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spk03: Good day and welcome to the B-Square Corporation first quarter 2022 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ralph Derrickson, President and CEO. Please go ahead, sir.
spk02: Thank you. Good afternoon, investors, and welcome to the Q1 2022 B-Square quarterly earnings call. Joining me on today's call is B-Square 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 earnings 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 first quarter of 2022. Overall, Q1 2022 was a better quarter for us than last quarter. We saw improvements in the partner solutions revenue and gross profits. We kept our losses from operations relatively flat and we cut our quarterly cash burn nearly in half. Our partner solutions business segments continues to be an important source of cash, and as you will hear more about, a vital avenue to growing revenue for our connected device product offerings. On the call last quarter, I said we would be initiating the marketing of our connected device products, specifically device hardening and Square One, and that is what we've done. These initial efforts have allowed us to gather important data and to establish a baseline for decision-making regarding future marketing spending. These sales and marketing programs are well-instrumented, allowing us to learn rapidly, adjust, and iterate our messages and tactics. eSquare is emerging from a long period of financially-induced marketing silence, and the climb out of dormancy will require focused sales and marketing efforts to achieve our objectives. I'm pleased we achieved these critical first marketing steps at a sustainable burn rate, and I believe these investments will, in time, help return us to breakeven and ultimately to profitability. Let me leave it at that for now and have Chris take us through the details of the first quarter of 2022.
spk01: I'll get back to our plans for the future following Chris's remarks. Over to you, Chris. Thank you, Ralph, and good afternoon, investors.
spk00: As Ralph mentioned, the first quarter of 2022 marked the first full quarter of increased investment in building awareness for B2 solutions for IoT device makers. Our marketing campaigns are designed not only to reach customers who are building connected devices, but also to reestablish our position as a source of valuable expertise in the increasingly complex world of IoT operations. We believe we've now reached this stage of B-square's turnaround, where an investment in marketing stands a reasonable chance of delivering the intended result, a return to growth. The first quarter of 2022 also marked a change in the recent trajectory of our revenue. While it's far too early to declare a cause-and-effect relationship between our marketing spend and revenue growth, We believe we now have products worth talking about, customers who are interested in what we're saying and selling, and a portfolio of technologies that can meet an increasingly broad spectrum of requirements. Ralph will expand on our efforts to attract new customers after I provide a closer look at our Q1 2022 financial results. I'll start with a comparison of the quarter just ended to the fourth quarter of 2021. Total revenue for the first quarter of 2022 increased $700,000, or 7% over the fourth quarter of 2021. This rise in revenue was driven by relatively strong performance in our partner solution segment, partially offset by temporary delays in edge-to-cloud revenue. Total gross profit shows a similar pattern, with a $200,000 quarter-over-quarter increase, strength in partner solutions, and timing-based softness in edge-to-cloud. To unpack these results, let's first take a closer look at the partner solution segment, where a notably large one-time order and an encouraging uptick of orders in March provided a $1 million increase in first-quarter revenue over the fourth quarter of 2021. We're hopeful that this is the beginning of a trend for 2022, and we're investing marketing dollars in a concerted effort to accelerate this growth as the pandemic recedes. That being said, and as we've noted before, our customer supply chains have been damaged, particularly by ongoing chip shortages, and their own production schedules are still choppy. We're not forecasting their recovery to be linear, and accordingly, we anticipate continued revenue variability in the partner solution segment. Nonetheless, for nearly three decades, vSquare has been there for our OEM customers, and we'll be ready when they are. First quarter gross profit in the Partner Solutions segment was $1.6 million, and the segment's gross margin rate was 17.3%. Both the dollars and the rate were improvements over the fourth quarter of 2021 and were aided by product mix and the large one-time sale I noted earlier, which carried above average margins. Additionally, we recorded a quarterly increase in Microsoft product rebates, which we recognize as a reduction in our cost of goods sold for the segment. Turning attention now to the Edge to Cloud segment, A $400,000 decrease in quarterly revenue stemmed primarily from timing issues related to one key customer, both the timing of our work with them and the timing of their deployment of our technologies to their customers. These circumstances have caused a delay in segment revenues, but the effects are known to be temporary. We believe that full year results for 2022 will be consistent with our expectations for the segment. As a result of the revenue shortfall for the quarter, gross profit dollars and gross margin rate both declined for Edge to Cloud. Our cost of goods sold remain relatively constant in this segment, which means that the $400,000 revenue decrease has a direct and commensurate effect on margins. Gross profit decreased by $200,000, driving our gross margin rate temporarily negative. Moving on now to operating expenses. Compared to the prior quarter, selling, general, and administrative expenses increased, while research and development expenses decreased. Part of both variances were related to a reclass of personnel between these two categories, And as such, total operating expenses provides the most useful basis for quarter-over-quarter comparison. Total operating expenses in the first quarter were $2.4 million, an increase of $200,000 compared to the fourth quarter. Much of this increase was due to marketing-related expenditures, while the balance was due to a relatively large one-time vendor credit in Q4 that did not reoccur in Q1, and some incremental personnel-related expenses in Q1 that were not present in Q4. Overall, we expect our quarterly operating expenses to be relatively consistent with some incremental increases in marketing occurring throughout the year. We'll be monitoring our spending closely and adjusting as needed to ensure that we're on a path to achieve the needed return on these investments. Throughout 2021 and into the first quarter of 2022, we invested in the development of the two new product offerings announced in late 2021, Square One, a secure device management SaaS solution, and Device Hardening, a solution to configure operating systems for IoT deployments. These products form the foundation of our plans for future growth. In the first quarter of 2022, our product development investment totaled $400,000, of which approximately $100,000 was capitalized on our balance sheet as internally developed software. The remaining $300,000 is shown on the income statement as research and development expense. This investment is a direct reflection of our ongoing transformation to a product company. Overall loss from operations for the first quarter of 2022 was $900,000. flat to the fourth quarter's operating loss of roughly the same amount. Net loss for the quarter was also $900,000 or 5 cents per diluted share, which compares to a net loss of $800,000 or 4 cents per diluted share in the fourth quarter of 2021. As of March 31st, 2022, our cash balance was $39.4 million, a decrease of $600,000 compared to December 31st, 2021. This measured investment of cash is in line with the expectations we've been seeking to convey in prior calls. We have cash in the bank that we will seek to deploy intelligently to drive revenue. Some of the cash will be put toward continued product development, such as Square One and the device hardening solution mentioned earlier. Some of our cash will be invested in awareness building so that our device maker customers think of B-Square when they and their customers are faced with the operational challenges inherent in IoT deployments. While we will continue to manage our cash prudently, we will seek reasonable opportunities to invest in pursuit of growth. I'll now turn it back to Ralph for some additional insight into our planned investments in vSquare's future and the contributions our first quarter business activities have made toward those objectives.
