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Bsquare Reports Third Quarter 2009 Results
(Market Wire Via Acquire Media NewsEdge) BELLEVUE, WA -- (MARKET WIRE) -- 11/05/09 --
Bsquare Corporation (NASDAQ: BSQR) today
announced financial results for the third quarter and the nine months ended
September 30, 2009. Total revenue for the quarter was $16.4 million, up 1%
from $16.2 million in the prior year. Total revenue for the first nine
months of 2009 was $49.2 million, up 1% from $48.7 million in 2008.
The Company reported net income for the quarter of $71,000, or $0.01 per
diluted share, down from the prior year in which the Company reported net
income of $1.1 million, or $0.11 per diluted share. The current quarter
benefited from the reversal of an accrued legal fees liability of $534,000,
or $0.05 per diluted share, as a result of the Court's final approval of a
settlement agreement in the Company's class action securities litigation,
whereas the year-ago quarter benefited from a $300,000 patent sale, or
$0.03 per diluted share. For the first nine months of 2009, the Company
reported net income of $329,000, or $0.03 per diluted share, compared to
net income of $2.3 million, or $0.23 per diluted share, in 2008. TestQuest
results negatively affected the bottom-line for the quarter in the amount
of $441,000, or $0.04 per diluted share, and $967,000, or $0.09 per diluted
share, for the first nine months of 2009 (no effect in prior year).
The Company's EBITDAS (earnings before interest, taxes, depreciation,
amortization and stock compensation expense) was $477,000 for the quarter,
the 12th consecutive positive quarter, compared to $1.6 million in the
prior year. The Company's EBITDAS was $1.5 million for the first nine
months of 2009, compared to $3.7 million in the prior year.
Brian Crowley, Bsquare's chief executive officer, commented on the third
quarter's results, "Operating results were mixed and came in under our
expectations; primarily due to difficulties we encountered closing
TestQuest sales in the quarter and overruns we experienced on the Ford
program. Regarding the Ford program, we are in a critical stage of the
program and in our efforts to support Ford's release schedule, we expended,
and expect to expend, more time than we anticipated which negatively
impacted our results. We are currently in discussion with Ford to modify
our fee agreement to cover the additional time but there can be no
guarantees that we will be successful. On a positive note, our efforts to
boost third-party software sales bore positive results in the quarter as
our sales were up sequentially which ended several consecutive quarters of
declines."
Key Results, Achievements and Events
Recently, the Company:
-- Entered into a distribution agreement with Microsoft Corp. under which
Bsquare will become the first distributor of the Windows Mobile family of
operating systems. Bsquare will sell Windows Mobile internationally, along
with the Company's Windows Mobile-related product and service offerings;
-- Was named Enterprise Partner of the Year at the Microsoft Windows
Embedded Channel Summit in the POS/Kiosk/ATM category for its innovative
work with the Coca-Cola® Freestyle® soda-dispensing machine built on
the Windows Embedded CE platform;
-- Delivered the first Windows embedded CE 6.0 R3 Board Support Package
for the Texas Instruments OMAP(TM) 3 platform;
-- Announced it will distribute McAfee Embedded Security(TM) software
formerly sold by Bsquare as Solidcore S3 Control Embedded. Bsquare will
continue to add value to Bsquare's OEM customers with this offering, while
benefiting from the global brand recognition and resources offered by
McAfee;
-- Extended Bsquare's TestQuest automated testing solution to provide
support for the S60 platform allowing TestQuest to be used with devices
from manufacturers including Nokia, Samsung and Sony Ericsson; and
-- Became an Authorized Reseller of Microsoft's Visual Studio 2008
Professional Edition with MSDN Embedded subscriptions and renewals, a new
product offering within Microsoft's MSDN subscription program.
Revenue Results
Sales of third-party software were $8.9 million for the quarter compared to
$7.9 million in the prior year, representing an increase of 13%. The
increase was attributable to growth in Microsoft licensing revenue driven
by an increase in average sales per customer, and to a $640,000 Flash
licensing sale. Third-party software sales were $22.9 million for the first
nine months of 2009 compared to $27.0 million in 2008. A decrease in
Microsoft license sales drove the nine-month decrease, which resulted from
a drop in customer order volumes attributable to the economic slowdown in
the first six months of this year, and the effect of a one-time $1.3
million order that benefited the first quarter of 2008.
