Bsquare Reports Second Quarter 2017 Financial Results

BELLEVUE, Wash., Aug. 8, 2017 /PRNewswire/ -- Bsquare Corporation (NASDAQ: BSQR) today announced financial results for the second quarter of 2017.

Jerry Chase, Bsquare President and CEO, commented, "During the second quarter we saw marked uptick in the number of paid pilot DataV deployments undertaken by new customers. In fact, over the second quarter and early third quarter we entered into eight new pilots with customers across a number of industries, four of which closed during Q2. Given the increase in customer momentum, shortening of the sales cycles, and strength of our sales pipeline, we plan on continuing to invest across sales and marketing, service delivery, and product development in order to capitalize on this emerging market opportunity."

"While our focus has been, and continues to be, growing our DataV business, we are also managing our traditional third-party software and engineering services business leanly with an emphasis on cash generation."

Q2 2017 Financial Highlights

Total revenue for the quarter was $18.8 million, down 17% compared to both the first quarter of 2017 and the second quarter of 2016. Net loss for the quarter was $2.6 million, or $0.20 per diluted share, compared to net income of $0.2 million, or $0.02 per diluted share, in the first quarter of 2017 and net loss of $0.2 million, or $0.02 per diluted share, in the year-ago quarter. Adjusted EBITDAS* was negative $2.0 million, down $2.6 million from the first quarter of 2017 and $2.3 million from the second quarter of 2016. Our cash, cash equivalents and short-term investments at June 30, 2017 totaled $27.3 million, a decrease of $3.7 million from March 31, 2017.

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


                           Three Months Ended
                           ------------------

                 6/30/2017                    3/31/2017         6/30/2016
                 ---------                    ---------         ---------

    Revenue:

    Third-
     party
     Software                      $15,505              $16,797            $18,337

     Proprietary
     Software                          481                2,654                398

    Prof.
     Engineering
     Services                        2,862                3,390              4,003
                                     -----                -----              -----

    Total
     Revenue                        18,848               22,841             22,738
                                    ------               ------             ------

    Total
     Gross
     Profit                          3,873                6,253              3,893

    Gross
     Margins:

    Third-
     party
     Software                          15%                 16%               16%

     Proprietary
     Software                          92%                 99%               69%

    Prof.
     Engineering
     Services                          36%                 27%               15%
                                       ---                  ---                ---

    Total
     Gross
     Margin                            21%                 27%               17%
                                       ---                  ---                ---

    Total
     Operating
     Expenses                        6,492                6,212              3,978
                                     -----                -----              -----

    Net
     Income
     (Loss)                       $(2,560)                $202             $(185)
                                   =======                 ====              =====

    Per
     Share-
     Diluted                       $(0.20)               $0.02            $(0.02)
                                    ======                =====             ======

     Adjusted
     EBITDAS*                     $(2,041)                $593               $282
                                   =======                 ====               ====

    Cash
     and
     Investments
     EoQ
     (includes
     $250,000
     long-
     term
     at
     6/30/2016)                    $27,296              $30,984            $27,148
                                   =======              =======            =======


    Notes:

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

Financial Commentary on Second Quarter 2017 Results (Compared to First Quarter 2017)

    --  Revenue from third-party software was $15.5 million, a decrease of 8%
        from $16.8 million in the first quarter of 2017, due primarily to a more
        competitive environment following the anticipated end of Microsoft's
        volume purchase programs on December 31, 2016, as well as the continued
        impact of fourth quarter 2017 buy-ins of additional product by certain
        customers;
    --  Professional engineering services revenue totaled $2.9 million, a
        decrease of 16% from $3.4 million in the first quarter of 2017, due
        primarily to higher DataV services delivered during the prior quarter;
        while engineering services margins increased by nine percentage points
        to 36% on the strength of higher labor utilization and lower management
        overhead following the 2016 restructuring efforts; and
    --  Operating expenses totaled $6.5 million, an increase of approximately
        $280,000, or 5%, over the prior period due to increased DataV-related
        investments in R&D and sales associated with driving DataV growth.

First Half 2017 Financial Highlights

    --  Revenue was $41.7 million, a 13% decrease compared to $48.2 million for
        the year-ago period, resulting from lower sales of third-party software
        and professional engineering services, partially offset by higher
        proprietary DataV software revenue in the first quarter of 2017;
    --  Net loss was $2.4 million, or $0.19 per diluted share, a decrease of
        $2.7 million compared to net income of $0.3 million, or $0.03 per
        diluted share, for the six months ended June 30, 2016 reflecting higher
        levels of investment to grow DataV, partly offset by higher margins on
        DataV software revenues in the first quarter of 2017; and
    --  Adjusted EBITDAS* was negative $1.4 million, a decrease of $2.9 million
        compared to positive $1.5 million in the year-ago period.