spk01: Thank you, Chris. At the top of the call, I talked about launching our connected device products.
spk02: Let's start with some context for that product strategy, as it's critical to understanding our path to returning to profitability. Since our founding, we have been known as the system software people that get embedded devices to market. That expertise is the most common reason people choose to work with us today. We're good at system software, and we're a great business partner. As our customers' embedded products have become part of systems of devices, their hard problems have changed, and so we have changed in response. Today, we serve one market, device makers, with a suite of products that include OS licensing, device hardening, a solution to configure operating systems for IoT deployments, and Square One, a secure system for remotely monitoring and managing connected devices. Our product suite allows us to engage and serve our customers throughout their lifecycle. Last quarter, we shared that we would be shifting our marketing strategy from being product-focused to customer-centric, with a concentration on device makers, And that is exactly what we've done. As a reminder, we define device makers as equipment makers whose success and brand reputation relies on the quality, security, connectivity, and operational integrity of their products. Device makers build and sell products that are increasingly deployed and operated as part of critical business systems and or IoT environments. Our first quarter marketing initiatives included the launch of an initial awareness campaign focused on device maker pain points and the corresponding B-Square solutions, a digital search campaign intended to drive website activity and improve our product visibility, and the publication of a series of thought leadership content highlighting B-Square's position on industry trends and topics including cybersecurity, IoT lifecycle management, and cost savings for device makers. These initiatives have laid the foundation on which to position vSquare as a thought leader and solutions expert for connected device makers. We were pleased to see that our efforts yielded increases in website activity, awareness of our new product offerings, and increased engagement with our existing customers. There are numerous conversations in flight with existing OS licensing customers. These conversations both validate our connected device business hypothesis and provide the opportunity for cross-selling our device hardening and Square One products. We intend to build on Q1 efforts throughout 2022 with additional investments in sales and marketing, as well as product development. I want to stress that while we intend to invest, we will continue to do so at a pace and level that is sustainable, guided by data, and builds on success. While we are optimistic, it is not clear how quickly these efforts will bear fruit. For planning purposes, we assumed we would not see revenue from device hardening or square one until the second half of 2022. It doesn't mean we won't see revenue sooner, but expectations need to be tempered by the reality that we only just launched our marketing after a long period of quiet. In addition to building connected device customer relationships, we are cultivating connected device partnerships. Business and technology partners are an essential part mechanism for tapping into the full potential of the connected device market, and they are a key element of our customer acquisition and revenue growth strategies. The partnership with Intel, announced last quarter, continues to evolve as we integrate their vPro technology into our Square One product. 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. We also know that some of our OS licensing customers will be strong partners and have initiated discussions with them regarding scenarios where their customers would benefit from our connected device product suite. We're exploring how to turn them into channel partners for accelerating growth. We are not alone in identifying the connected device opportunity and take note that the competitive environment is intensifying. We view this changing environment as validation of the enormous potential of the connected device market. It's clear that the problems faced by device makers are real and persistent and that other smart people working independently have arrived at the same conclusion, there's a big opportunity. One huge advantage for B-Square We have been serving these customers with system software since our founding, and in that time we have helped thousands of companies build and sell millions of embedded devices. Okay, we've covered a lot of ground, and I hope I've helped you understand a bit more about the opportunity and our approach. It is still very early, and there is much more to come. As customers allow and partnerships develop, we will be sharing more. In the meantime, I hope our track record of prudent financial management will give you confidence that we're not going to spend wildly, but when appropriate, we will spend on initiatives that will accelerate our return to profitability. Before we open up for questions, I want to cover one administrative matter that we addressed in our 10Q filing today. Our annual shareholder meeting will not be held in June, but will take place later this year. Further details will be forthcoming as we finalize that date. 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.
spk03: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions.
spk04: And I'll remind everyone it is star one if you would like to ask a question at this time. And at this time, we do not have any questions in the queue.
spk02: Okay, operator, thank you very much. Investors, thank you for your time today and your interest in B-Square. If you would like to arrange a follow-up call, please email us at investorrelations at bsquare.com. Thank you and have a good afternoon.
spk03: And this concludes today's call. Thank you for your participation. You may now disconnect.
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