Proprietary software revenue was $947,000 for the quarter compared to
$831,000 in the prior year, representing an increase of 14%. TestQuest
product and support revenue of $273,000, compared to none in the prior
year, drove the increase. Proprietary software revenue was $3.1 million for
the first nine months of 2009 compared to $2.4 million in 2008. TestQuest
product and support revenue of $1.3 million, compared to none in the prior
year, drove the nine-month increase, which was partly offset by a $752,000
decline in service contract royalties.
Commenting on software sales for the quarter, Mr. Crowley said, "I was very
happy to see the sequential increase in third-party software sales this
quarter, particularly Microsoft licensing. This has been the area of our
business most affected by the economy and I'm hoping this is a precursor of
better things to come. I was very disappointed in our TestQuest product
sales this quarter. We entered the quarter expecting a modest sequential
increase, but instead we saw a substantial decline in license sales. After
analyzing the shortfall, I am convinced that the market opportunity for the
product remains strong, and that the shortfall is attributable to a
combination of challenging economic conditions and several sales execution
issues that we have identified and are addressing."
Service revenue was $6.5 million for the quarter, down 13% compared to $7.5
million in the prior year driven by declines in both North America and Asia
Pacific (APAC) service revenue. The Ford project accounted for $3.3 million
in service revenue in the quarter, compared to $2.5 million in the prior
year. Despite the increase in Ford service revenue, total North America
service revenue declined 10% year-over-year due largely to macro economic
conditions, which drove a 17% decline in project count and a 16% decline in
customer count. Further, revenue from one historically large customer fell
$663,000 compared to the year-ago quarter. In the second quarter of 2009,
the Company modified its project fee structure with Ford from straight
time-and-materials to time-and-materials with a cap and, consequently,
modified its accounting method for the remainder of the project to
percentage-of-completion accounting. During the quarter, the Company
experienced, and expects to experience, significant project overruns on the
Ford project, which had the effect of reducing recognized revenue on a
percent complete basis. The project overruns also had a significant
negative impact on service gross profit and gross margin in the quarter.
APAC service revenue declined $307,000, or 36%, year-over-year due to poor
economic conditions. Service revenue increased 20% to $23.2 million for the
first nine months of 2009 compared to $19.3 million in 2008 driven by the
Ford project. Ford service revenue was $13.6 million for the first nine
months of 2009, compared to $2.7 million in 2008.
"I was pleased with the roughly $500,000 sequential increase in our APAC
service revenue. Our APAC service revenue has been particularly hard-hit
by the economic downturn and it is encouraging to see signs of recovery as
customers look to start new device projects," continued Mr. Crowley.
"Unfortunately, the positive impact from APAC was offset by
lower-than-expected Ford revenue due to the overruns. As I mentioned
earlier, we are in dialogue with Ford to obtain additional funds to account
for the extra resources we have applied to the program. Any additional
funds would benefit revenue in Q4 and for the remainder of the project."
Gross Profit and Gross Margin Results
Overall gross profit was $3.4 million for the quarter, or 21% of total
revenue, as compared to $4.4 million, or 27% of total revenue, in the prior
year, with the gross profit decline attributable to a $1.4 million decline
in service gross profit due largely to the Ford project. The overall gross
margin decline was driven by a 16 percentage point decline in service gross
margin. Third-party software margin was 17% for the quarter compared to 15%
in the prior year. Proprietary software gross margin was 84% this quarter,
down from 97% in the prior year due to amortization of intangible assets
associated with the TestQuest acquisition. Service gross margin was 17% for
the quarter, compared to 33% in the prior year. The service gross margin
decline was primarily attributable to the Ford project overruns. Overall
gross profit was $12.2 million, or 25% of total revenue, for the first nine
months of 2009 compared to $12.7 million, or 26% of total revenue, in 2008.
The decline in overall gross profit and margin for the nine-month period
was driven by the same factors impacting this quarter.
Operating Expenses
Total operating expenses were $3.3 million for the quarter compared to $3.6
million in the prior year. This quarter's operating expenses benefited
from the reversal of an accrued legal fees liability in the amount of
$534,000, without which operating expenses would have increased $238,000.
