Q1 2020 Earnings Call

Ladies and gentlemen, hopes that H.B. square Corporation's first quarter 2020 financial results call.

At this time Youre sitting additional participants and do fundamentally momentarily.

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Just if I were about to begin.

Good day and welcome to be Square Corporation first quarter 2020 financial results call Today's conference is being recorded.

Just sounds like to turn the conference over to dispose the suburbs Investor Relations. Please go ahead.

Thank you and good afternoon, everyone slowly began we'd like to remind you that this call is being webcast not in according with the call how much extra is on the paired remarks will be available on deals close website. During this call me well 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 could differ materially. During this call management will also not started GAAP and non-GAAP financial measure.

Please refer to the cautionary chest regarding forward looking statements as well as the non-GAAP reconciliation to comparable GAAP financial measures. He came Andy's question or anything that was issued today and on our website at www Dot Com square dotcom <unk> under investors all per share amounts discussed today, our fully diluted.

Burst where applicable.

Now I'd like to turn the call on the child's Terex and it was clear president and CEO.

Thank you Leslie good afternoon investors I appreciate you taking the time to participate in our call today and I hope that you when your family are healthy and safe.

Q1, 2020 was a good quarter it be square marked by positive financial performance, improving operations and traction, helping our customers build and operate the next generation of intelligent devices and systems.

We increased revenue for the third consecutive quarter decreased operating expenses.

Excluding restructuring costs for the fifth consecutive quarter, and we essentially cheap break even on the adjusted EBITDA basis, allowing us to add to our cash balance.

I attribute these results to a number of factors, including the one be square initiatives, we announced on our earnings call a year ago. Shortly after my arrival.

Combination of those initiatives are focused on operating discipline and the efforts of the committed entrepreneurial team made the results possible, but what really drove revenue growth was strong customer engagement.

Chance favors the well prepared and I believe you were ready with the right combination of products and services in a market that is evolving from purpose built often disconnected devices to systems of devices, often working together, what I refer to as intelligent devices in systems.

Our long history of providing system software combined with our recent experience building in operating I O T systems at scale are combining in a way that allows us to meet our customers where they are in the evolution of their business.

In a moment, Chris Wheaton, our CFO will take us through the Q1 2020 numbers in detail. Following his remarks I will have additional comments about our business.

Impacts of coping 19, and our plans during these uncertain times I mean, I'll turn it over to Chris for more specifics on the business in our financial results.

Thank you Ralph and good afternoon investors I sure hope, so hope that you're safe and healthy during challenging times that you've settled into a work retained at least somewhat resembles normal.

The first quarter of 2020 delivered a solid set of financial results for be square here's some highlights.

Total revenue for the quarter was $16.7 million up 1.4 million over the fourth quarter at 20, Nike and about the high end of the revenue guidance, we provided on the last call.

Well prepared to deliver on a number of unique customer partners. They were not readily apparent when we developed a written to clearance for Q1.

Or solutions segment revenue was 15.9 million up by 2.6 million over the fourth quarter for 19.

As always revenue in this segment was driven primarily by higher sales and Microsoft embedded operating systems.

However, this quarter. We also saw significant traction from sales of other that its software and importantly, we see signs of additional growth from the square one outlets utility that we launched in April.

Revenue in the edge to cloud segment was lower in the quarter, because we were focused on retooling our solutions and preparing two of our largest customer compute for future growth.

In a quite moment in the growth of this segment unrelated to cover 19.

The blended gross margin across across both segments was 15%, which was higher than her guidance and expectations.

There were several bright spots in our gross margin story that bode well for the future and it creates some flexibility for us as we maneuver through the rapidly changing economic environment created by Koby 19.

Partner solutions gross margins in Q1 were 17% up from the prior quarters margins of 14% due primarily to higher than average margins on the previously mentioned sales other embedded software.

That's the clock gross margins were negative in Q1, we expected lower margins are in this segment this quarter as we absorbed costs and improve their software to address scale, they could quality issues and transitioning into worthy to actually suite.

We believe these investments will pay off with enhanced relationships with these large audio t. customers.

We continue to improve or be too like you software components as we work to exceed our customers' expectations gaining experience building and operating intelligent systems at scale.

Activities in the first quarter produced the GAAP net loss of $500000 worth four cents per diluted share.

When compared to net loss of 1.4 million or 10 cents per diluted share in the fourth quarter 2019, the progress we've been making is clear.

Operating loss net of restructuring was $400000 compared to $600000 into fourth quarter 20 or anything.

That 200000 dollar improvement arises from the completion of important cost containment projects such as the full closure of our Taiwan office, that's all ongoing attention at all levels of the organization to smart spending.

