BSQUARE Corporation (NASDAQ:BSQR) Q1 2023 Earnings Call Transcript May 11, 2023

Operator: Greetings, and welcome to the Bsquare Corporation First Quarter 2023 Earnings Call. [Operator Instructions] 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, and you may proceed, sir.

Ralph Derrickson: Thank you. Good afternoon, investors, and 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 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 e-mail to investorrelations@bsquare.com. This mailbox is monitored regularly and you will get a response within 1 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 first quarter. 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: Thank you, Ralph, and good afternoon, investors. Today, I’ll be providing an overview of our financial results for the first quarter of 2023. Most of my comparisons will be to the fourth quarter 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 first quarter was approximately $8.1 million, which was an increase of $200,000 or 2% from the fourth quarter. 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 1 additional shipping day in the first quarter compared to the fourth quarter. 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 fourth quarter. 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 fourth quarter.

Of this improvement, $200,000 was due to restructuring charges that were recorded in the fourth quarter and did not recur in the first quarter. 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 fourth quarter of 2022, we incurred professional fees related to the completion of a significant overhaul and upgrade of our website. Also marketing related, in the first quarter, we recognized a larger amount of cooperative rebate dollars from Microsoft as compared to the fourth quarter. 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 fourth quarter 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 $0.01 per diluted share, which was a significant improvement over the fourth quarter 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, and 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 first quarter 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 first quarter results, and I’ll turn it back to Ralph now.

Ralph Derrickson: 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. However, 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. 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 are 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 nonrecurring 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. And if we can’t drive growth, we will seek to return value to shareholders in other ways. Again, I don’t have a specific time line, 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 first quarter 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 15. Of the items to be voted on there, 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. So we are asking shareholders to approve the restated articles of incorporation, which combined 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 1 directors that includes the reelection 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, so 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 e-mail to investorrelations@bsquare.com.

Operator: [Operator Instructions] Mr. Derrickson, it seems like there are no questions. If it’s okay with you, could I hand over to you perhaps for closing remarks, though.

Q&A Session

Ralph Derrickson: Thank you, operator, and thank you, investors. I really appreciate your time and participating in our call today. We participate in your interest, and we look forward to seeing you at the Annual Shareholders Meeting in June. Good afternoon.

Operator: 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 lines.

End of Q&A: