Q4 2022 Bsquare Corp Earnings Call
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Ladies and gentlemen, this is the operator.
The conference of beef glad Corporation will begin shortly please standby.
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Ladies and gentlemen, greetings and welcome to the Biscuit Corporation fourth quarter 2022 earnings Conference call.
At this time all participant lines are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on the telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce you to Ross seat Derrickson, President and CEO .
Please go ahead.
Thank you good afternoon investors and welcome to the Q4 2020 to be square quarterly earnings call joining.
Joining me today for the first time as Sheryl when these squares Chief Financial Officer, though this is the first time, you'll actually hear from Sheryl you have heard her words as she has played a significant role in drafting our prepared remarks and prior periods.
<unk> joined us as our director as our senior director of Finance and controller in November 2020.
Since joining Cheryl has significantly improved our accounting systems as well as our internal reporting and analysis.
Chris's departure and her transition to this new role has been natural and without any issues I look forward to working closely with Cheryl as we strive for breakeven operations in 2023.
Cheryl and I appreciate your interest in <unk> and thank you for taking the time to be with US This afternoon.
Before we go any further we'd 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 <unk> square website.
During today's 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 be square 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> Dot com.
Mailbox is monitored regularly and you will get a response within one business day.
Okay with that out of the way, let's get started.
Q4 was really a mixed bag partner revenue partner solutions revenue was down and square one revenue did not materialize as we had hoped on the plus side higher than expected margins in interest income from our investments helped to reduce our net loss.
Those were offset by the onetime restructuring charges associated with the workforce reduction we implemented in December of 2022.
The 20% workforce reduction in December while difficult was an important part of our preparation to achieve breakeven operations in 2023.
I will talk more about our plans for 2023 after share all takes us through the fourth quarter results Cheryl over to you.
Okay.
Thank you Ralph and good afternoon investors today, I'll be providing an overview of our financial results for the fourth quarter of 2022. Most of my comparisons will be to the third quarter I will let you know when I'm comparing to other periods.
I'll start with a review of our income statement and then move to a discussion of our balance sheet.
Total revenue for the fourth quarter was approximately $8 million.
The decrease of $500000 or 5% from the third quarter. The partner solutions segment drove the decrease as revenue from the edge to cloud segment was up slightly quarter over quarter.
Despite the revenue decrease total gross profit was up $100000 as compared to the previous quarter driven by gross margin rate improvement in both segments.
Let's take a look at our revenue and gross profit results at a segment level, starting first with partner solutions.
Partner solutions revenue decreased $500000 or 6% quarter over quarter continued supply chain disruptions and other macroeconomic factors affected the ordering patterns of this segment's customers in spite of the revenue decrease gross profit dollars. In this segment increased just over $60000 driven.
By 180 basis point improvement in gross margin rate.
This rate improvement was primarily due to higher quarter over quarter recognition of rebate stemming from Microsoft distributor incentive program.
Portion of these rebates are recorded as a reduction of cost of goods sold and accordingly impact our gross margin rate in the partner solutions segment.
And the edge to cloud segment revenue was up very slightly $29000 or 3%. This increase was driven by the timing of future completion for one of our key customers.
Cost of revenue in this segment is relatively fixed and accordingly was essentially flat quarter over quarter. Thus the increase in revenue drove an increase in gross profit dollars.
Turning our attention now to expenses as we've noted before our cost structure is stable and well managed nevertheless, there is some seasonality to our expenses, which causes fluctuation quarter to quarter. We saw this in our fourth quarter, selling general and administrative or SG&A expenses.
For $250000 higher than the third quarter.
A portion of the increase was due to professional fees related to Q4 activities.
Typically once a year expenses that we incur related to our annual shareholder meeting.
The rest of the SG&A increase was driven by marketing spend primarily related to an overhaul and upgrade of our web site. We knew this is a critical investment to make and are pleased with the changes.
Research and development expenses, which consists primarily of labor and benefits were flat quarter over quarter.
As Ralph noted earlier during the fourth quarter, we executed a reduction in force as part of broader efforts to align our cost base with our 2023 strategic priorities, which include breakeven operations.
We reduced our head count by nearly 20% and recorded expenses of $200000 related to the onetime termination benefits provided to impacted employees.
