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BSQUARE Reports Third Quarter 2011 Results

Quarter Includes Accretive Contribution From MPC Data Ltd. Acquisition (November 10, 2011)

BELLEVUE, WA -- (Marketwire) -- 11/10/11 -- BSQUARE Corporation (NASDAQ: BSQR), a leading enabler of smart, connected devices, today announced financial results for the third quarter and nine months ended September 30, 2011. Total revenue for the quarter was $24.0 million, down 5% year-over-year, while total revenue for the nine months was $73.5 million, up 6% year-over-year. The Company generated a net loss for the quarter of $166,000, or $0.02 per share, down 118% year-over-year, while net income for the nine months was $39,000, or $0.00 per share, down 97% year-over-year. EBITDA for the quarter was $297,000, or $0.03 per share, down 80% year-over-year, while EBITDA for the nine months was $2.2 million, or $0.19 per share, down 34% year-over-year. The Company's recently announced acquisition of MPC Data, which closed on September 11, 2011 contributed $333,000 of revenue for the quarter. MPC also contributed $118,000, or $0.01 per share, in net income and $140,000, or $0.01 per share, in EBITDA. The Company incurred $152,000 in transaction-related expenses which negatively affected the quarter.

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

------------------------------------------------------------ Three Months Ended Nine Months Ended ------------------------------------------------------------ 9/30/2011 9/30/2010 Inc/(Dec) 9/30/2011 9/30/2010 Inc/(Dec) ------------------------------------------------------------ Revenue: Third-party Software $ 15,593 $ 18,031 -14% $ 48,259 $ 45,359 6% Engineering Services 7,008 6,213 13% 20,630 20,805 -1% Proprietary Software 1,428 1,094 31% 4,570 3,024 51% ------------------------------------------------------------ Total Revenue 24,029 25,338 -5% 73,459 69,188 6% ------------------------------------------------------------ Total Gross Profit 4,804 5,041 -5% 15,161 13,999 8% Gross Margins: Third-party Software 15% 15% 0% 15% 14% 7% Engineering Services 23% 24% -4% 22% 23% -4% Proprietary Software 62% 83% -25% 75% 85% -12% ------------------------------------------------------------ Total Gross Margin 20% 20% 0% 21% 20% 5% ------------------------------------------------------------ Total Operating Expenses 5,282 4,046 -31% 15,220 11,872 -28% ------------------------------------------------------------ Net Income (Loss) $ (166) $ 936 -118% $ 39 $ 1,469 -97% ============================================================ Per Share- Diluted $ (0.02) $ 0.09 -122% $ 0.00 $ 0.14 -100% ============================================================ EBITDA* $ 297 $ 1,486 -80% $ 2,225 $ 3,369 -34% ============================================================ Per Share- Diluted $ 0.03 $ 0.14 -79% $ 0.19 $ 0.33 -42% ============================================================ Cash and Investments** $ 17,696 $ 21,494 -18% $ 17,696 $ 21,494 -18% ------------------------------------------------------------


Notes:
*EBITDA = Earnings before interest, taxes, depreciation, amortization and stock compensation expense and 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 9/30/11 = $1.0 million).

CEO Commentary on Business and Financial Results

Brian Crowley, chief executive officer of BSQUARE, commented on the current quarter results and business activity: "Over the last year, we have made numerous strategic investments to better position BSQUARE in the rapidly growing and evolving smart, connected devices marketplace. We believe we are making the right investments: growing our international sales footprint, expanding our Asia development capabilities and investing in our Handset Certification Platform. We are confident that the acquisition of MPC Data will provide a solid base of operations to drive European product and service sales, and MPC Data was immediately accretive in the quarter. We have more than doubled the size of our Asia engineering teams over the past few quarters, and the utilization of those engineers on billable projects is ramping up every week. Our Handset Certification Platform installation at China Mobile is up and running and we are still in discussion with a North American mobile network operator on starting a Handset Certification Platform trial this year. This incremental progress reinforces our confidence that we are on the right, long-term, strategic path. In the short-term, these investments have meant incremental expense, but the revenue has not yet reached the level we need, leading to the disappointing results for this quarter."

"In the near-term, we are focused on improved sales execution, particularly aligning our sales efforts to match the engineering resources we have on staff," Crowley continued. "Improving our engineering utilization will help increase our service margins, which remain sub-optimal. As we scale our business, we will benefit from the larger, but more strategically relevant infrastructure we have built in the last year. Overall, I am disappointed with this quarter's results, but I remain optimistic about our overall business opportunities and believe we have a platform from which we can drive revenue growth and incremental profitability."

