Q4 2021 Bsquare Corp Earnings Call
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Thank you for standing by this is the conference operator, welcome to the Biscuit Corporation fourth quarter Investor call. As a reminder, all participants are in a listen only mode and the conference is being recorded after the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then one.
On your telephone keypad.
Should you need any assistance during the conference you may signal, an operator by pressing star and Sir I would now like to turn the conference over to Ralph Derrickson, <unk> President and CEO . Please go ahead.
Thank you good afternoon investors and welcome to the Q4 2021, <unk> quarterly earnings call.
Joining me on today's call as <unk>, CFO and COO Chris.
Chris and I appreciate your interest in <unk> square and thank you for taking the time to be with US This afternoon.
Before we begin wed like to remind you that this call is being webcast and that a recording of the call and the text of our prepared remarks will be available on the beef square website.
During this call we will 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 to differ materially.
In our commentary we may also refer to GAAP and non-GAAP financial measures.
Please refer to the cautionary text regarding forward looking statements contained in <unk>, earning release.
Issued today and on our website at Www Dot <unk> dot com under investors.
All per share amounts discussed today are fully diluted numbers where applicable.
We will be taking questions. After our prepared remarks for anyone who would like to arrange a follow up conversation with US. Please send an email to investor relations at <unk> square Dot com.
This mailbox is monitored regularly and you will get a response within one business day.
Okay with that another way, let's turn our attention now to the fourth quarter of 2021.
Total revenue was down compared to the third quarter and full year 2021 revenue was down compared to 2020. This was a disappointment as we had been seeing a small but steady quarter over quarter recovery and our partner solutions business segment.
Which is the lion's share of our revenue.
Chris will provide more color on our revenue trends in a moment.
Continued expense management kept our loss from operations flat quarter over quarter.
Trolling expense and managing cash while critical in the early stages of our turnaround and still very necessary on an ongoing basis are not sufficient.
So our focus has shifted to revenue.
The products, we announced late last year square, one and device hardening, where the first step toward restoring the square to revenue growth, but there is much more work to be done.
After Chris takes us through the Q4 and full year 2021 results I'll spend some time walking through our plans for returning to growth.
Over to you Chris.
Thank you Ralph and good afternoon investors.
As evidenced by the fourth quarter's revenue results, our customers recover from Covid and supply chain challenges there has not been linear.
Oil recovery, particularly in our partner solutions segment is still not apparent.
The second and third quarters of 2021, we were encouraged to see revenue trending upward year over year.
Nonetheless revenue in Q4 2021 decreased for both Q4 2020, and the third quarter of this year.
These results are both disappointing and reflective of the inconsistent and unpredictable customer ordering patterns, we've seen since the onset of the pandemic.
The $9 $1 million results for total Q4 revenue represents a decrease of $1 6 million or 15% compared to Q3 2021.
This decrease was driven almost entirely by our partner solutions segment, which is our ordering variability is particularly acute.
Total revenue for the full year 2021 was $40 4 million, a decrease of $6 8 million or 14% compared to 2020.
Partner solutions revenue was again the primary story behind the decline, let's take a closer look at the results within that segment.
Partner solutions revenue in the fourth quarter of 2021 was $8 1 million or 16% lower than the third quarter.
As noted both today and in prior calls our partner solutions business continues to be buffeted by a number of challenges.
Demand for our customers' products has been hurt by Covid the supply chains have been damaged by ongoing chip shortages and upcoming product releases from Microsoft.
Triggered intentional delays in our customers plans for new device shipments.
In the 12 months period, just prior to the onset of the pandemic partner solutions revenue averaged $4 $6 million per month, and it was trending upward in.
And the 21 months between April 2020 in December 2021 monthly revenue averaged $3 million with an average of just $2 $7 million per month for the fourth quarter of 2021.
We're hopeful that the number of new customers actively purchasing in the fourth quarter combined with the upcoming release of Windows 10, Iot will spur incremental sales in the first half of 2022.
Yeah.
Fourth quarter gross profit in the partner solutions segment was $1 2 million generated from a gross margin rate of 14, 4% both the dollars and the rate were slight increases from the third quarter of 2021.
This quarter over quarter margin improvement. Despite the decline in revenue was driven by the mix of products purchased by our customers combined with increases in product rebates from Microsoft that were recognized in the fourth quarter.
Revenue decreases product mix and rebates also affected the full year 2021 performance compared to 2020.