I believe we're finding the right balance between frugality, an intelligent investment in the business.

Adjusted EBITDA a non-GAAP measure also continues to show quarter over quarter improvement Q1, 2020 was essentially breakeven in that important measure compared to negative $300000 in the fourth quarter of 29 team.

Much of the difference between our GAAP net loss and adjusted Ebitdas arose from a charge for stock based compensation for all be square employees ruffled for Greg will provide further thoughts on that program later.

Finally, our cash balance, which includes restricted cash and short term investments reached $10.6 million on March 31st 2020, an increase over December 31st 2019 of approximately $100000.

But the corporate historical context, the last time be squirt grew revenue three quarters in a row was the second quarter 2015.

In addition, the Q1 net loss of $500000 with our smallest loss since the first quarter 2017.

And finally, while our quarter over quarter cash increase was modest seeing an increase at all is something that hasn't happened since the fourth quarter of 2016.

Of course. These positive Q1 results were produced in the context of emergence of cooking 19, which we now know it'd be the dominant economic challenge for virtually every business in the world.

You didn't in mid March in response to local mandates. These were temporarily suspended onsite operations in our offices and Trowbridge in United Kingdom.

And stopped all non essential activities in our Bellevue, Washington facility.

Immediately after the mandates were announced these square was notified by number of our customers that their businesses were considered essential under applicable guidelines and they notified us that we were in turn essentially suppliers to their businesses.

They specifically asked us to make accommodations to continue to serve them without interruption, we've been meeting our customers' needs through our very limited and appropriately socially distance to build the operations.

As the scope in depth of the effects that could be making it became clear we began a series of contingency planning exercise, we modeled a variety of scenarios with particular emphasis on liquidity, we knew that we needed to be prepared for situation, but our use of cash once again surpassed our source of cash.

Further we began to plan to cost cutting steps that would be taken at the economic downturn became prolonged.

Majority of our costs are salaries and personnel expenses.

Shortly after our consisted contingency planning efforts began identifying options for cost reduction you visibility of the Paycheck protection program was announced we applied for and received a 1.57 million dollar loan through this program.

Funds and forestalled any immediate cost cutting measures and have allowed us to support our ongoing operations.

Importantly, our employees can focus on fulfilling our obligations as an essential supplier to essential businesses around the country.

The effects of Cobot 19 on our customers has varied by segment.

As to cloud segment, the effects are less pronounced minor project delays among some customers have been at least partially offset by the initiation of new projects by other customers.

However by the end of March we've started to see a significant decrease in order activity in our partnership partner solution segment.

I believe that are most immediate term challenge will be a reduced customer demand for products in that segment.

The slow down a partner solutions arises from a variety of factors all of which appear related directly or indirectly to the pandemic.

Most directly our customers are likely experiencing a slowdown in demand for their products, which in turn reduces the need for our products or indirectly demand for our customers products may not have changed but disruptions in global supply chains may prevent them from meeting that demand.

Regardless it caused we've already started to see the effects ripple into the partner solutions segment.

Notably whether or not a customer is essential or non essential appears to have no effect on an order for patterns thus far.

We continue to work closely with our customers as they struggled to predict their business. We believe the lack of visibility into demand and availability of components is gonna be a factor in the partner solution segment for the near term.

The duration of this challenge and its financial implications are unknown at this time as a result, we have decided not to provide guidance.

With that let me turn the call back to rough.

Thank you Chris.

I'd like to expand on how we have been coking, but the rapidly changing situation.

Even before the effects of the Cobot 19 pandemic became apparent we had been reconsidering, how and where we work as well as how we collaborate with our engineering team in the UK and customers all over the globe collaborating over long distances and time zones wasn't operating imperative locally in the Seattle Bellevue area, we had to contend with the can use them as well.

However, we put our new office someone on the team would be facing a difficult commute from the outset, we conceived of our new location to the collaboration space not a traditional office. We then adopted a work anywhere approach for our operations in both Seattle and Trowbridge, we invested in an integrated voice over IP and virtual meeting system for all employ.

Ladies and all locations, including the UK, which meant that could collaborate from anywhere.

At the time, we were making these plans we had no idea how meaningful our decisions would prove to be when the cobot 19 pandemic arrived in February.

We're still planning to locate we're still planning to locate to our new collaboration space, Our corporate headquarters in Seattle in June local construction more Torrance related to covert 19 have ease such that our tenant improvement project is back on track, we expect to be using the space regularly starting in June as allowed by local social dispensing require.

Permits.

We will also start reusing.

