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spk01: Thank you for standing by. This is the conference operator. Welcome to the B Squared 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 will be an opportunity to ask questions. To join the question queue, you may press the star, then one on your telephone keypad. Should you need any assistance during the conference, You may signal an operator by pressing star and zero. I would now like to turn the conference over to Ralph Derrickson, president and CEO. Please go ahead.
spk03: Thank you. Good afternoon, investors, and welcome to the Q4 2021 B Square quarterly earnings call. Joining me on today's call is B Square's CFO and COO, Chris Wheaton. Chris and I appreciate your interest in B Square, and thank you for taking the time to be with us this afternoon. Before we begin, 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 B-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 B-Square's earning release issued today and on our website at www.bsquare.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 investorrelations at bsquare.com. This mailbox is monitored regularly and you will get a response within one business day. Okay, with that out of the 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. Controlling 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, were the first step toward restoring B2 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.
spk02: Thank you, Ralph, and good afternoon, investors. As evidenced by the fourth quarter's revenue results, our customers' recovery from COVID and supply chain challenges has not been linear. Full recovery, particularly in our partner solutions segment, is still not apparent. After the second and third quarters of 2021, we were encouraged to see revenue trending upward year over year. Nonetheless, revenue in Q4 2021 decreased from 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 result 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 solution segment, which is where 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. Their supply chains have been damaged by ongoing chip shortages. and upcoming product releases from Microsoft have triggered intentional delays in our customers' plans for new device shipments. In the 12-month period just prior to the onset of the pandemic, Partner Solutions revenue averaged $4.6 million per month and was trending upward. In the 21 months between April 2020 and December 2021, monthly revenue averaged $3 million, with an average of just $2.7 million per month in 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. Fourth quarter gross profit in the partner solution 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 full-year 2021 performance compared to 2020, as segment gross margin was off $2 million, and the rate declined from 16.8% 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 experience an anticipated reduction in revenue as the third quarter included one-time 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're adopting our technologies across their installed base of equipment. Edge to Cloud gross profit decreased slightly quarter over quarter as a 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. As such, changes in gross profit will often closely mirror changes in revenue, and gross margin rate will typically improve 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 base cost structure. Research and development expense in the fourth quarter was down slightly, about $50,000 compared to the third quarter. However, 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 B2 to a product company. We've made great strides shifting our engineering orientation away from consulting to product development, capturing the real-world experience of serving large, complex customers in the form of repeatable, scalable products. Q4 announcements of two new products, Square One and Device Hardening, are a 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 $855,000 compared to a loss of $866,000 in the third quarter. Net loss was $780,000 or 4 cents per diluted share compared to a net loss of $900,000 or 5 cents per diluted share in the third quarter of 2021. As of December 31st, 2021, our cash balance was $40.1 million. This balance is a decrease of $1.3 million from September 30th, 2021, but an increase of $27.1 million from December 30th, 2020. 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 at last quarter's call, our cash on hand provides ready access to capital 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. 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 our renewed focus on growth.
spk03: Thank you, Chris. As I said at the start of the call, And as Chris just emphasized, our focus for 2022 is 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, how we will be investing in sales and marketing, and when we expect to see the results of those efforts. I will stop short of forecasting revenue as it's too early for us to predict. but I want to be clear that we are focused on growing our revenue. 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 M, build and sell products that are deployed and operated as part of critical business systems. We find these systems all around us in 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 43,000 original equipment manufacturers or OEMs, in the United States and Europe. However, not every OEM is a device maker in the way we've defined 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 this 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. ITRON is an example of such a customer and one that we have spoken about in the past. Organizations like ITRON 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 in connected devices. Device makers require new approaches to product development, deployment, and connected device operations. B-Square's long history of system and OS software expertise, our experience serving a large and diverse OEM customer base, and our experience 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 a portfolio of 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 or a hardware failure. 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 B-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 a connected system, we offer Square One, a device management product that provides remote operation and management securely at scale. Square One's capabilities are based on our experience building and operating custom IoT systems. This expertise is at the core of conversations we're having now with customers in a range of verticals, including healthcare, retail, facilities management, and others where operational integrity and cybersecurity 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-focused. Starting in Q1 2022, we are shifting to a customer-centric approach, marketing a portfolio of products to a single audience, device makers. Our marketing is designed to meet the customer where they are in their life cycle with products, value propositions, and messages tailored to the pain points and their life cycle objectives. This approach allows us to concentrate on messages that are highly relevant, 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, potentially 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. Square One is a subscription-based product that creates revenue from a software as a service or SaaS model. 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 that's 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 what's 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. The investments we make this year we hope will establish multi-year customer relationships that can produce an annuity of revenue streams in 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 vPro technology in Square One. The inclusion of Intel vPro's active management technology makes Square One one of the most comprehensive device management tools by providing customers with the ability to remotely power devices up and down, even in the event of OS failure, and to isolate compromised devices. You can expect to hear more from us about partnerships in the future. It's an essential part of our strategy. B Square is a much different company today than the 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. We've restored our strategic partnerships with Microsoft and Amazon and are building new partnerships like the one we announced with Intel. With lessons from our customers, we've 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.
spk01: We will now begin the question and answer session. To join the question queue you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone please pick up the handset before pressing any keys. To withdraw your question please press star then 2. We will pause for a moment as callers join the queue. This concludes the 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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