BSQUARE Corporation
Q1 2015 Earnings Call Transcript

Published: 14 May 2015

[Operator:]

Good day, and welcome to the BSQUARE Corporation first quarter 2015 financial results conference call. Today's conference is being recorded. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Jerry Chase, BSQUARE’s Chief Executive Officer. Please go ahead sir.

[Jerry Chase:]

Thank you, and good afternoon, everyone. Before I begin, let me remind you that this call is being broadcast over the Internet, and that a recording of the call and the text of our prepared remarks will be available on our 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. Please refer to the cautionary text regarding forward-looking statements contained in our earnings release issued today and in the posted version of these prepared remarks, both of which apply to the content of this call. All per share amounts discussed today are fully diluted numbers where applicable. BSQUARE achieved solid results in Q1, with a $3.5 million increase in revenue, a $2.2 million increase in net income, and a $2.1 million in increase adjusted EBITDAS while reducing opex by 4% from the year ago quarter. A few comments about each of BSQUARE’s three revenue lines

[Marty Heimbigner:]

Thanks, Jerry. With that business overview from Jerry, let me recap our financial results, reflecting the continued hard work and talents of the entire BSQUARE team. We reported total revenue this quarter of $26.3 million, up 16% from $22.7 million in the same quarter in the prior year, and up 3% sequentially from $25.6 million in the fourth quarter of 2014. Third-party software sales were $19.8 million this quarter, up 12% year over year from $17.7 million. The increase from the prior year quarter was attributable to strong Microsoft licensing sales as well as the aforementioned MobileV sale. Third-party software sales were down 1% sequentially from $20.1 million in the fourth quarter. The quarter over quarter decrease resulted from the larger sales of MobileV reference designs in Q4 2014, compared with the MobileV sales in Q1, 2015, partially offset by an increase in Microsoft licensing sales. Service revenue was $4.5 million this quarter, up 5% year over year from $4.3 million, but down 10% quarter over quarter from $5.0 million. Service revenue was down quarter over quarter primarily as a result of decreased service revenue in Japan, partially offset by higher revenue in North America. As we have previously reported, 2014’s fourth quarter results included the completion of a large project in Japan that contributed $598,000 of revenue and margin. Proprietary software revenue was $2.0 million this quarter, up 162% year over year from $755,000 and up 254% from $560,000 quarter over quarter. Revenue from our proprietary software products can fluctuate significantly from one quarter to the next and investors should not extrapolate Q1 results for the remainder of the year. Next, I’ll turn to our gross profit and margins. Overall gross profit was $5.4 million this quarter, or 21% of total revenue, compared to $3.5 million or 16% of revenue in the year ago quarter and $4.8 million or 19% of revenue in Q4 2014. Third-party software gross margin was 14% this quarter compared to 13% in the year ago quarter and 14% in Q4 2014. The improvement year over year was driven primarily by a favorable product mix this quarter. Service gross margin was 17% this quarter, 15% in the year ago quarter, and 29% in Q4 2014. The year over year increase is as a result of increased revenue from higher realized rates per hour, the quarter over quarter decrease was due to the completion of a Japanese handset project and recognition of $598,000 of profit on that contract in Q4 2014. Proprietary software gross margin was 93% this quarter, 78% in the year ago quarter, and 85% in Q4 2014. Fluctuations in proprietary software gross margin are generally driven by changes in revenue as the cost of sales is relatively fixed. Gross margins from our proprietary software products can fluctuate significantly from one quarter to the next and investors should not extrapolate Q1 results for the remainder of the year. Moving down the income statement to operating expenses, total operating expenses were $3.6 million this quarter, down 4% year over year from $3.7 million and up 3% quarter over quarter from $3.5 million. The quarter over quarter increase was primarily as a result of normal seasonal timing of expenses for fringe benefits and taxes. Now, I’ll speak to our bottom line results. We reported net income for the quarter of $1.8 million, or $0.15 per share compared to a net loss of $393,000 or $0.03 per share in the year ago quarter and compared to net income of $1.4 million or $0.12 per share in Q4 2014. This improvement in net income reflects our continued focus on increasing the efficiency of our core business and commitment to sustained profitability. We generated adjusted EBITDAS of $2.3 million this quarter compared to adjusted EBITDAS of $210 [million] in the year ago quarter and adjusted EBITDAS of $1.7 million in Q4 2014. Adjusted EBITDAS is a non-GAAP measure defined as operating income before depreciation, amortization, and stock based compensation. The reconciliation of the comparable GAAP financial measure can be found in our press release and on our website at BSQUARE.com. Cash and investments increased to $26.8 million at quarter end from $26.6 million at the beginning of the year. Generally, adjusted EBITDAS is a proxy for cash flow from our business. However, in Q1, the magnitude of working capital changes limited the increase in cash and investments to $200,000. We expect over the balance of the year that the timing of working capital changes will reverse such that adjusted EBITDAS for the full year will approximate the increase in cash and investments. I will now turn the call back to Jerry for closing remarks.

[Jerry Chase:]

Thank you, Marty. Turning to Q2, we currently expect revenue will be between $25 million and $28 million. We expect to be GAAP profitable and as mentioned earlier, we expect to have higher gross margin profile in engineering services. Operator, please open the call for questions.

[Operator:]

[Operator instructions.] And we’ll now take our first question from Kevin Lyons with Moloco Partners.

[Kevin Lyons:]

My usual question, you referenced improving engineering [unintelligible]. What’s the latest there in terms of planning or expectations? How quickly will we see that improve?

[Jerry Chase:]

You broke up a little bit there, Kevin. You’re asking about engineering services gross margin?

[Kevin Lyons:]

Yeah, you mentioned improvement, so I wanted to hear some more about that if we could.

[Jerry Chase:]

In the prepared remarks, we had mentioned that as a result of orders from Google, Coca-Cola, Ford, and a new Global 100 customer, we expect that gross margins for the engineering services business is going to climb into the low to mid-20s for the remainder of the year. So that was the basis of that remark.

[Operator:]

[Operator instructions.] And it appears there are no further questions at this time. I’d like to turn the conference back over to management for any additional or closing remarks.

[Jerry Chase:]

Thank you, operator. Before concluding the call, on behalf of the entire BSQUARE team, I’d like to thank our investors and our customers for your interest and for your business. We look forward to reporting back to you next quarter. Thank you for joining us.