Bsquare (NASDAQ:BSQRD)
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BSQUARE Corporation (Nasdaq:BSQRD), a leading provider
of embedded software solutions, today announced financial results for
the third quarter and nine months ended September 30, 2005.
For the third quarter of 2005, BSQUARE reported total revenue of
$10.1 million, a decrease of 4% from the $10.6 million reported during
the third quarter of 2004, and a 2% decrease from the $10.3 million
reported in the second quarter of 2005. The third quarter of 2004
included $2.3 million in sales to Cardinal Healthcare compared to none
for the current quarter. Sales to new and existing customers other
than Cardinal increased 23% year-over-year. Cardinal was the company's
most significant customer in 2004, representing 19% of total revenue.
As previously announced, Cardinal began purchasing from a competitor
in the second quarter of 2005. The second quarter of 2005 included
$525,000 in revenue from an OEM for previously unreported royalties.
Total revenue for the nine months ended September 30, 2005 was
$30.2 million, which included $828,000 in sales to Cardinal, compared
to $30.0 million during the first nine months of 2004, which included
$6.0 million in sales to Cardinal, representing a 22% year-over-year
increase in revenue generated from customers other than Cardinal.
The company reported a net loss for the quarter of $469,000, or
$0.05 per diluted share, compared to net income of $208,000, or $0.02
per diluted share, in the third quarter of 2004, which included income
of $169,000 from discontinued operations. The company reported a net
loss of $37,000, or break-even on an earnings per share basis, in the
second quarter of 2005. For the nine months ended September 30, 2005,
the company reported a net loss of $1.1 million, or $0.11 per diluted
share, compared to a net loss of $7.1 million, or $0.75 per diluted
share, in the first nine months of 2004, which included a loss from
discontinued operations of $6.3 million (all EPS amounts are
split-adjusted).
Key Results, Achievements and Events:
-- Service revenue increased to $2.9 million this quarter which
represented the second consecutive quarterly increase, and was
up 21% year-over-year and 18% sequentially. This increase came
as a result of improved sales execution;
-- Service gross margin was 30% for the quarter, up from 23% in
the second quarter of 2005 and 24% in the third quarter of
2004. Increased service revenue and improved personnel
utilization contributed to the increase;
-- The company renewed its Original Equipment Manufacturer
distribution agreement with Microsoft to provide OEMs with
Microsoft Windows Embedded operating systems;
-- The company announced the availability of SDIO Now! for Linux.
This announcement is significant as BSQUARE has historically
only provided its SDIO Now! product for devices running
Windows CE and Windows Mobile operating systems and now with a
Linux-based product available, it increases the addressable
market;
-- The company continued development of its next generation
reference designs that will serve the wireless, handheld and
portable media player markets. During the quarter, the company
began sales and marketing activities around these products and
has started to build a customer pipeline; and
-- The company's Board of Directors approved a one-for-four
reverse stock split of BSQUARE's common stock effective
October 7, 2005. Consequently, the total number of shares
outstanding was reduced to approximately 9.5 million. As a
result, the company's common stock closed above $1 for more
than 10 consecutive trading days and on October 24, 2005, the
company was notified by Nasdaq that it regained compliance
with the $1 minimum bid price continued listing requirement
set forth in Marketplace Rule 4450(a)(5) and is not currently
subject to delisting from The Nasdaq National Market.
"Revenue during the quarter was in-line to slightly better than
our internal projections. We expected some softness in sales of
third-party and proprietary software and were pleased to see the
continued progress in our service revenue line," said Brian Crowley,
president and chief executive officer of BSQUARE. "We were also
satisfied with the progress made in our product initiatives. We
expanded our SDIO Now! product line this quarter, including the
announcement of our product for Linux, and we are beginning to build a
pipeline for our reference designs, including the Portable Media
Player design, which will create additional revenue opportunities as
we more firmly entrench ourselves in the high growth area of portable
consumer electronic devices."
Revenue Overview
Software revenue for the quarter was $7.2 million (71% of total
revenue), including $6.7 million in sales of third-party software
products, primarily Microsoft Embedded operating systems. This
compared to software revenue of $8.1 million in the third quarter of
2004 and $7.8 million in the second quarter of 2005, which included
$7.5 million and $6.9 million in sales of third-party software,
respectively. Cardinal accounted for $2.3 million in third-party
software sales in the third quarter of 2004 (Cardinal sales were
negligible in the second and third quarters of 2005). Excluding sales
to Cardinal, third-party software revenue in the third quarter of 2005
increased 29% compared to the third quarter of 2004 and was off
slightly from the second quarter of 2005. The year-over-year increase
was due primarily to sales growth within the company's top-10 accounts
other than Cardinal.
Proprietary software revenue was $491,000 for the quarter,
compared to $635,000 in the third quarter of 2004 and $970,000 in the
second quarter of 2005. Lower sales of the company's SDIO Now! product
accounted for the decrease as compared to the third quarter of 2004,
whereas lower SDIO Now! revenue and the $300,000 OEM royalty
settlement in the second quarter of 2005 accounted for the sequential
decrease.
