Earnings Transcript for BSQR - Q2 Fiscal Year 2022

Operator: Good day and welcome to the BSQUARE Corporation Second Quarter 2022 Earnings Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Ralph C. Derrickson, President and CEO. Please go ahead sir.

Ralph Derrickson: Thank you. Good afternoon investors and welcome to the Q2 2022 BSQUARE quarterly earnings call. Joining me on today’s call is BSQUARE’s CFO and COO Chris Wheaton. Chris and I appreciate your interest in BSQUARE and thank you for taking the time to be with us this afternoon. 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 the BSQUARE website. During the 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. In our commentary, we may also refer to GAAP and non-GAAP financial measures. Please refer to the cautionary text regarding forward-looking statements contained in BSQUARE’s earnings release issued today and on our website at www.bsquare.com under “Investors”. All per share amounts discussed today are fully diluted numbers where applicable. We will be taking questions after our prepared remarks. For anyone who would like to arrange a follow up conversation with us, please send an email to investorrelations@bsquare.com. This mailbox is monitored regularly, and you will get a response within 1 business day. With that out of the way let’s get started. We’re going to do things a little differently today in response to questions we’ve gotten recently from shareholders. As usual, we will start with a review of the Q2 2022 financial results. But after that we will cover more deeply than we have in the past our plans for driving organic growth, with an emphasis on our SquareOne product offering. Following that we will make some remarks regarding cash and thoughts on the potential for inorganic growth. Finally, we’ll close with some general updates and governance matters before opening up the line for questions. Turning our attention now to the second quarter of 2022, revenue was up again quarter-over-quarter. Gross profit improved and operating expense decreased. Our operating loss improved as well over the first quarter of 2022. Our operations did use cash during the period, but our balance sheet remains strong, with significant cash reserves and no debt. Q2 2022 was our second quarter of execution against our ongoing plan to drive organic growth and return BSQUARE to profitability. After Chris takes us through the Q2 results, I’ll be back to talk more about our plans and our progress. Over to you, Chris.

Chris Wheaton: Thank you, Ralph, and good afternoon investors. Let’s jump right into our second quarter financial results. Most of my comparisons will be to the first quarter of this year and, if not, I’ll indicate where I’m comparing to other periods. Total revenue for the second quarter of 2022 improved $700,000, or 7% over the first quarter, with both the Partner Solutions and Edge to Cloud segments contributing to the increase. Within the Partner Solutions segment, revenue increased $200,000, or about 2%, with a large one-time order and one additional shipping day in the quarter driving the improvement. While we have recorded two consecutive quarters of revenue growth in our Partner Solutions segment, we note that our volumes are still well behind those we saw prior to COVID. Our average monthly revenue is about $1.5 million less than it was before the onset of the pandemic. It remains uncertain how long the effects of COVID and other looming economic issues will impact our Partner Solutions revenue. In the Edge to Cloud segment, a $400,000 increase in quarterly revenue stemmed primarily from a renewed relationship with one of our largest and most important customers. Our contract amendment both extends the relationship and stabilizes revenue recognition from this customer – albeit at a quarterly rate lower than we recorded in this second quarter of 2022. The contract renewal is an important outcome for the quarter and we believe it further increases the stability of this business segment. Total gross profit for the quarter also improved, as we achieved a $100,000 quarter-over-quarter increase, driven by the Edge to Cloud segment. Gross margin rate for the Partner Solutions segment was 13.3%, in-line with recent historical averages. That rate is, however, a decrease from the first quarter, when we closed a large one-time order with an above-average margin. Q2 gross profit in the Partner Solutions segment decreased $300,000 quarter-over-quarter. As we’ve discussed previously, the cost of revenue in the Edge to Cloud segment tends to be fairly stable, resulting in gross profits moving commensurate with revenue. This remained true for the second quarter of 2022 as both segment revenue and gross profit were up $400,000 compared to the prior quarter. Moving on total operating expenses in the second quarter were $2.3 million, a decrease of $100,000 compared to the first quarter. The decrease was driven by reduced selling, general and administrative, or SG&A, expenses as research and development expenses remained flat. The SG&A decrease was driven primarily by reduced personnel-related costs and professional fees. Spending on third party services was down quarter-over-quarter as these expenses are typically highest in the first quarter of the year, driven by fiscal yearend audit and tax services. While some of our expenses, like professional fees, fluctuate quarter to quarter based on seasonality, our operating cost structure is relatively stable and has recently only increased because of planned investments in sales and marketing. During the quarter, we also continued to develop and enhance our product portfolio. In the first half of 2022, our product development investment totaled $700,000, of which approximately $300,000 was capitalized on our balance sheet as internally developed software. The remaining $400,000 is shown on the income statement as research and development expense. Overall, loss from operations for the second quarter of 2022 was $700,000, an improvement of $200,000 compared to the first quarter. Net loss for the quarter was $600,000, or $0.03 per diluted share, an improvement compared to a net loss of $900,000, or $0.05 per diluted share, in the first quarter of 2022. Turning quickly to the balance sheet