TestQuest-related operating expenses of $589,000, compared to no related
expense in the prior year, accounted for the increase, offset in part by a
decline in selling, general and administrative expense. Total operating
expenses were $12.0 million for the first nine months of 2009 as compared
to $10.8 million in 2008. TestQuest-related operating expenses of $1.9
million drove the increase, partly offset by the reversal of the accrued
legal fees liability. Scott Mahan, Bsquare's chief financial officer,
commented on operating expenses, "This quarter benefited from the reversal
of our securities class action legal reserve. On October 6, 2009, the
Court approved final settlement of this litigation, which has been ongoing
since 2001, at which point we determined the legal liability was no longer
probable as of September 30, 2009, and therefore, no longer necessary.
Under the settlement, the Company itself bears no financial obligation;
rather, the Company's insurers will pay all costs. While the settlement is
subject to appeal, we have no reason to believe that our ultimate financial
obligation would be impacted materially as a result of the appeals
process."
Cash and Investments
The Company's cash, cash equivalents and investments, both short and
long-term, increased by $3.8 million to $15.6 million at September 30,
2009, as compared to $11.8 million at June 30, 2009 ($900,000 of the
September 30 and June 30 balances were restricted). The increase was
driven largely by the collection of $4.1 million in accounts receivable
from Ford which were past due as of June 30, 2009.
Conference Call
Management will host a conference call today, November 5, 2009, at 5 p.m.
Eastern Time (2 p.m. Pacific Time). To access the call, please dial
877-941-1428, or 480-629-9665 for international callers, and reference
"BSQUARE Corporation Third Quarter 2009 Earnings Conference Call." A replay
will be available for one week following the call by dialing 800-406-7325
or
303-590-3030 for international callers; reference pin number 4173762. A
live and replay webcast of the call will be available at www.bsquare.com in
the investor relations section.
About Bsquare
Bsquare is an industry leader with a proven track record in providing
production-ready software products and engineering services to the smart
device market. For more information, visit www.bsquare.com.
BSQUARE is a registered trademark of BSQUARE Corporation. All other product
and company names herein may be 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, without limitation, statements relating to our projected
financial results, future and potential sales, or projects, expected
results of our negotiations with Ford, and expectations for our TestQuest
products. All of the statements contained herein that do not relate to
matters of historical fact should be considered forward-looking statements.
Forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from such statements. There can be no
assurance that forward-looking statements will be achieved. Important
factors that could cause actual results to differ materially from those
indicated in forward-looking statements include: whether we are able to
maintain our existing favorable relationships with Microsoft Corporation
and Ford Motor Company; risks, uncertainties and changes in financial
condition; our ability to execute our product strategies for TestQuest and
other products; intellectual property risks; and risks associated with our
international operations. Therefore, all forward-looking statements should
be considered in light of various important factors including, but not
limited to, the risks and uncertainties listed above. The Company makes no
commitment to revise or update any forward-looking statements in order to
reflect events or circumstances after the date any such statement is made.
Please also refer to the Company's most recent Quarterly Report on Form
10-Q, Annual Report on Form 10-K and other filings with the SEC for other
important risk factors that could cause actual results to differ materially
from those indicated in any forward-looking statements.
BSQUARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September December
30, 2009 31, 2008
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,475 $ 7,703
Accounts receivable, net of allowance for
doubtful accounts of $195 at September 30,
2009 and $198 at December 31, 2008 12,092 10,726
Prepaid expenses and other current assets 675 703
----------- -----------
Total current assets 23,242 19,132
Long-term investments 4,199 4,679
Equipment, furniture and leasehold improvements,
net 796 981
Intangible assets, net 1,639 1,975
Restricted cash 900 900
Other non-current assets 90 91
----------- -----------
Total assets $ 30,866 $ 27,758
=========== ===========
LIABILITIES AND SHAREHOLDERS? EQUITY
Current liabilities:
Accounts payable $ 3,046 $ 2,925
Other accrued expenses 4,242 3,057
Accrued compensation 1,592 1,636