Service revenue for the quarter was $2.9 million, compared to $2.4
million in the third quarter of 2004 and $2.5 million in the second
quarter of 2005. The increase in quarterly service revenue
year-over-year and sequentially was attributable to higher activity
levels driven by sales improvements and improved personnel
utilization. Billable hours increased by 41% sequentially and by a
similar amount over the prior year. The company worked on 61 projects
during the quarter, up 17% over the second quarter of 2005. The
realized rate per hour was down about 10% compared to the second
quarter of 2005, predominantly driven by the impacts of revenue
recognition and the structure of certain contracts.
"We are particularly happy with the increase in service revenue
during the quarter, as this has been a key management focus,"
commented Crowley. "Based on sales activity levels, backlog and a
strong start in October, we expect to see increases in all revenue
lines such that we expect to see overall sequential top-line growth of
10-15% in the fourth quarter."
Gross Profit Margin Overview
Overall gross profit was $2.3 million, or 22.3% of total revenue,
for the quarter, compared to $2.3 million, or 21.8%, in the third
quarter of 2004 and $2.5 million, or 24.5%, in the second quarter of
2005.
Software gross margin was 19.2% of software revenue for the
quarter, compared to 21.3% for the third quarter of 2004 and 24.9% for
the second quarter of 2005. Overall, software margins were down due to
a lower mix of high-margin proprietary software revenue compared to
prior quarters. In particular, the second quarter of 2005 included
$300,000 in revenue from an OEM royalty settlement. Third-party
software margin was approximately 14.2% of software revenue this
quarter, flat compared to the prior (sequential) quarter and down
slightly from the 14.6% reported for the third quarter of last year.
Service gross margin was 29.9% of service revenue this quarter,
compared to 23.5% in the third quarter of 2004 and 23.3% in the second
quarter of 2005.
Scott Mahan, BSQUARE's chief financial officer, commented, "We
were pleased to see the margin leverage on service revenue materialize
this quarter. We continue to drive toward our goal of increasing
service margin to 35% and higher on a quarterly basis as well as
increase our overall margin, both as a percentage and in dollars,
through growth in high-margin proprietary software revenue. As these
initiatives begin to take hold, they should start to yield incremental
bottom-line impact."
Operating Expenses Overview
During the quarter, operating expenses were $2.8 million, compared
to $2.4 million in the third quarter of 2004 and $2.6 million in the
second quarter of 2005. When compared to the second quarter of 2005,
approximately half of the increase in operating expenses came as a
result of increased expenses associated with the Vibren acquisition,
which closed on June 30, 2005, while the remainder came from a slight,
but expected, increase in research and development expenses and
increased professional fees and recruiting expenses. The increase in
operating expenses this quarter, as compared to the third quarter of
2004, was driven by a 112% increase in research and development
expense to support the company's proprietary product development
efforts coupled with the expense increases outlined previously.
Mahan commented, "Operating expense trends continue to be in line
with previously set expectations. We increased R&D expense prudently
this quarter and also saw the expected increase in operating expenses
stemming from the Vibren acquisition."
Cash Flows Overview
The company's cash and cash equivalents and short-term investments
declined from $11.8 million at June 30, 2005 to $10.2 million at
September 30, 2005, of which $1.2 million is restricted. This decrease
was driven by the timing of sales of Microsoft embedded operating
systems during the quarter. "As we have mentioned previously, our cash
flows and working capital are extremely sensitive to the timing of
Microsoft Embedded operating systems sales within the quarter due to
collection patterns and the timing of royalty payments to Microsoft.
This quarter was particularly emblematic of that sensitivity. Our
August and September sales were the lowest and highest on record for
some time, respectively. This created a $1.7 million increase in
quarter-end receivables with no corresponding offset in our royalties
payable to Microsoft. We do expect to see an improvement in our cash
position next quarter as we collect on these receivables," Mahan
noted.
Conference Call
Management plans to host a conference call today, Thursday,
November 3 at 5 p.m. Eastern Time (2 p.m. Pacific Time). To access the
call, please dial 1-800-936-9754 or 1-973-935-2048. A replay will be
available for one week following the call by dialing 1-877-519-4471 or
1-973-341-3080; reference conference ID 6646802. A live and replay
webcast of the call will be available at www.BSQUARE.com in the
investor relations section. The web cast may also be accessed at
ViaVid's website at www.viavid.net. The web cast can be accessed until
December 3, 2005 on either site. To access the web cast, you will need
to have the Windows Media Player on your desktop. For the free
download of the Media Player please visit:
http://www.microsoft.com/windows/windowsmedia/en/download/default.asp.