Ralph Derrickson: Thank you, Chris. I am pleased with the improvements in revenue and stability of our expense allowing us to maintain reserves. In Q2 we continued our efforts to drive organic growth based on the business opportunities we described on previous calls serving customers that are manufacturing, deploying and operating IoT products. The opportunity is a natural outgrowth of the OS licensing and system software business we are in today and that we have been in since our founding more than 25 years ago. In that time, we have helped thousands of OEMs ship millions of purpose-built devices The opportunity also builds on years of experience implementing and operating custom IoT systems for large companies. We believe that our expertise, particularly at the point of interaction between the operating system and the device hardware, is a core asset and a point of competitive differentiation. Our new product offering, SquareOne, is central to our plans for organic growth. As a reminder, SquareOne is our recently-announced product offering that provides secure remote device management for manufacturers and operators of IoT products. I believe it is critical that investors understand our product strategy, and for that reason I am going to turn it back to Chris now, this time in his role as our Chief Operating Officer, to take us through SquareOne in detail. Chris leads our product management, engineering, and operations teams that are building and operating IoT infrastructure for our customers.

Chris Wheaton: Thanks again, Ralph. I’m pleased to be able to go a bit deeper into SquareOne and the role it’ll play in our plans for BSQUARE’s future. In some of our more recent earnings calls, we have touched on the SquareOne product and the value it can provide. We’ve described it as a natural extension to the relationship we have with many of our IoT customers. We’ve alluded to the business opportunity and to SquareOne’s contributions to the evolution of our plans for growth. However, on today’s call, I’m going to lift the hood and begin to answer some of the most important questions that investors and observers are likely to have about the product and the strategy we’ve built around it. SquareOne is a complete solution for companies that are manufacturing, deploying and operating IoT products. Based on input from customers, we now offer SquareOne in two packages

Ralph Derrickson: Thank you, Chris. I am very excited about the prospects of SquareOne and look forward to reporting more as those products contribute to our revenue story. I want to call to your attention to the close coupling of SquareOne and our Microsoft OS licensing business. SquareOne builds naturally on our OS licensing customer relationships. Now and into the future, licensing will remain a key offering within our suite of products for device makers. And, while SquareOne revenue is ramping, licensing will provide the lion’s share of our revenue. Okay, I would like to switch gears now to address a question that has come up during investor conversations and that is

Operator: Thank you. [Operator Instructions] And with no questions in the queue, I will now turn the call back to Ralph Derrickson for any additional or closing remarks.

Ralph Derrickson: Thank you operator, and thank you investors for taking the time to participate in our call. We appreciate your interest in BSQUARE. See you at our earnings call and shareholder meeting in November.

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Operator: And this concludes today's call. Thank you for your participation. You may now disconnect.