Bsquare Reports Third Quarter and Nine Months YTD 2015 Results

Third Quarter Net Income $1.2 million; EPS $0.10

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Nov 12, 2015, 04:10 ET

BELLEVUE, Wash., Nov. 12, 2015 /PRNewswire/ -- Bsquare (NASDAQ: BSQR) today announced financial results for the third quarter and first nine months of 2015.

Third Quarter 2015 Financial Highlights

Revenue was $26.4 million, an 8% decrease compared to the second quarter of 2015 and an 8% increase over the third quarter of 2014.
Net income was $1.2 million, or $0.10 per share, compared to $1.9 million, or $0.15 per share, in the second quarter of 2015 and $0.7 million, or $0.06 per share, in the year-ago quarter.
Adjusted EBITDAS* was $2.0 million, a decrease of $341,000 from $2.3 million in the second quarter of 2015, and an increase of $872,000 compared to $1.1 million in the year-ago quarter.
Cash and investments at September 30, 2015 were $29.6 million, a decrease of $0.1 million from June 30, 2015.

Details as follows (unaudited, in 000's except per share amounts):

	Three Months Ended
	9/30/2015			6/30/2015			9/30/2014
Revenue:
Third-party Software	$	20,790		$	23,316		$	19,217
Engineering Services		5,220			5,197			4,767
Proprietary Software		425			360			551
Total Revenue		26,435			28,873			24,535
Total Gross Profit		4,873			5,232			3,963
Gross Margins:
Third-party Software		15	%		15	%		14	%
Engineering Services		26	%		29	%		20	%
Proprietary Software		74	%		64	%		74	%
Total Gross Margin		18	%		18	%		16	%
Total Operating Expenses		3,486			3,361			3,240
Net Income	$	1,245		$	1,885		$	691
Per Share-Diluted	$	0.10		$	0.15		$	0.06
Adjusted EBITDAS*	$	1,977		$	2,318		$	1,105
Cash and Investments EoQ**	$	29,561		$	29,680		$	25,471

Notes:

*Adjusted EBITDAS = Operating income (loss) before depreciation, amortization and stock compensation expense. Adjusted EBITDAS is a non-GAAP measurement (reconciliation provided after financial statement tables).

**Cash and Investments EoQ includes both short and long-term amounts (long-term at each date above was $250,000).

CEO Commentary

Jerry Chase, President and CEO of Bsquare, commented, "Our results in the third quarter showed year-over-year improvements in financial performance and were the result of continued focus and execution on our core businesses. Revenue and profits were down on a sequential quarterly basis as a result of a very strong second quarter that included the effects of Microsoft fiscal year-end sales incentives. During the third quarter we made progress developing our new DataV^TMIoT product and as a result made additional operational investments including expanded marketing initiatives and the hiring of additional sales personnel."

Financial Commentary on Third Quarter 2015 Results (Compared to Second Quarter 2015)

Revenue from third-party software was $20.8 million, a decrease of 11% from $23.3 million in the second quarter of 2015, due primarily to Microsoft June 30 fiscal year-end sales incentives which positively impacted second quarter revenue.
Engineering services revenue was essentially flat at $5.2 million, while engineering services margin decreased by three percentage points to 26%. The margin decrease resulted from higher than planned labor hours required on a large project.
The decrease in cash and investments of $0.1 million was primarily due to an increase in accounts receivable and a decrease in third-party software fees payable, which reduced cash balances by more than the positive Adjusted EBITDAS contribution of $2.0 million. Days sales outstanding (DSO) increased to 54 days at September 30, 2015, from 47 days at June 30, 2015 and 49 days at December 31, 2014. The DSO increase is a result of extended payment terms granted to a Fortune 100 customer.

Nine Months 2015 Financial Highlights

Revenue was $81.6 million, a 16% increase compared to $70.3 million for the year-ago period, driven primarily by increased software revenue.
Net income was $5.0 million or $0.40 per share, a $4.0 million increase compared to net income of $0.9 million or $0.08 per share in the first nine months of 2014. Increased software revenue, higher margins and lower operating costs all contributed to this improvement.
Adjusted EBITDAS* was $6.6 million, an increase of $4.2 million compared to $2.4 million in the year-ago period.

Details as follows (unaudited, in 000's except per share amounts):

	Nine Months Ended
	9/30/2015			9/30/2014
Revenue:
Third-party Software	$	63,914		$	53,877
Engineering Services		14,894			14,690
Proprietary Software		2,765			1,754
Total Revenue		81,573			70,321
Total Gross Profit		15,554			11,763
Gross Margins:
Third-party Software		15	%		13	%
Engineering Services		24	%		23	%
Proprietary Software		87	%		72	%
Total Gross Margin		19	%		17	%
Total Operating Expenses		10,420			10,567
Net Income	$	4,953		$	949
Per Share-Diluted	$	0.40		$	0.08
Adjusted EBITDAS*	$	6,581		$	2,366
Cash and Investments EoQ**	$	29,561		$	25,471

Notes:

**Cash and Investments EoQ includes both short and long-term amounts (long-term at each date above was $250,000).

Financial Commentary on September 30, 2015 YTD Results (compared to YTD 2014)