We will also restart using the existing clearbridge facility when guidelines in the UK allow.

I want to thank the be square team members in the UK ending the U.S. for how they have adjusted to the changes we have been virtual since early March out, especially like to thank and acknowledge our be square families for how they have adapted our original model of working from home did not include running a day care running a school and all the other challenges our team and their families have had to navigate.

To a person they have responded and we continue to serve our customers without interruption.

Since I joined be square I've been working to build an entrepreneurial culture.

In an effort to reinforce that culture, we modeled a new equity incentives for our team members. After option plants typically found in startup company in January February we collaborated with our compensation committee to prepare a recommendation for option grants that was approved by the full board in early March using the existing pool of employed.

And the option grants aligning incentives of everyone at the square with you our shareholders and investors the potential the building share in the creation of long term value is what drew me, Chris Stephen on the other entrepreneurs to be square I believe this plan and this team will help me build value for you and their grit and perseverance will help us weather the storm.

To us by the Cobot 19 pandemic.

As we close out the call I went to speak to the promise of technology to help us adapt and change the intelligent devices and systems. We are building, we are helping to build will be part of how the world adapts to health care challenges energy challenges and resource management challenges, our customers, where they started at a device at our building up to the cloud or phase.

Started from the cloud and are reaching down to a device faced a growing software challenge made more complicated by different hardware operating system software and cloud providers. These systems also require new operation skills, managing cloud instances and activities over large diverse networks I believe be square is uniquely positioned to meet.

This need and I'm optimistic about our future for now however, we have a storm to manage through and that is where we are focused Q2 will no doubt test are resolved, but I'm confident that we have the team the contingency plans and the resources necessary rather that storm.

No matter what happens we will look back on this time and say that we acted with decisiveness with dignity and with compassion.

Thank you for your time and your attention, we'll see you for the Q2 earnings call.

Moderator. Please open the lines for questions now.

Thank you if you'd like to ask a question pretty similar pricing start wondering your telephone keypad, if you're using these speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Once again that is star one to ask a question a little cost for just a moment in time doing an opportunity to signal.

Once again that is star one if you'd like to ask a question, we'll hear first from Richard carpet.

Turning Corp. Please go ahead.

[noise] were unable to hear you. Please check your mute function.

[noise] Retuned are you there.

Oh, sorry, yes, I'm here.

Did you hear me.

Yes are we can yes again.

Yes, hi, I'd like to ask.

Where the 1.6 million appears in the financials first of all did you receive it in the quarter completed.

Yes, we I can answer that question, we did not receive it in Q1, we received in Q2 and therefore it is not reflected into Q1 financial stands.

I see.

So this is the kind of loan that under some circumstances you don't have to pay back is that correct and if so are you going to meet those circumstances.

Yeah. It is a part of the SBH paycheck to Paycheck protection program loan and a function of those of that program is when a certain criteria are met that portions of the loan up to the you can kind of them out as alone. It can be for given the guidance has been a little things so far from.

From yesterday as to how exactly those calculations will be performs but will be will be addressing that as the as the program itself wants to conclusion, which we expect to be sometime in June.

So.

As of now you actually have more cash by a significant amount, including the proceeds of that loan then as of March 30, Onest is better wrote a reasonable guess on my part.

I Didnt check our cash balance this morning, but we those that 1.6 million is definitely in the.

Any accounts as of today and I will be reflected into Q2 results when we present them at about three months.

And more importantly, then all that.

The quarter, just completed you reported positive cash flow not counting the loan proceeds and if that's really the case that is quite an accomplishment and you should be congratulated for that.

Thank you that isn't the case.

But the other than that I'm personally troubled by.

The complete lack of guidance for Q2, because there's nowhere else to get it any information at all.

Maybe you could comment on it that's likely to change or.

Anything you can provide that would help those of us who are not insiders.

Yes, Hi, Richard this is Rob I'll take that all three saying I'm done.

Okay, well if he wants me to speak to you offline, but.

Yeah, if you want to take off we'll do that later thanks, no no I can take it now, but I'm going to turn off my mice [laughter] Oh, Okay I was confused.

So yeah with regard to that as Chris mentioned during his remarks, we're seeing.

Order activity changing in the in a partner solutions segment, we saw that start to happen near the end of.

The month of March we saw that continue into April and we've seen that into may it's unclear exactly what that means just yet whether.

How that will stabilize and how the quarter will end up so the choice of having a very wide margin for revenue guidance or waiting and seeing where things come out we chose the ladder.

Thank you once again that is star one if I could ask a question.

That does conclude today's question answer session.

Also concludes today's conference. Thank you all for your participation you may now disconnect.

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