These restructuring charges are presented as a separate line item within operating expenses on our income statement.
As you may recall during the third quarter, we implemented an investment strategy intended to take advantage of rising interest rates, while maintaining a focus on liquidity.
Our Q4 results include $300000 of interest income, reflecting a full quarter of strategy execution.
We intend to continue investing our cash reserves for the foreseeable future until there is an alternative use of the reserves that will produce a higher return.
We are utilizing a laggard investment strategy staggering maturity dates so that portions of our portfolio mature at regular intervals. This strategy ensures that our liquidity is readily accessible and available to fund strategic growth investments.
Overall loss from the loss from operations for the quarter was $1 $5 million compared to the third quarter loss from operations of $1 2 million.
Half of this deterioration was driven by the onetime restructuring charges and the other half was driven by the increased SG&A expenses.
Net loss for the quarter was $1 2 million or six per diluted share compared to a net loss of $1 $1 million or <unk> <unk> per diluted share in the third quarter of 2022.
The quarter over quarter decline was driven by loss from operations, partially offset by an improvement in interest income.
Turning now to the balance sheet in total cash cash equivalents restricted cash and short term investments totaled $35 6 million at year end.
This reflects a net cash use of $4 5 million during 2022.
Which was primarily driven by loss from operations.
Small portion of our cash use however did relate to the share repurchase program that we announced in November as a reminder, we announced a plan to repurchase up to $5 million worth of our common stock. The plan is intended to return value to our shareholders without compromising our ability to pursue organic growth or strategic alternatives.
During the fourth quarter, we repurchased nearly 180000 shares for approximately $200000.
Despite the cash decreased during 2022, we continue to have a strong financial position with healthy reserves current receivables and no debt.
I'll turn it back to Ralph now for more color on our operations and plans for 2023.
Thank you Cheryl.
The decline in partner solutions revenue was a continuation of what we've experienced since the onset of the Covid pandemic.
We continue to add new customers with new product designs. The reality is new customers are generally buying lower priced licenses and their order activity typically start small and increases over time.
In 2022, the wins simply didn't grow fast enough to make up for the decay of revenue from existing customers, whose product lines, we're reaching the end of life or were disrupted by supply chain issues.
Total revenue from our top 20 customers didn't changed much between 2021 and 2022, where we saw the decay was in the middle of our book of business.
The same time the square one launch didn't go as we had hoped.
Our 2022 plan assumed that we would acquire some customers with existing fleets of devices that would ramp revenue in the second half of the year and that didn't happen.
We encountered two problems.
Potential customers had a solution that was in their words, good enough or that square one didn't provide a specific feature they require.
Where we did find opportunity was with new partner solutions customers, but again they are early in their lifecycle and theyre per device revenue potential is low initially.
For 2023, we knew we had to make some changes we knew it would be unwise to assume revenue growth. So we did our planning based on flat partner solutions revenue predictable revenue from our edge to cloud customers and a very small amount of revenue from square one or related projects.
With those assumptions, we knew we would need to reduce expenses. So in early December we implemented a reduction in the team.
The timing wasn't ideal, but we didn't like the idea of not telling our team what was happening and in hindsight I am glad we did it ahead of the onslaught of tech industry layoffs that occurred in January and February .
For 2023, we established three initiatives that drove our planning and budgeting. Our first initiative is to achieve breakeven operations.
The first step towards this was the reduction I discussed earlier.
We also eliminated in our 2023 budget any spending that wasn't generating revenue or wasn't vital to our other initiatives.
Achieving breakeven operations also requires us to maximize the existing business assets for reinvestment and revenue growth, which is our second 2023 initiative to do this we are changing how we are going to market and managing our business assets and.
Partner solutions, we will emphasize our reputation as a premium provider of technical support and business services.
In an effort to improve our ability to attract new customers, we have simplified and repackaged our OS consulting services, creating a starter bundle of services for customers with new product designs.
Early experience with this approach has been positive.
We believe the repackaging has the potential to increase the initial value of a new customer and improve our ability to upsell. Our OS consulting services. It also gives us visibility into the nature of their business model and the potential opportunity for square, one or device operations and management solution.