Accrued legal fees -- 534
Deferred revenue 1,492 355
----------- -----------
Total current liabilities 10,372 8,507
Deferred rent 329 309
Shareholders? equity:
Preferred stock, no par value: 10,000,000
shares authorized; no shares issued and
outstanding -- --
Common stock, no par value: 37,500,000 shares
authorized; 10,135,096 shares issued and
outstanding at September 30, 2009 and
10,082,654 shares issued and outstanding at
December 31, 2008 123,292 122,660
Accumulated other comprehensive loss (786) (1,048)
Accumulated deficit (102,341) (102,670)
----------- -----------
Total shareholders? equity 20,165 18,942
----------- -----------
Total liabilities and shareholders? equity $ 30,866 $ 27,758
=========== ===========
BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2009 2008 2009 2008(2)
-------- -------- -------- --------
Revenue:
Software $ 9,876 $ 8,716 $ 25,999 $ 29,392
Service 6,523 7,486 23,191 19,294
-------- -------- -------- --------
Total revenue 16,399 16,202 49,190 48,686
-------- -------- -------- --------
Cost of revenue:
Software 7,561 6,747 19,598 22,983
Service (1) 5,436 5,022 17,353 13,008
-------- -------- -------- --------
Total cost of revenue 12,997 11,769 36,951 35,991
-------- -------- -------- --------
Gross profit 3,402 4,433 12,239 12,695
Operating expenses:
Selling, general and
administrative (1) 2,426 3,006 8,821 8,998
Research and development (1) 906 622 3,208 1,827
-------- -------- -------- --------
Total operating expenses 3,332 3,628 12,029 10,825
Gain on sale of
patents -- 300 -- 300
-------- -------- -------- --------
Income from operations 70 1,105 210 2,170
Interest and other income, net 22 58 126 306
-------- -------- -------- --------
Income before income taxes 92 1,163 336 2,476
Income tax expense (21) (16) (7) (143)
-------- -------- -------- --------
Net income $ 71 $ 1,147 $ 329 $ 2,333
======== ======== ======== ========
Basic income per share $ 0.01 $ 0.11 $ 0.03 $ 0.23
======== ======== ======== ========
Diluted income per share $ 0.01 $ 0.11 $ 0.03 $ 0.23
======== ======== ======== ========
Shares used in calculation of
income per share:
Basic 10,126 10,039 10,108 10,009
======== ======== ======== ========
Diluted 10,265 10,103 10,244 10,251
======== ======== ======== ========
(1) Includes the following amounts related to non-cash stock-based
compensation expense:
Cost of revenue - service $ 68 $ 94 $ 210 $ 321
Selling, general and administrative 107 250 389 717
Research and development 10 14 23 59
-------- -------- -------- --------
Total stock-based compensation expense $ 185 $ 358 $ 622 $ 1,097
======== ======== ======== ========
(2) Restated. See Item 1 of Part I, ?Financial Statements ? Note 8 ?
Restatement of Financial Information (Unaudited) of our September 30,
2009 Quarterly Report on Form 10-Q, for related discussion.
BSQUARE CORPORATION
NON-GAAP INFORMATION AND RECONCILIATION TO COMPARABLE
GAAP FINANCIAL MEASURES
(In thousands) (Unaudited)
Three months Nine months
ended September ended September
30, 30,
---------------- ----------------
2009 2008 2009 2008(2)
------- ------- ------- -------
EBITDAS:
Net income (loss) as reported (3) $ 71 $ 1,147 $ 329 $ 2,333
Income tax (benefit) / expense 21 16 7 143
Interest and other income (22) (58) (126) (306)
Depreciation and amortization 222 138 705 403
Stock-based compensation expense 185 358 622 1,097
------- ------- ------- -------
EBITDAS (1) $ 477 $ 1,601 $ 1,537 $ 3,670
======= ======= ======= =======
(1) EBITDAS is a non-GAAP financial measure. Generally, a non-GAAP
financial measure is a numerical measure of a company's performance,
financial position or cash flow that either excludes or includes
amounts that are not normally excluded or included in the most directly
comparable measure calculated and presented in accordance with GAAP.
EBITDAS is defined as net income (loss) before income taxes, interest
income, depreciation and amortization, and stock-based compensation.
EBITDAS should not be construed as a substitute for net income (loss)
or net cash provided by (used in) operating activities (all as
determined in accordance with GAAP) for the purpose of analyzing our
operating performance, financial position and cash flows, as EBITDAS
is not defined by GAAP. However, the Company regards EBITDAS as a
complement to net income and other GAAP financial performance measures,
including as an indirect measure of operating cash flow.
(2) Restated. See Item 1 of Part I, ?Financial Statements ? Note 8 ?
Restatement of Financial Information (Unaudited) of our September 30,
2009 Quarterly Report on Form 10-Q, for related discussion.
(3) Net income as reported included the benefit of a non-cash $534,000
reversal of a legal fees accrual during the three and nine months ended
September 30, 2009, and a $300,000 gain on the sale of patents during
the three and nine months ended September 30, 2008.
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