of those initiatives, operating excellence has dominated the last 5 quarters and much of our reporting to you. As Chris described, that foundation of operational excellence is now in place, so I'd like to focus on some of the other critical business rebuilding activities that are well underway.

[Operator:]

At this time, no one has signaled to ask a question.

[Ralph Derrickson:]

Thank you, moderator. I think we can close the line now. Thank you, everyone, for joining us today. For those individuals who would like a follow up call, please contact Steven Gottlieb, VP of Corporate Affairs, to arrange that.

[Operator:]

We did actually get a question now. Would you like to take it?

[Ralph Derrickson:]

Yes.

[Operator:]

And we'll hear that question from Richard Karp, TicTran Corp.

[Richard Karp:]

I apologize if you hear any background noise since my landlord picked today to decide to power wash the building, unfortunately.

[Ralph Derrickson:]

[Richard Karp:]

Comparing June 30 balance sheet to September 30, since your sales increased over the last quarter, I would have expected accounts receivable to increase. But in fact, they went down by a considerable amount and current assets are down by a noticeable amount from the last quarter as well. So would it be a fair assessment to state that the main reason why you didn't burn much cash this quarter was that you were more aggressive in collecting?

[Ralph Derrickson:]

Yes. Let me turn that question, Richard, over to Chris, to field for you.

[Chris Wheaton:]

Richard, I don't think it is quite right to characterize it as more aggressive. I think it's just a matter of abnormal timing. We were not particularly aggressive this quarter or unaggressive last quarter. I just think it is or actually, I know it is a combination of when the sales came in, in Q1 and were paid in Q2 relative to when the sales came in, in Q3 and we're not yet paid in Q3. We do have customers that have longer than 30-day terms. So sometimes, those receivables can linger for a while on the balance sheet.

[Operator:]

And no further questions, everyone.

[Chris Wheaton:]

Thank you.

[A - Ralph Derrickson:]

Thank you, moderator. I think we can close the call now.

[Operator:]

Thank you. And ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.