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


                                        Six Months Ended
                                        ----------------

                               6/30/2017                         6/30/2016
                               ---------                         ---------

    Revenue:

    Third-party Software                                 $32,302           $38,254

    Proprietary Software                                   3,135               648

    Prof. Engineering Services                             6,252             9,275
                                                           -----             -----

    Total Revenue                                         41,689            48,177
                                                          ------            ------

    Total Gross Profit                                    10,126             8,189

    Gross Margins:

    Third-party Software                                     16%              15%

    Proprietary Software                                     98%              64%

    Prof. Engineering Services                               31%              21%
                                                             ---               ---

    Total Gross Margin                                       24%              17%
                                                             ---               ---

    Total Operating Expenses                              12,704             7,625
                                                          ======             =====

    Net Income (Loss)                                   $(2,358)             $315
                                                         =======              ====

    Per Share-Diluted                                    $(0.19)            $0.03
                                                          ======             =====

    Adjusted EBITDAS*                                   $(1,448)           $1,495
                                                         =======            ======


    Notes:

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

Financial Commentary on First Half 2017 Results (Compared to First Half 2016)

    --  Revenue from third-party software was $32.3 million, a 16% decrease from
        $38.3 million recorded in the prior year period due primarily to a more
        competitive environment following the anticipated end of Microsoft's
        volume purchase programs on December 31, 2016, as well as the impact of
        fourth quarter 2017 buy-ins of additional product by certain customers.
    --  Professional engineering services revenue totaled $6.3 million, a net
        decline of $3.0 million. The prior year period included higher levels of
        traditional services revenues on contracts completed during the period,
        partly offset by higher DataV services revenue during the first quarter
        of 2017. Professional engineering services gross profit was $1.9
        million, essentially flat from the prior year period as higher
        utilization rates in the current year were offset by lower revenue
        reported from each of our geographical areas during the current period.
    --  Proprietary software gross profit was $3.1 million, an increase of $2.65
        million from $0.4 million in the prior year period. The increase was
        primarily due to recognition of $2.5 million in DataV revenue in the
        first quarter of 2017.
    --  Operating expenses totaled $12.7 million, an increase of $5.1 million
        from $7.6 million in the prior year period. This increase was due to
        higher R&D and sales and marketing investments to drive DataV growth.

Additional DataV Metrics (Including Non-GAAP Measures)

    --  We recorded $473,000 in DataV bookings during the second quarter,
        including four new paid pilots (bookings is a non-GAAP measure, defined
        as the contract value of new agreements signed with customers); cash
        receipts from DataV contracts totaled $1.5 million in the first half of
        2017.
    --  DataV backlog (a non-GAAP measure defined as total DataV bookings less
        DataV revenue recognized to date) was $3.4 million at June 30, 2017,
        compared to approximately $5.7 million at December 31, 2016.
    --  Total deferred revenue at June 30, 2017 was $2.4 million, compared to
        $3.9 million at December 31, 2016. The June 30, 2017 balance included
        DataV deferred revenue of $2.0 million. The deferred revenue balances
        relating to our DataV sales do not represent the total contract value of
        our DataV agreements. DataV unbilled deferred revenue (which is a
        non-GAAP measure) was an additional $1.4 million at June 30, 2017 and
        approximately $2.5 million at December 31, 2016, and represents future
        contract billings that have not been invoiced, and, accordingly, are not
        included in deferred revenue.

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 new DataV product sales, since revenue may be recognized in different periods than those in which orders have been received or cash has been collected.

Q3 2017 Outlook

Management currently has the following expectations for Q3 2017:

    --  Revenue in the range of $18.5 million to $20.0 million, excluding any
        significant DataV software revenue as its timing is dependent on
        customer acceptances;
    --  The company successfully closed four paid pilots with new customers in
        the third quarter and expects additional pilots to close in the quarter;
    --  Blended gross margin in the 19% to 21% range reflecting stabilized
        margins from sales of third-party software and engineering services, and
        minimal DataV revenue recognition; and,
    --  A net loss in Q3 reflecting continued investments in R&D, sales and
        marketing to grow DataV.

Conference Call

Management will host a conference call today, August 8, 2017, at 5 p.m. Eastern Time (2 p.m. Pacific Time). To access the call dial 1-888-287-5563 or 1-719-457-6931 for international callers, and reference "BSQUARE Corporation Second Quarter 2017 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 1386018. 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 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, gross margins, profitability, cash and investments; and 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: 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(TM), the Internet of Things, and our product and service offerings more generally; 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)


                                                          June 30,                 December 31,
                                                                2017                        2016
                                                                ----                        ----

                                                         (Unaudited)

                          ASSETS

    Current assets:

    Cash and cash equivalents                                             $9,468                        $14,312

    Short-term investments                                              17,828                         18,888

    Accounts receivable, net of allowance for
     doubtful accounts of $50 at June 30, 2017
     and December 31, 2016                                              17,949                         21,579

    Prepaid expenses and other current assets                            1,196                            878

    Contract assets                                                        636                              -
                                                                           ---                            ---