As segment gross margin was off $2 million and the rate decline from 68% to 13, 8%.
Moving on now to the more stable, but much smaller edge to cloud segment.
Fourth quarter revenue in this segment was approximately $1 million roughly even with the third quarter.
We did experienced an anticipated reduction in revenue as the third quarter included onetime recognition from now concluded professional services projects.
But this reduction was partially offset by increased revenue from one of our other large customers related to the improved rate at which they are adopting our technologies across their installed base of equipment.
Edge to cloud gross profit decreased slightly quarter over quarter is relatively consistent cost base was incurred against lower quarterly revenue.
As we've noted before cost of goods sold in this segment is primarily comprised of personnel costs that do not tend to move with revenue.
Changes in gross profit will often closely mirror changes in revenue and gross margin rate will typically improved with increased revenue.
Selling general and administrative expense or SG&A in the fourth quarter was $1 $8 million, which was flat to the third quarter.
SG&A for all of 2021 was $8 million a year over year decrease of $1 3 million.
These results are indicative of the work that's been done to right size, the largely fixed elements of our based cost structure.
Research and development expense in the fourth quarter was down slightly about $50000 compared to the third quarter.
Over R&D for the full year of 2021 was $1 3 million, an increase of $1 million over 2020.
This increase is a direct reflection of our continued investment in the transformation of beef square to a product company we.
We've made great strides shifting our engineering orientation away from consulting to product development, capturing the real world real world experience of serving large complex customers in the form of repeatable scalable products.
Q4 announcements of two new products square, one device hardening, our direct outcome of those efforts. These new products along with the Intel partnership announced yesterday represent important opportunities for us to build new customer relationships as well as engage differently with our existing customers.
Rob will speak more to this momentarily in the context of our plans for growing the business.
Overall, our fourth quarter loss from operations was $855000 compared to a loss of $866000 in the third quarter net loss was $780000 or <unk> <unk> per diluted share compared to a net loss of $900000 or <unk> <unk> per diluted share in the third quarter of 2021.
As of December 31, 2021, our cash balance was $40 1 million.
This balances a decrease of $1 $3 million from September 32021, but an increase of $27 1 million from December 32020, the year over year increase was driven by the sale of $6 9 million shares of our common stock in the second and third quarters of 2021.
As we noted in last quarter's call our cash on hand provides ready access to capital to to use to return to growth.
While positive cash flows are neither in our plans nor among our expectations for 2022, we will continue to be very careful with our cash.
<unk> track record speaks to this diligence, but we will take every reasonable opportunity to invest in pursuit of growth.
I'll now turn it back to Ralph for some additional information about our business plans and a renewed focus on growth.
Thank you Chris.
As I said at the start of the call.
As Chris just emphasized our focus for 2022 as revenue growth.
On our earnings call in November we outlined the market opportunity and announced two new products.
I'd like to expand on those remarks today I will take us through the market opportunity, we see the products that will allow us to address that market.
We will be investing in sales and marketing and when we expect to see the results of those efforts.
We'll stop short of forecasting revenue as it's too early for us to predict but I want to be clear.
With that we are focused on growing our revenue.
Yes.
I'll start with our target market, which we have defined as equipment makers, whose success and brand reputation relies on the availability quality functionality security and most importantly, then the connectivity of their products.
Our customers, who we call device makers, that's capital D capital N <unk>.
Build and sell products that are deployed and operated as part of critical business systems.
We find these systems, all around us and healthcare retail energy and building and facility management to name a few.
For these systems and our customers' products connectivity is essential uptime is paramount operational integrity is vital and security is an ever present concern.
We estimate that there are approximately 43000 original equipment manufacturers or Oems in the United States and Europe . However.
However, not every OEM is a device maker and the way we define that category.
We are focused on a subset of the OEM market about one third who are pursuing a connected device strategy and who would benefit the most from our portfolio of products.
We estimate the total addressable market to be worth $13 4 billion.
With an average near term annual revenue growth rate of roughly 5%.
Today, our existing book of business is comprised of several hundred customers many of which can also be considered device makers.
As you would expect we will target these existing customers with our new products and seek ways to expand our relationship beyond OS licensing.
Our book of business also includes a number of fortune 500 customers for whom we built and now operate a bespoke Iot system.
<unk> is an example of such a customer and one that we have spoken about in the past organizations like <unk> are ideal targets as they both build the devices and deploy and operate the devices.