Their business model is simply to sell devices to their customers' square one isn't likely relevant if there if their business model has to change.
Charge their customers a monthly fee for the service provided by the device some form of digital transformation, then square one could be highly relevant.
I'll say more about square one in a moment, but I want to call out the importance of being able to understand how and if companies are evolving their business models to a recurring revenue model.
It would be easy to assume the partner solutions segment is just the low margin commodity business and for a portion of it that is true.
But for the portion that is evolving their business model has the potential to provide valuable information that could inform our product and strategic decisions.
Maximizing business in the edge to cloud segment. It means continuing to provide great service, while we look for opportunities to expand our relationships with those customers and when possible replicating. The success, we've had using square one as a solution accelerant.
For square one maximizing the business means dialing back heavy investment in general marketing and instead working closely with our customers and technology partners to understand where there is opportunity and where development is needed we.
We are modular rising the square when design, making it easier to configure or plug in new capabilities that support our customer requirements.
<unk> potential business partners.
In 2022, we position square one as a complete solution.
In 2023, we're positioning it as a solution accelerant that can be valuable to customers and other players in the Iot ecosystem.
We see potential selling partnerships with our customers and other technology players, especially in the building and facilities management healthcare point of sale and energy verticals.
We believe this approach has the potential for generating revenue revenue, albeit at a much slower pace than we assumed in 2022.
And it can provide value input valuable input into our third initiative.
Our last initiative is to identify and pursue strategic opportunities with the potential for high growth revenue and margin.
This effort will be informed by the first two initiatives as well as other efforts to find strategic opportunities.
So to summarize we are entering 2023 with an operating plan and our cost structure that aligns with reality we.
We will seek every avenue for organic growth within our means but we will only invest in repeatable success.
We are running and will continue to run the business as efficiently as possible, while we aggressively consider a range of strategic options.
We believe our understanding of our business assets, our operating discipline and our cash reserves provide a strong foundation for building value for our shareholders in 2023 and beyond.
Before we close out the call on a remind shareholders that we are planning to put forth a plan to declassify the board of directors in a phased manner over three years ultimately, resulting in one year terms for all directors, we intend to present. This plan at the annual shareholder meeting that will take place in June of this year.
Which is back on our historical cadence.
Classification of the board will bring us in line with governance best practices and reflects the input of several of our shareholders.
Okay with that operator, please open the line for questions.
Because we don't often get many questions on our call I will remind you that if you'd like to arrange a follow up conversation. Please send an email to investor relations at <unk> Dot Com operator, please open the line.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before.
Pressing desktop piece.
Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Yeah.
Our first question comes from the line of Jacobsen Vito and individual Investor. Please go ahead.
Okay.
Yes, hi.
Good afternoon can you hear me.
Yes, we can thank you well.
Well thank you.
Was wondering given the declining revenue and the increasing expenses has the company given any consideration to simply spinning the company down and paying the cash out to the investors.
Great question I will tell you that the board and I have looked at and we will continue to consider all strategic options.
Okay have you specifically.
This.
Option is one off.
We are always looking at the right thing to do for building shareholder value and so that among others is something that we would absolutely.
Have looked at.
Okay.
Just speaking for myself as an individual investor.
I'm seeing is a declining balance sheet the declining revenue and.
<unk>.
Not a great situation and the company does have cash assets and it does have intellectual property and so forth.
I would urge the board of directors to consider this as an option. Please.
Yes I appreciate your question I appreciate your point of view and.
And absolutely understand and thank you. Thank.
Thank you.
Okay.
Okay.
Thank you.
Our next question comes from the line of Steve <unk> from.
From an individual investor. Please go ahead.
Hey, Ross.
Well first off I completely.
Completely disagree with what the last caller just asked you.
I don't think you guys are nearly at that point, but that's obviously you guys to decide.
What I really would like to know obviously the hot button right now is artificial intelligence.
<unk>.
It's been around forever.
Or are these for a long time.
Internet of things is.
Is there a potential correlation between the two can create some added additional revenue for you guys.
That's a great question, Steve and that's actually something that we've looked at as you know.