About BSQUARE
BSQUARE is a solution provider to the global embedded device
community. Committed to delivering quality, lowering project risk and
time to market, our teams collaborate with smart device makers at any
stage in their device development. Our solution portfolio includes
software and hardware development, systems integration services,
reference designs, board support packages, middleware, and
applications. As a full service provider, device makers can also
license best-in-class software products and operating systems. Since
1994, BSQUARE has completed hundreds of successful projects and has
become a trusted partner to smart device makers worldwide. For more
information about BSQUARE, visit its website at www.bsquare.com.
BSQUARE is a registered trademark of BSQUARE Corporation. Other
product or service names mentioned herein are the trademarks of their
respective owners.
This release contains forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, including statements relating to our
projected financial results, stock performance, business development
and proprietary products strategy. The words "believe," "expect,"
"intend," "anticipate," "presume," variations of such words, and
similar expressions identify forward-looking statements, but their
absence does not mean that the statement is not forward-looking. Our
forward-looking statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that
are difficult to predict and could cause actual results to differ
materially from those projected. Factors that could affect our actual
results include a decline in the market for our products, technology
licenses and services; a decline in the market for Windows-based or
other smart devices or the failure of this market to develop as
anticipated; adverse changes in macro-economic conditions; our ability
to successfully implement, execute and make adjustments in our
business strategy, business model or product offerings to meet the
needs of our current, new and potential customers; risks associated
with the effects of our restructurings; our ability to successfully
support our operations; competition; and intellectual property risks.
A more detailed description of certain factors that could affect
actual results include, but are not limited to, those discussed in
BSQUARE's Quarterly Report on Form 10-Q for the period ended June 30,
2005 in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect
Future Results." Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of
this release. We undertake no obligation to update publicly any
forward-looking statements to reflect new information, events or
circumstances after the date of this release or to reflect the
occurrence of unanticipated events.
-0-
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BSQUARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September December
30, 31,
2005 2004
--------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $7,199 $4,943
Short-term investments 1,794 6,800
Accounts receivable, net 7,737 4,841
Inventories 55 --
Prepaid expenses and other current assets 528 563
--------------------
Total current assets 17,313 17,147
Furniture, equipment and leasehold improvements,
net 755 784
Intangible assets, net 355 --
Restricted cash 1,200 1,200
Other non-current assets 54 --
--------------------
Total assets $19,677 $19,131
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,569 $1,340
Accrued compensation 980 878
Accrued legal fees 535 534
Other accrued expenses 3,754 2,880
Customer deposits and deferred revenue 787 390
--------------------
Total current liabilities 7,625 6,022
Deferred rent 362 375
Shareholders' equity(1):
Preferred stock, no par value: authorized
10,000,000 shares; no shares issued and
outstanding -- --
Common stock, no par value: authorized 37,500,000
shares; issued and outstanding, 9,543,436 shares
as of September 30, 2005 and 9,533,082 shares as
of December 31, 2004 118,383 118,350
Accumulated other comprehensive loss (432) (406)
Accumulated deficit (106,261)(105,210)
--------------------
Total shareholders' equity 11,690 12,734
--------------------
Total liabilities and shareholders' equity $19,677 $19,131
====================
(1) All share information has been adjusted to reflect the reverse
stock split effective October 7, 2005.
BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------------------
2005 2004 2005 2004
------------------------------
(unaudited) (unaudited)
Revenue:
Software $7,158 $8,138 $22,432 $21,840
Service 2,938 2,431 7,795 8,150
------------------------------
Total revenue 10,096 10,569 30,227 29,990
Cost of revenue:
Software 5,783 6,407 17,552 16,960
Service 2,059 1,859 5,988 6,097
------------------------------
Total cost of revenue 7,842 8,266 23,540 23,057
------------------------------
Gross profit 2,254 2,303 6,687 6,933
Operating expenses:
Selling, general and administrative 2,305 2,119 6,563 7,319
Research and development 493 234 1,326 579
Restructuring and related charges -- -- -- 40
------------------------------
Total operating expenses 2,798 2,353 7,889 7,938
------------------------------
Loss from operations (544) (50) (1,202) (1,005)
Other income, net 75 89 217 187
------------------------------
Income (loss) before income taxes (469) 39 (985) (818)
Income tax provision -- -- (66) --
------------------------------
Income (loss) from continuing operations (469) 39 (1,051) (818)
Income (loss) from discontinued
operations -- 169 -- (6,310)
------------------------------
Net income (loss) $(469) $208 $(1,051)$(7,128)
==============================
Basic and diluted income (loss) per
share (1):
Income (loss) from continuing
operations $(0.05) $0.00 $(0.11) $(0.09)
Income (loss) from discontinued
operations 0.00 0.02 -- (0.66)
------------------------------
Basic and diluted income (loss) per
share $(0.05) $0.02 $(0.11) $(0.75)
==============================
Shares used in calculation of income
(loss) per share (1):
Basic 9,542 9,483 9,538 9,449
Diluted 9,542 9,591 9,538 9,449
(1) All share information has been adjusted to reflect the reverse
stock split effective October 7, 2005.
*T