Bsquare Reports Third Quarter 2018 Financial Results

Q3 Revenue $16.7 million; Q3 EPS $(0.16); reduced Opex 21% YoY; initiates CEO search

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Nov 12, 2018, 16:05 ET

BELLEVUE, Wash., Nov. 12, 2018 /PRNewswire/ -- Bsquare Corporation (NASDAQ: BSQR) today announced financial results for the third quarter of 2018.

"Our third quarter financial results reflect progress on a number of fronts," said Kevin Walsh, Acting CEO. "We have reduced operating expenses by removing approximately $6 million in annualized costs from the business over the past two quarters, and we have decreased our quarterly cash usage."

"As we enter 2019, the importance of our IoT services business, as well as strengthening our partnerships with AWS and Microsoft Azure as the industry shifts toward cloud-anchored IoT infrastructure, are key elements of our strategy. As we ramp our IoT services offerings in response to customer demand, we will continue to make targeted investments in DataV; we believe our IoT services business provides an inroad to eventual DataV sales. And, we are also implementing new initiatives in our third-party software business that we believe will allow us to grow this business while complementing our IoT services. Taken together, we believe these changes will result in positioning Bsquare as a trusted IoT solutions provider and will help us return to profitability in the second half of 2019. As a result, the board considers it timely to launch the search for a permanent CEO."

Third Quarter 2018 Financial Highlights

Revenue for the quarter was $16.7 million, down 15.1% compared to the third quarter of 2017 and down 13.1% compared to the second quarter of 2018.
Net loss for the quarter was $2.1 million, or $0.16 per diluted share, compared to a net loss of $2.5 million, or $0.20 per diluted share, in the third quarter of 2017 and a net loss of $3.7 million, or $0.29 per diluted share, in the second quarter of 2018.
Adjusted EBITDAS ⁽¹⁾ was negative $1.7 million, up $0.2 million from the third quarter of 2017 and up $1.9 million from the second quarter of 2018.
Cash, cash equivalents and short-term investments at September 30, 2018 totaled $17.3 million, a decrease of $9.5 million from September 30, 2017 and $0.6 million from June 30, 2018 due to a combination of lower operating expenses and strong cash collections.

Details as follows (unaudited, in thousands except percentages and per share amounts):

	Three Months Ended
	September 30, 2018			September 30, 2017			Q3-Q3 Change ⁽²⁾			June 30, 2018			Q3-Q2 Change ⁽²⁾
Revenue:
Third-party software	$	14,241		$	16,240		$	(1,999)		$	16,992		$	(2,751)
Proprietary software		796			1,200			(404)			281			515
Professional engineering service		1,657			2,213			(556)			1,930			(273)
Total revenue		16,694			19,653			(2,959)			19,203			(2,509)
Total gross profit	$	3,359		$	4,380		$	(1,021)		$	3,261		$	98
Gross margins:
Third-party software		15.7	%		16.1	%		(0.4)	%		14.8	%		0.9	%
Proprietary software		86.1	%		97.2	%		(11.1)	%		64.4	%		21.7	%
Professional engineering service		26.3	%		26.8	%		(0.5)	%		29.4	%		(3.1)	%
Total gross margin		20.1	%		22.3	%		(2.2)	%		17.0	%		3.1	%
Total operating expenses	$	5,491		$	6,926		$	(1,435)		$	6,979		$	(1,488)
Net loss		(2,087)			(2,468)			381			(3,683)			1,596
Per diluted share		(0.16)			(0.20)			0.04			(0.29)			0.13
Adjusted EBITDAS ⁽¹⁾		(1,666)			(1,843)			177			(3,570)			1,904
Cash, cash equivalents and short-term investments	$	17,271		$	26,758		$	(9,487)		$	17,861		$	(590)


Notes:
⁽¹⁾	Adjusted EBITDAS = loss from operations before depreciation, amortization and stock compensation expense. Adjusted EBITDAS is a non-GAAP measurement (reconciliation provided after financial statement tables).
⁽²⁾	For gross margin, amount represents percentage point change.