Artificial intelligence machine learning and the models that are absolutely part of the things that we get involved in with with our customers with square one and some of the larger edge to cloud customers. So yes, we do see there's opportunity for that I think chat GPT is getting a lot of buzz right now and Thats really an AI.
I am putting together words and phrases in sort of answering questions, but absolutely the use of AI machine learning and that kind of those kinds of models are things that we're involved in and we will continue to look for ways to take advantage of that that isn't lost on us and that's a great point.
And Steve Thanks, it's great to get a question, especially from you and also.
No.
I wanted to kind of address your point about we're not at that point and what the other caller had said is that we're constantly looking at ways to evaluate.
And to create value and I.
I think we've shown that discipline and using our our cash and we're transparent with things we're going to look at everything.
Sometimes those options are more appealing than others, but we are not going to stop looking for ways to build value and appreciate your support.
Good I appreciate it well that's kind of what I wanted to hear because you guys aren't exactly burning cash like a biotech or as the joke is always in my household like my daughters.
If I left him so.
That would seem to me like a desperate moves from a company that had chosen not doing.
$24 million in revenue and hemorrhaging, which you guys are not.
To me, there's just too much potential.
Particularly now things we're in a recession.
No.
And it's a tough one because expenses are going up for everybody as revenue is stagnant or declining and it's not just you guys.
It's a tough environment, but as we all know it is not going to stay that way forever.
With crisis is going to become opportunity and as I said to you before those that have the cash at the end a good win and you might be able to buy somebody.
You can implement would they have into you have for pennies on the dollar.
I guess, that's always the dream of each square, so anyway, I'm glad that that still alive.
And I see that there is an opportunity you guys have pulled the trigger at some point.
Yes.
Close by.
Saying that our plan for 'twenty three as we've got it.
The expense structure that works within the revenue that we plan, we're going to maximize.
Assets of our business, we've got a history of easing to expense and we're going to continue to look for ways.
To use our assets to create opportunities for us and that's our commitment we will continue that into 2023.
Cool Thanks Ralph.
Thank you.
Thank you.
Ladies and gentlemen, if you wish to ask a question. Please press star one.
Our next question comes from the line of Jacobsen Vito and individual Investor. Please go ahead.
Yes, Thank you yes.
Follow up question.
I understand the realignment of the cost.
Structure does that mean that you expect to be cash flow positive or EBITDA positive or anything like that in the next coming quarter. So when do you expect to see this breakeven.
Yes, that's good.
Right.
So.
I'll field, this and I'll turn it over to Cheryl for more color, but getting to breakeven won't happen immediately we believe that it will happen things will improve in the first quarter, but the big improvement will come in second quarter, and then the second half of the year.
We.
It will take a certain amount of time for the adjustments that we've made to flow through and take full advantage of those and that won't be realized until the second half sure was there any thing you want to add to that.
But also we have some revenue recognition that will occur more in the second half of the year based on the pattern of how our customers utilize our software. So when we talk about breakeven operation today, It's a 2023 in its entirety goal and we look forward to reporting out on each quarter, but it won't be until the end of 2023 that will really be able to.
Hey, we're a breakeven operation.
Yes, I appreciate that I mean, I don't have access to the backlog. So I don't have an understanding of the Blackrock of course, but.
Again, when I urge you to look at all alternatives.
And to give formal callers point I appreciate that.
Opportunities out there, but at the end of the day.
Our job is to maximize return on investment.
So I appreciate what you guys are doing I'm, just asking you to take a good look and if you do not expect that you can return to profitability.
Timely manner then.
I would urge the board of directors to consider an alternative plan. Thank you.
Thank you for that I appreciate that input and we will be sure to relay that to our board.
Thank you.
Ladies and gentlemen, if you wish to ask a question. Please press star one.
Ladies and gentlemen, a reminder, if you wish to ask a question. Please press star one.
Since there are no further questions I would like to turn the conference over to Ross that exit President and CEO for closing comments.
Thank you. Thank you investors I really appreciate the questions and the dialogue.
Thank you for taking the time for participating with US today and we appreciate your interest in <unk> have a nice day.
Thank you Sir the conference of beef Squib Corporation has now concluded. Thank you for your participation you may now disconnect your lines.
Yes.
Yes.
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Okay.
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