Our expertise serving these large customers has and will continue to help us attract not only other large organizations, but also Oems seeking to expand their opportunities and connected devices.
Device makers require new approaches to product development deployment and connected device operations.
<unk> long history of system and OS software expertise, our experience, serving a large and diverse OEM customer base and our experienced building and operating large Iot systems have led us to a collection of principles that underpin the successful management of connected devices and the systems in which they operate.
From these principles, we have developed the portfolio solutions to serve device makers throughout their product lifecycle for customers looking to design in security, we offer device hardening to ensure that the product itself is securely configured and can be recovered to a known state in case of a security breach our hardware fail.
<unk>.
Our device hardening solution supports the development of connected devices that run Windows, Iot Linux and Android.
For device makers seeking to purchase licenses to support manufacturing we offer a full suite of Microsoft OS licensing services with a loyalty program that rewards them for increasing their business with be square.
And because we don't sell hardware, we're an ideal partner for device makers, who don't want to buy from a potential competitor.
And lastly for device makers looking to deploy and operate their devices as part of our connected system. We offer square one device management product that provides remote operation and management securely at scale.
<unk> capabilities are based on our experience building and operating custom Iot system.
Yeah.
This expertise is at the core of conversations we're having now with customers.
A range of verticals, including health care retail facilities management, and others, where operational integrity and cyber security are significant challenges.
With a clearly identified target market target customer and products that address their challenges, we turn our attention now to sales and marketing.
In the past our marketing has been product focus.
Starting in Q1 2022, we are shifting to a customer centric approach.
Marketing a portfolio of products to a single audience device makers are marketing is designed to meet the customer where they are in their lifecycle with products value propositions and messages tailored to the pain points.
And their lifecycle objectives.
This approach allows us to concentrate on messages that are highly relevant potentially.
Potentially improving the efficiency and effectiveness of our lead generation spending.
In addition to acquiring new customers, our product portfolio allows us to deepen relationships with existing customers.
Helping us to grow revenue very efficiently.
Our business model is changing too.
The new products. We are offering are designed to help us engage with customers in a way that we believe will result in profitable recurring revenue streams.
<unk> is a subscription based product that creates revenue from a software as a service or SaaS model as.
As the product becomes an increasing part of our mix, we will have multi year predictable revenue streams and we expect that annual recurring revenue will become a key performance indicator for us.
Growing revenue will require an investment in sales and marketing that will consume cash.
You can expect that losses will likely increase initially as we launch our products.
We are not however, going to open the floodgates on marketing spending that has never been our style and thats not going to change, we will be making measured investments assessing their effectiveness and adjusting as we go.
These critically important investments will be closely monitored and spending will be adjusted as we learn more about whats working and what isn't.
We hope that our marketing efforts and investments will yield some incremental revenue in the second half of this year, but I want to temper expectations.
Yes.
The investments we make this year, we hope will establish multiyear customer relationships that can produce an annuity of revenue streams and future periods.
Alongside the execution of our brand building and customer acquisition plans, we are continuing to evolve our current offering and explore the development of new products.
As an example of that evolution you may have seen that yesterday, we announced the partnership with Intel.
And our use of their V pro technology and square one.
The inclusion of Intel depots active management technology makes square one one of the most comprehensive device management tools by providing customers with the ability to remotely powered devices up and down even in the event of OS failure.
To isolate compromised devices.
Can expect to hear more from us about partnerships in the future. It is an essential part of our strategy.
<unk> is a much different company today.
One I joined three years ago to start the turnaround process.
We have retooled the company from top to bottom.
Rebuilt relationships with our large Iot and our licensing customers.
Restored our strategic partnerships with Microsoft and Amazon and in building new partnerships like the one we announced with Intel.
With lessons from our customers, we have developed a set of products that directly address the challenges they are facing today.
We are now a product company with solutions that complement our licensing business with the potential for higher margin recurring revenue.
And finally, we had the good fortune last year to raise cash we can use to accelerate our success.
Chris and I look forward to sharing more with you as we move forward.
Thank you for your time today and operator, please open the line for questions.
We will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad you will hear return acknowledging your request. If you are using a speakerphone. Please pick up the handset before pressing any keys to us.
Joe Your question. Please press Star then two we will pause for a moment as cool as joined the queue.
This concludes our question and answer session and today's conference call. You May now disconnect. Your lines. Thank you for participating and have a pleasant day.
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