Bsquare - Q1 2023

Transcript

Operator (participant)

Greetings, welcome to the Bsquare Corporation Q1 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ralph C. Derrickson, the President and CEO. Thank you may proceed, sir.

Ralph Derrickson (President and CEO)

Thank you. Good afternoon, investors, welcome to the Q1 2023 Bsquare quarterly earnings call. Joining me today is Cheryl Wynne, Bsquare's Chief Financial Officer. Before we go any further, we'd like to remind you the 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 today's 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 [email protected]. This mailbox is monitored regularly and you will get a response within one business day. Okay, with that out of the way, let's turn our attention to the Q1 2023 results. We are pleased with the significant quarter-over-quarter improvement in our loss from operations. As we've shared in recent calls, running the business as efficiently as possible is a priority for us, and it was gratifying to see it play out in our numbers in the Q1. Let's start by having Cheryl take us through the Q1 results in detail, and I'll continue my remarks after that. Cheryl, over to you.

Cheryl Wynne (CFO)

Thank you, Ralph, and good afternoon, investors. Today, I'll be providing an overview of our financial results for the Q1 of 2023. Most of my comparisons will be to the Q4 of 2022. I'll let you know when I'm comparing to other periods. I'll start with a review of our income statement and then move to a discussion of our balance sheet. Total revenue for the Q1 was approximately $8.1 million, which was an increase of $200,000 or 2% from the Q4. The Partner Solutions segment drove the increase as revenue from the Edge to Cloud segment was flat quarter-over-quarter. The favorable revenue results drove a total increase in gross profit of $49,000. Let's take a look at our revenue and gross profit results at a segment level, starting first with Partner Solutions.

Partner Solutions revenue increased $190,000 or 3% quarter-over-quarter. The increase was largely due to one additional shipping day in the Q1 compared to the Q4. Daily average sales were flat quarter-over-quarter. Commensurate with the revenue increase, Partner Solutions gross profit increased $34,000. Gross margin rate improved 10 basis points driven by customer and product mix. In the Edge to Cloud segment, revenue was $874,000, which was in line with the Q4. Some favorability in cost of revenue drove a 180 basis point improvement in gross margin rate, resulting in a small increase in the segment's gross profit. Turning our attention now to expenses. Total operating expenses were $1.7 million, which was a $1 million decrease from the Q4.

Of this improvement, $200,000 was due to restructuring charges that were recorded in the Q4 and did not recur in the Q1. The rest of the quarter-over-quarter improvement or $800,000 was driven by decreases in our selling, general, and administrative or SG&A costs. Marketing expenses were the most notable driver of the decrease. In the Q4 of 2022, we incurred professional fees related to the completion of a significant overhaul and upgrade of our website. Marketing related, in the Q1, we recognized a larger amount of cooperative rebate dollars from Microsoft as compared to the Q4. The other driver of the quarter-over-quarter decrease in SG&A costs was labor and benefits due in part to the reduction in force action that was executed in December 2022. Research and development expenses were up very slightly quarter-over-quarter.

As you may recall, during the third quarter of 2022, we implemented an investment strategy intended to take advantage of rising interest rates while maintaining a focus on liquidity. Our Q1 results include $360,000 of interest income. We intend to continue investing our cash reserves for the foreseeable future until there is an alternative use of the reserves that will produce a higher return for our shareholders. We are utilizing a laddered investment strategy, staggering maturity dates so that the portions of our portfolio mature at regular intervals. This strategy ensures that our liquidity is readily accessible and available to fund strategic growth investments.

Overall, loss from operations for the quarter was $448,000 compared to the Q4 loss from operations of $1.5 million. This $1 million improvement was primarily driven by the decrease in operating expenses discussed earlier. Net loss for the quarter was $71,000, less than a penny per diluted share, which was a significant improvement over the Q4 net loss of $1.2 million or $0.06 per diluted share. Turning now to the balance sheet. Cash, cash equivalents, restricted cash and short-term investments totaled $34 million on March 31, 2023, a decrease of $1.7 million compared to December 31, 2022. $400,000 of the cash decrease was driven by share repurchases. $500,000 of the cash decrease was due to annual prepaid items, including corporate insurance.

The balance of the change, or $800,000, was primarily timing related, stemming from changes in our working capital account balances. As a reminder, we announced a plan to repurchase up to $5 million worth of our common stock. The plan is intended to return value to our shareholders without compromising our ability to pursue organic growth or strategic alternatives. During the Q1 of 2023, the company repurchased approximately 304,000 shares for $400,000. In total, we have repurchased approximately 483,000 shares for $600,000. This concludes my summary of our Q1 results, and I'll turn it back to Ralph now.