Revenue from third-party software was $63.9 million, a 19% increase from $53.9 million recorded in the prior year period, due to increased customer demand.
Third-party software gross profit was $9.6 million, a $2.4 million or 33% increase from $7.2 million in the prior year period. The increase was due to the 19% revenue increase, improved operational efficiencies, product mix and customer mix, contributing to an increase in gross margin percentage from 13% in the nine months ended September 30, 2014 to 15% in the current year period.
Engineering services gross profit was $3.6 million, an increase of 9% from $3.3 million in the prior year period. The 2014 period marked the completion of a large hand-held terminal project in Japan resulting in the recognition of $478,000 of revenue and gross profit in the second quarter of 2014.
Proprietary software gross profit was $2.4 million, an increase of $1.1 million from $1.3 million in the prior year period. The increase was due to sales of our legacy software in the first quarter of 2015 that exceeded the historical trend combined with a relatively fixed cost of sales.
Operating expenses totaled $10.4 million, a decrease of $147,000 from $10.6 million in the prior year period. This decrease was primarily due to the operational efficiencies and reduction in overhead costs implemented in late 2013 that were fully realized in the second half of 2014.

Outlook

Management currently has the following expectations for Q4 2015:

Total revenue will be in the range of $23 to $26 million;
Gross margin for services will continue in the mid-20% range;
Bookings and initial revenue from DataV;
Continued GAAP profitability; and
Accounts receivable balance is expected to continue to increase into early 2016 as we have selectively provided extended payment terms to a highly credit-worthy customer beginning mid-year 2015. We believe this new arrangement will leverage our strong cash position to improve our third-party gross margins and profitability. Our accounts receivable balance and DSO metrics will therefore increase, with a commensurate decrease in cash and/or short-term investments balances.

Conference Call

Management will host a conference call today, November 12, 2015, at 5 p.m. Eastern Time (2 p.m. Pacific Time). To access the call dial 1-888-737-3616 or 1-913-981-5540 for international callers, and reference "Bsquare Corporation Third Quarter 2015 Earnings Conference Call." A replay will be available for two weeks following the call by dialing 1-877-870-5176, or 1-858-384-5517 for international callers; reference pin number 8238864. A live and replay Webcast of the call will be available at www.bsquare.com in the investor relations section.

About Bsquare

For more than two decades, Bsquare has helped its customers extract business value from a broad array of physical assets by making them 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 Internet of Things (IoT) 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 IoT 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 growth and profitability, and cash and investments; and strategies for customer retention, growth, product and service development, 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: 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 ability to execute our development initiatives and sales and marketing strategies around DataV™, the Internet of Things, and our product and service offerings more generally; our success in leveraging strategic partnering initiatives with companies such as Microsoft, Intel, Aava Mobile and Future Electronics; 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 CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)

	September 30, 2015		December 31, 2014
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,385	$	13,127
Short-term investments		15,926		13,263
Accounts receivable, net of allowance for doubtful accounts of $36 at September 30, 2015 and $125 at December 31, 2014		15,560		13,626
Deferred tax assets		10		10
Prepaid expenses and other current assets		514		717
Total current assets		45,395		40,743
Equipment, furniture and leasehold improvements, net		1,236		1,336
Restricted cash		250		250
Deferred tax assets		294		391
Intangible assets, net		628		729
Goodwill		3,738		3,738
Other non-current assets		52		54
Total assets	$	51,593	$	47,241
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Third-party software fees payable	$	10,184	$	12,247
Accounts payable		285		165
Accrued compensation		2,333		2,106
Other accrued expenses		1,320		1,539
Deferred rent, current portion		293		275
Deferred revenue		705		712
Total current liabilities		15,120		17,044
Deferred tax liability		141		144
Deferred rent		1,255		1,476
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; 12,012,358 shares issued and outstanding at September 30, 2015 and 11,767,577 shares issued and outstanding at December 31, 2014		132,601		131,071
Accumulated other comprehensive loss		(829)		(846)
Accumulated deficit		(96,695)		(101,648)
Total shareholders' equity		35,077		28,577
Total liabilities and shareholders' equity	$	51,593	$	47,241

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenue:
Software	$	21,215	$	19,768	$	66,679	$	55,631
Service		5,220		4,767		14,894		14,690
Total revenue		26,435		24,535		81,573		70,321
Cost of revenue:
Software		17,698		16,760		54,732		47,189
Service		3,864		3,812		11,287		11,369
Total cost of revenue		21,562		20,572		66,019		58,558
Gross profit		4,873		3,963		15,554		11,763
Operating expenses:
Selling, general and administrative		3,174		2,880		9,120		9,352
Research and development		312		360		1,300		1,215
Total operating expenses		3,486		3,240		10,420		10,567
Income from operations		1,387		723		5,134		1,196
Other income (expense), net		32		(16)		124		(118)
Income before income taxes		1,419		707		5,258		1,078
Income tax expense		(174)		(16)		(305)		(129)
Net income	$	1,245	$	691	$	4,953	$	949
Basic income per share	$	0.10	$	0.06	$	0.42	$	0.08
Diluted income per share	$	0.10	$	0.06	$	0.40	$	0.08
Shares used in calculation of income per share:
Basic		11,959		11,655		11,867		11,520
Diluted		12,466		11,832		12,294		11,732

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Adjusted EBITDAS:
Operating income as reported	$	1,387	$	723	$	5,134	$	1,196
Depreciation and amortization		137		154		425		479
Stock-based compensation expense		453		228		1,022		691
Adjusted EBITDAS (1)	$	1,977	$	1,105	$	6,581	$	2,366



(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 operating income (loss) 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 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 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.