Financial Commentary on Third Quarter 2018 Results (Compared to Third Quarter 2017)

Third-party software revenue decreased for the quarterly period, primarily due to lower sales of Microsoft Windows Embedded operating systems to Honeywell.
Proprietary software revenue decreased for the quarterly period, primarily due to lower sales of other (non-DataV) proprietary software.
Professional engineering service revenue decreased for the quarterly period, primarily due to the completion of several existing customer projects in 2017.
Operating expenses decreased for the quarterly period, primarily due to lower salaries and related benefits in Selling and General & Administrative expense from spending reductions in fiscal 2018, partially offset by Research and Development investment made in DataV.

Additional DataV Metrics (Including Non-GAAP Measures)

During the third quarter of 2018, we recorded $1.0 million in DataV bookings (a non-GAAP measure defined as the contract value of new agreements signed with customers).
DataV backlog (a non-GAAP measure defined as total DataV bookings less DataV revenue recognized to date and adjustments such as de-bookings) was $6.5 million at both September 30, 2018 and December 31, 2017.
Total deferred revenue at September 30, 2018 was $2.4 million, compared to $3.3 million at December 31, 2017. The September 30, 2018 balance included DataV deferred revenue of $1.9 million. The DataV deferred revenue balances do not represent the total contract value of our DataV agreements.
DataV unbilled deferred revenue (a non-GAAP measure defined as future contract billings that have not been invoiced and, accordingly, are not included in deferred revenue) was approximately $4.6 million at September 30, 2018 and approximately $3.7 million at December 31, 2017.

Bookings, backlog and unbilled deferred revenue are non-GAAP measures. These non-GAAP measures have been included because management believes they provide meaningful information related to our DataV product sales, since revenue from such sales may be recognized in different periods than those in which orders have been received or cash has been collected.

Fourth Quarter 2018 Outlook

Management currently has the following expectations for the fourth quarter of 2018:

Revenue in the range of $15.5 million to $17.5 million.
Blended gross margin in the 18% to 22% range.
Net cash usage of $0.5 million to $1.5 million.

Conference Call

Management will host a conference call today, November 12, 2018, at 5 p.m. Eastern Time (2 p.m. Pacific Time). To access the call dial 1-800-289-0438 or 1-323-794-2423 for international callers, and reference "BSQUARE Corporation Third Quarter 2018 Earnings Conference Call." A replay will be available for two weeks following the call by dialing 1-844-512-2921, or 1-412-317-6671 for international callers; reference pin number 5720283. A live and replay Webcast of the call will be available at www.bsquare.com in the investor relations section.

About Bsquare Corporation

For more than two decades, Bsquare has helped its customers extract business value from a broad array of physical assets by making these assets intelligent, connecting them, and using the data they generate to optimize business processes. Bsquare DataV software solutions can be deployed by a wide variety of enterprises to create business-focused Industrial Internet of Things systems that more effectively monitor device data, automate processes, predict events and produce better business outcomes. Bsquare goes a step further by coupling its purpose-built DataV software with comprehensive analytic and engineering services that help organizations of all types make IIoT a business reality. For more information, visit www.bsquare.com.

Cautionary Note Regarding Forward-Looking Statements

This release contains "forward-looking statements" within the meaning of the safe-harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "expect," "believe," "plan," "strategy," "future," "may," "should," "will," and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding expected operating results in future periods, such as anticipated revenue, gross margins, profitability, cash and investments, and regarding strategies for customer retention, growth, new product and service developments, and market position. Forward-looking statements are neither historical facts nor assurances about future performance. Instead, they are based on current beliefs, expectations and assumptions about the future of our business and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements.

Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others: our ability to execute our development initiatives and sales and marketing strategies around DataV™, the Industrial Internet of Things, and our product and service offerings more generally; the extent to which we are successful in gaining new long-term customers and retaining existing ones; whether we are able to maintain our favorable relationship with Microsoft as a systems integrator and distributor; our success in leveraging strategic partnering initiatives with companies such as Microsoft, AWS and Intel; and such other risk factors as discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Any forward-looking statement made by us in this release is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by law, we undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Bsquare, the Bsquare Logo, and DataV are trademarks of Bsquare Corporation in the U.S. and other countries. Other names and brands herein may be trademarks of others.

BSQUARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)

	September 30, 2018		December 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,392	$	12,859
Short-term investments		5,879		11,895
Accounts receivable, net of allowance for doubtful accounts of $49 and $50 at September 30, 2018 and December 31, 2017, respectively		13,124		18,014
Contract assets		1,030		937
Prepaid expenses and other current assets		677		548
Total current assets		32,102		44,253
Equipment, furniture and leasehold improvements, less accumulated depreciation		1,306		989
Intangible assets, less accumulated amortization		291		365
Goodwill		3,738		3,738
Other non-current assets		211		89
Total assets	$	37,648	$	49,434
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Third-party software fees payable	$	7,882	$	10,547
Accounts payable		329		375
Accrued compensation		2,016		2,266
Other accrued expenses		535		681
Deferred rent		355		339
Deferred revenue		1,627		3,219
Total current liabilities		12,744		17,427
Deferred rent, long-term		247		516
Deferred revenue, long-term		799		61
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par: 10,000,000 shares authorized; no shares issued and outstanding		—		—
Common stock, no par: 37,500,000 shares authorized; 12,747,225 and 12,664,489 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		138,223		137,622
Accumulated other comprehensive loss		(885)		(916)
Accumulated deficit		(113,480)		(105,276)
Total shareholders' equity		23,858		31,430
Total liabilities and shareholders' equity	$	37,648	$	49,434

BSQUARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Revenue:
Third-party software	$	14,241	$	16,240	$	47,297	$	48,542
Proprietary software		796		1,200		2,872		4,335
Professional engineering service		1,657		2,213		6,406		8,465
Total revenue		16,694		19,653		56,575		61,342
Cost of revenue:
Third-party software		12,003		13,619		39,837		40,804
Proprietary software		111		34		252		105
Professional engineering service		1,221		1,620		4,666		5,927
Total cost of revenue		13,335		15,273		44,755		46,836
Gross profit		3,359		4,380		11,820		14,506
Operating expenses:
Selling, general and administrative		3,199		5,338		13,548		15,249
Research and development		2,292		1,588		6,600		4,381
Total operating expenses		5,491		6,926		20,148		19,630
Loss from operations		(2,132)		(2,546)		(8,328)		(5,124)
Other income, net		65		34		156		148
Loss before income taxes		(2,067)		(2,512)		(8,172)		(4,976)
Income tax benefit (expense)		(20)		44		(32)		150
Net loss	$	(2,087)	$	(2,468)	$	(8,204)	$	(4,826)
Basic loss per share	$	(0.16)	$	(0.20)	$	(0.65)	$	(0.38)
Diluted loss per share	$	(0.16)	$	(0.20)	$	(0.65)	$	(0.38)
Shares used in per share calculations:
Basic		12,721		12,607		12,697		12,578
Diluted		12,721		12,607		12,697		12,578

BSQUARE CORPORATION NON-GAAP INFORMATION AND RECONCILIATION TO COMPARABLE GAAP FINANCIAL MEASURES (In thousands, unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Loss from operations as reported	$	(2,132)	$	(2,546)	$	(8,328)	$	(5,124)
Depreciation and amortization		161		163		466		483
Stock-based compensation		305		540		620		1,350
Adjusted EBITDAS⁽¹⁾	$	(1,666)	$	(1,843)	$	(7,242)	$	(3,291)

⁽¹⁾

Adjusted 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. Adjusted EBITDAS is defined as income (loss) from operations before depreciation expense on fixed assets and amortization expense (including impairment) on intangible assets, and stock-based compensation expense. Adjusted EBITDAS should not be construed as a substitute for net income (loss) or net cash provided (used) by operating activities (all as determined in accordance with GAAP) for the purpose of analyzing our operating performance, financial position and cash flows, as Adjusted EBITDAS is not defined by GAAP. However, BSQUARE regards Adjusted EBITDAS as a complement to net income and other GAAP financial performance measures, including an indirect measure of operating cash flow.

SOURCE Bsquare