Ralph Derrickson (President and CEO)

Thank you, Cheryl. While it was great to see Partner Solutions revenue up slightly quarter-over-quarter, we have seen a long-term trend of revenue decline that worsened with the onset of COVID. We anticipate that this trend will continue. Unlike other Microsoft software distributors who also sell hardware, our Partner Solutions revenue is very much tied to the success of Microsoft's Windows IoT operating system in the embedded market and their ability to effectively compete with Linux and Android. Microsoft software distributors who also sell hardware aren't as concerned with which operating system their customer chooses, nor are they as concerned about preserving software margin. Our primary competitive advantage among distributors is our technical expertise and superior business services. We will continue to use these qualities as a differentiator, especially with new customers who need our help configuring the Windows IoT operating systems for new products.

We anticipate the year-over-year Partner Solutions revenue decline will continue. Our immediate objective is to maximize the segment by preserving margins and attempting to minimize revenue decay. The Edge to Cloud segment continues to be a stable source of revenue and contribution margin for us. The bulk of the business derives from a handful of large customers who have long-term contracts with us that generate revenue from a mix of software licensing and professional services. Our SquareOne product was informed by these customers, and we hope in the future to incorporate components of SquareOne into these customers' solution when they're up for renewal or when they're ready to upgrade their systems.

Turning to SquareOne, the shift in positioning to a solution accelerant that we discussed at our last earnings call has broadened the scope of our conversations, allowing us to improve engagement with potential customers and partners. It's important to note that the shift in positioning isn't a shift in business model. The model assumes that revenue will be a mix of non-recurring or NRE software services, software licensing, and potentially operations services. We anticipate the gross margin mix of the SquareOne model will settle above 50%. SquareOne offers a very well-defined set of extensible device management software components that allow us to tailor SquareOne to the unique needs of customers without having to create a new product for each one. Leading with this capability has been the difference in engagement and response from potential customers. Turning now to the business more broadly.

With the headcount reductions we made in December of 2022 and a revenue plan that considers the realities I covered earlier, we are running the company as efficiently as possible. With that as a backdrop, the board and leadership team have been evaluating all options for creating shareholder value. There have been a number of questions recently from shareholders about the options we are contemplating, so let me expand on that to the extent that I can now. Partner Solutions line of business generates cash and could be a valuable complement to the right organization. Our Edge to Cloud and SquareOne lines together could be the basis for a business focused solely on device operations. We could use our cash to make complementary acquisitions that could accelerate revenue growth.

We could make a special dividend, cash dividend to shareholders, but that decision, including the timing and the amount, is a function of the other options we're considering. I don't have anything specific to share today, but I wanted shareholders to know the breadth and extent of the options under consideration. What we are not going to do is to continue to dissipate cash to fund the status quo. None of us came here just to collect a paycheck. We are aggressively pursuing options for organic and inorganic growth. If we can't drive growth, we will seek to return value to shareholders in other ways. Again, I don't have a specific timeline, but I expect it is more likely measured in months and quarters than in years.

In the meantime, we will continue to operate the business as efficiently as possible, like we did in the Q1, as evidenced by our $1 million improvement in loss from operations. Before we take questions, there are a couple of administrative matters to discuss. As you may know, we filed our definitive proxy earlier this month and the annual shareholder meeting will take place at 11:00 A.M. Pacific Daylight Time on June 15th. Of the items to be voted on there are two that I would like to call out. First, we are asking for approval of our proposal to declassify the board of directors. Declassification requires a change to our articles of incorporation. We are asking shareholders to approve the restated articles of incorporation, which combine into a single document, all revisions previously approved by shareholders and the concurrent proposed change to declassify the board.

Declassification is the only substantive change to the articles we are asking for approval. The declassification of directors, if approved, will start next year and will continue with each class over the next three years. The second item I'd like to highlight is the vote on our slate of Class I directors. That includes the re-election of Bob Chamberlain, who also serves as Audit Committee Chair, and the election of Richard Karp, a new director. If passed, Richard will take our director Count-to-6. Other matters to be voted on are well covered in the proxy. I won't take time here. With that, operator, please open the line for questions. While people are signaling to ask questions, please remember that if you'd like to arrange a follow-up conversation, send an email to [email protected].

Operator (participant)

Thank you very much, sir. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star and then two if you would like to remove your question from the queue. Just another reminder, if you'd like to ask a question, please press Star and then one. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the Star keys. One moment please while we pull for questions.

Ladies and gentlemen, just another reminder, if you'd like to ask a question, please press star and then one. If you'd like to ask a question, please press star and then one. We will pause to see if we have questions. Mr. Derrickson, it seems like there are no questions. If it's okay with you, could I hand over to you, for closing remarks, sir?

Ralph Derrickson (President and CEO)

Thank you, operator. Thank you, investors. I really appreciate your time in participating in our call today. We participate your interest. We look forward to seeing you at the annual shareholders meeting in June. Good afternoon.

Operator (participant)

Thank you very much, sir. Ladies and gentlemen, this does conclude today's conference. Thank you very much for joining us. You may now disconnect your line.