    Total current assets                                                47,077                         55,657

    Equipment, furniture and leasehold
     improvements, net                                                   1,077                          1,089

    Deferred tax assets                                                      6                              7

    Intangible assets, net                                                 415                            464

    Goodwill                                                             3,738                          3,738

    Other non-current assets including contract
     assets                                                                 82                             53
                                                                           ---                            ---

    Total assets                                                         $52,395                        $61,008
                                                                         =======                        =======

           LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities:

    Third-party software fees payable                                     $9,083                        $14,831

    Accounts payable                                                       390                            283

    Accrued compensation                                                 1,693                          2,008

    Other accrued expenses                                                 661                            714

    Deferred rent, current portion                                         331                            321

    Deferred revenue                                                     2,287                          2,064
                                                                         -----                          -----

    Total current liabilities                                           14,445                         20,221

    Deferred tax liability                                         -                             23

    Deferred rent                                                          689                            854

    Deferred revenue                                                       162                          1,798

    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; 12,591,488 shares issued
     and outstanding at June 30, 2017 and
     12,532,348 shares issued and outstanding at
     December 31, 2016                                                 136,591                        135,660

    Accumulated other comprehensive loss                                 (916)                         (941)

    Accumulated deficit                                               (98,576)                      (96,607)
                                                                       -------                        -------

    Total shareholders' equity                                          37,099                         38,112
                                                                        ------                         ------

    Total liabilities and
     shareholders' equity                                                $52,395                        $61,008
                                                                         =======                        =======


                                                                            BSQUARE CORPORATION

                                                              CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                            (In thousands, except per share amounts) (Unaudited)


                                           Three Months Ended                                        Six Months Ended
                                                June 30,                                                 June 30,
                                                --------                                                 --------

                                         2017                              2016                                 2017               2016
                                         ----                              ----                                 ----               ----

    Revenue:

    Software                                     $15,986                                        $18,735                        $35,437          $38,902

    Professional engineering service             2,862                                          4,003                          6,252            9,275
                                                 -----                                          -----                          -----            -----

    Total revenue                               18,848                                         22,738                         41,689           48,177
                                                ------                                         ------                         ------           ------

    Cost of revenue:

    Software                                    13,142                                         15,459                         27,256           32,620

    Professional engineering service             1,833                                          3,386                          4,307            7,368
                                                 -----                                          -----                          -----            -----

    Total cost of revenue                       14,975                                         18,845                         31,563           39,988
                                                ------                                         ------                         ------           ------

    Gross profit                                 3,873                                          3,893                         10,126            8,189

    Operating expenses:

    Selling, general and administrative          5,046                                          3,204                          9,911            6,410

    Research and development                     1,446                                            774                          2,793            1,215
                                                 -----                                            ---                          -----            -----

    Total operating expenses                     6,492                                          3,978                         12,704            7,625
                                                 -----                                          -----                         ------            -----

    Income (loss) from operations              (2,619)                                          (85)                       (2,578)             564

    Other income, net                               59                                             55                            114               76
                                                   ---                                            ---                            ---              ---

    Income (loss) before income taxes          (2,560)                                          (30)                       (2,464)             640

    Income tax benefit (expense)            -                                         (155)                           106               (325)
                                          ---                                          ----                            ---                ----

    Net income (loss)                           $(2,560)                                        $(185)                      $(2,358)            $315
                                                 =======                                          =====                        =======             ====

    Basic income (loss) per
     share                                       $(0.20)                                       $(0.02)                       $(0.19)           $0.03
                                                  ======                                         ======                         ======            =====

    Diluted income (loss) per
     share                                       $(0.20)                                       $(0.02)                       $(0.19)           $0.03
                                                  ======                                         ======                         ======            =====

    Shares used in calculation of income
     (loss) per share:

    Basic                                       12,577                                         12,152                         12,563           12,127
                                                ======                                         ======                         ======           ======

    Diluted                                     12,577                                         12,152                         12,563           12,559
                                                ======                                         ======                         ======           ======


                                                                      BSQUARE CORPORATION

                                         NON-GAAP INFORMATION AND RECONCILIATION TO COMPARABLE GAAP FINANCIAL MEASURES

                                                                   (In thousands, unaudited)


                                       Three Months Ended                                       Six Months Ended

                                            June 30,                                                June 30,
                                          --------                                            --------

                                     2017                              2016                               2017                2016
                                     ----                              ----                               ----                ----

    Adjusted EBITDAS:

    Income (loss) from
     operations as reported                 $(2,619)                                       $(85)                       $(2,578)     $564

    Depreciation and amortization              167                                          152                             320       303

    Stock-based compensation expense           411                                          215                             810       628
                                               ---                                          ---                             ---       ---

    Adjusted EBITDAS (1)                    $(2,041)                                        $282                        $(1,448)   $1,495
                                             =======                                         ====                         =======    ======


    (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 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.

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SOURCE Bsquare Corporation