Financial Commentary on Three Month Results

  • The decrease in third-party software sales, down $2.4 million, or 14%, was driven by lower purchasing volumes from several of the Company's larger Microsoft® General Embedded licensing customers. These customers' purchasing volumes declined in the first half of 2011 due to excess inventory levels but order volumes did improve sequentially;
  • The increase in service revenue, up $795,000 or 13%, was due to MPC Data, which contributed $330,000 in the quarter, and growth in North America;
  • The increase in proprietary software revenue, up $334,000, or 31%, was driven by a $440,000 increase in sales of lower-margin BSQUARE Development Platform products which, in turn, caused proprietary software gross margin to decline;
  • Service margin declined one percentage point despite a 13% increase in service revenue due primarily to a 5% decline in the realized rate per hour;
  • The increase in operating expenses, up $1.2 million, or 31%, was driven by the Company's international expansion, incremental MPC Data costs of $66,000, transaction-related expenses of $152,000 and additional stock compensation expense of $302,000, or $0.03 per share; and
  • Quarter-end cash and investments of $17.7 million, including long-term amounts, were down $5.5 million compared to June 30, 2011, and $3.8 million year-over-year. During the quarter, the Company paid $4.8 million in purchase price consideration related to the MPC Data acquisition and also incurred the transaction expenses noted earlier. Additionally, subsequent to quarter-end, the Company paid $1.4 million in additional purchase price consideration under the terms of the stock purchase agreement. DSO increased to 59 days in Q3 compared to 52 in Q2, excluding the effect of MPC Data.

Outlook

The Company currently has the following expectations for Q4 as compared to the current quarter:

  • Total revenue is expected to be in the range of $24 million to $26 million. Third-party software sales and proprietary software sales are expected to be flat to up slightly, whereas service revenue is expected to increase as a result of the full-quarter effect of the MPC Data acquisition and growth in North America;
  • Bottom-line profitability and EBITDA are expected to improve; and
  • Cash and investments are projected to increase by approximately $1.0 million despite the additional MPC Data purchase price consideration paid in Q4.

Conference Call

Management will host a conference call today, November 10, 2011, at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). To access the call dial 1-877-941-4775, or 1-480-629-9761 for international callers, and reference "BSQUARE Corporation Third Quarter 2011 Earnings Conference Call." A replay will be available for one week following the call by dialing 1-877-870-5176, or 1-858-384-5517 for international callers; reference pin number 4484046. A live and replay Audiocast of the call will be available at www.bsquare.com in the investor relations section.

About BSQUARE

BSQUARE is an industry leader with a proven track record in providing production-ready software products, engineering services, solutions and automated testing for smart, connected devices. With deep technical knowledge of mobile and embedded technologies, BSQUARE enables device makers to develop and ship best in class products. Since 1994, BSQUARE has provided satisfied customers with innovative software solutions allowing them to get to market faster with reduced risk and cost. For more information, visit www.bsquare.com.

BSQUARE is a registered trademark of BSQUARE Corporation. All other product and company names herein may be trademarks of their respective owners.

This release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements relating to our projected financial results, including but not limited to, forecasts for revenue, margins, profitability, cash, investments, and potential impairments, or future and potential sales or projects and expectations with respect to specific customers, geographies or products. All of the statements contained herein that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from such statements. There can be no assurance that forward-looking statements will be achieved. Important factors that could cause actual results to differ materially from those indicated in forward-looking statements include: whether we are able to maintain our existing favorable relationships with Microsoft Corporation and Ford Motor Company; risks, uncertainties and changes in financial condition; our ability to execute our product and sales strategies for TestQuest, HCP, and other products and services; intellectual property risks; and risks associated with our international expansion, acquisition integration and ongoing operations. Therefore, all forward-looking statements should be considered in light of various important factors including, but not limited to, the risks and uncertainties listed above. Except as required by law, we make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made. Please also refer to our most recent Quarterly Report on Form 10-Q, Annual Report on Form 10-K and other filings with the Securities and Exchange Commission for other important risk factors that could cause actual results to differ materially from those indicated in any forward-looking statements.

BSQUARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) September 30, December 31, 2011 2010 -------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 9,053 $ 10,814 Short-term investments 7,652 11,329 Accounts receivable, net of allowance for doubtful accounts of $288 at September 30, 2011 and $290 at December 31, 2010 16,476 14,128 Deferred tax assets 145 145 Prepaid expenses and other current assets 1,037 403 -------------- -------------- Total current assets 34,363 36,819 Long-term investment 116 122 Equipment, furniture and leasehold improvements, net 946 653 Intangible assets, net 2,064 1,049 Restricted cash 875 875 Deferred tax assets 2,495 2,495 Goodwill 3,989 -- Other non-current assets 91 83 -------------- -------------- Total assets $ 44,939 $ 42,096 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Third-party software fees payable $ 10,101 $ 11,132 Accounts payable 373 261 Accrued compensation 2,062 2,497 Other accrued expenses and liabilities 3,949 1,467 Deferred revenue 984 1,417 -------------- -------------- Total current liabilities 17,469 16,774 Deferred rent 187 240 Long-term tax liability 368 -- 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; 10,698,230 shares issued and outstanding at September 30, 2011 and 10,415,541 shares issued and outstanding at December 31, 2010 126,682 124,716 Accumulated other comprehensive loss (617) (445) Accumulated deficit (99,150) (99,189) -------------- -------------- Total shareholders' equity 26,915 25,082 -------------- -------------- Total liabilities and shareholders' equity $ 44,939 $ 42,096 ============== ============== BSQUARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2011 2010 2011 2010 -------- -------- -------- -------- Revenue: Software $ 17,021 $ 19,125 $ 52,829 $ 48,383 Service 7,008 6,213 20,630 20,805 -------- -------- -------- -------- Total revenue 24,029 25,338 73,459 69,188 -------- -------- -------- -------- Cost of revenue: Software 13,856 15,588 42,233 39,265 Service 5,369 4,709 16,065 15,924 -------- -------- -------- -------- Total cost of revenue 19,225 20,297 58,298 55,189 -------- -------- -------- -------- Gross profit 4,804 5,041 15,161 13,999 Operating expenses: Selling, general and administrative 4,332 3,280 12,371 9,397 Research and development 950 766 2,849 2,475 -------- -------- -------- -------- Total operating expenses 5,282 4,046 15,220 11,872 -------- -------- -------- -------- Income (loss) from operations (478) 995 (59) 2,127 Other income (expense) 43 16 85 (477) -------- -------- -------- -------- Income (loss) before income taxes (435) 1,011 26 1,650 Income tax benefit (expense) 269 (75) 13 (181) -------- -------- -------- -------- Net income (loss) $ (166) $ 936 $ 39 $ 1,469 ======== ======== ======== ======== Basic income (loss) per share $ (0.02) $ 0.09 $ 0.00 $ 0.14 ======== ======== ======== ======== Diluted income (loss) per share $ (0.02) $ 0.09 $ 0.00 $ 0.14 ======== ======== ======== ======== Shares used in calculation of income per share: Basic 10,610 10,196 10,578 10,160 ======== ======== ======== ======== Diluted 10,610 10,390 11,780 10,340 ======== ======== ======== ======== BSQUARE CORPORATION NON-GAAP INFORMATION AND RECONCILIATION TO COMPARABLE GAAP FINANCIAL MEASURES (In thousands, except per share amounts) (Unaudited) Three months ended Nine months ended September 30, September 30, ------------------ ------------------ 2011 2010 2011 2010 -------- -------- -------- -------- EBITDA: Net income (loss) as reported $ (166) $ 936 $ 39 $ 1,469 Income tax expense (benefit) (269) 75 (13) 181 Other income (expense) (43) (16) (85) 477 Depreciation and amortization 197 215 599 688 Stock-based compensation expense 578 276 1,685 554 -------- -------- -------- -------- EBITDA (1) $ 297 $ 1,486 $ 2,225 $ 3,369 ======== ======== ======== ======== EBITDA per diluted share $ 0.03 $ 0.14 $ 0.19 $ 0.33 ======== ======== ======== ======== Diluted Shares 10,610 10,390 11,780 10,340 ======== ======== ======== ======== (1) EBITDA 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. EBITDA is defined as net income (loss) before income taxes, interest income, depreciation and amortization, and stock-based compensation. EBITDA 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 EBITDA is not defined by GAAP. However, management believes that EBITDA provides meaningful additional information about our performance and regards EBITDA as a complement to net income and other GAAP financial performance measures, including an indirect measure of operating cash flow.

Company Contact:
Scott Mahan
CFO
BSQUARE Corporation
425.519.5900
Email Contact

Investor Contact:
Brett Maas
Hayden IR
646.536.7331
Email Contact


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