Press Release

BSQUARE Reports Fourth Quarter and Year End Results; Reports Second Straight Profitable Quarter and Substantial Year-over-Year Bottom-line Improvement

BELLEVUE, Wash.--(BUSINESS WIRE)--March 3, 2005--BSQUARE Corporation (Nasdaq:BSQR) today reported financial results for the fourth quarter and year ended December 31, 2004. The company reported net income for the quarter of $79,000 ($0.0 per diluted share), which included $23,000 in income from continuing operations, resulting in the company's second straight profitable quarter. Net income in the fourth quarter of 2004 compared to a net loss of $3.7 million ($0.10 per diluted share) in the fourth quarter of 2003, and net income of $208,000 ($0.01 per diluted share) in the third quarter of 2004, on substantially higher revenue in the third quarter. Total revenue for the quarter was $8.9 million, compared to $10.7 million in the fourth quarter of 2003 and $10.6 million in the third quarter of 2004.

For the twelve months ended December 31, 2004, the company reported a net loss of $7.1 million, including a loss from continuing operations of $795,000, which compared to a net loss of $14.0 million in 2003, including a loss from continuing operations of $4.5 million. The company shut down its Power Handheld hardware business unit in the second quarter of 2004 and now accounts for it as a discontinued operation.

"As we stated in January, our fourth quarter top-line results were not what we hoped for, as sales of third party software products and engineering services were lower than we had anticipated due primarily to customer purchasing delays," commented Brian Crowley, Chief Executive Officer of BSQUARE. "Even so, we produced a second straight quarter of profitability on the strength of our proprietary software product sales and solid operational controls. Additionally, given a combined $80 million in losses for the preceding three years and the fact that our 2004 continuing operations loss of $795,000 included $500,000 in charges related to our discontinued Japan operation and the Microsoft audit settlement, we had a solid year."

    Key achievements during the quarter included:

    --  BSQUARE reported its second straight profitable quarter.
        Previously, the company had not reported two straight
        profitable quarters since the fourth quarter of 2000 and the
        first quarter of 2001;

    --  The company released its latest version SDIO 2.0 technology
        during the fourth quarter, and also recorded its first version
        SDIO 2.0 sale. This new version contains functionality
        requested by current SDIO Now! licensees, including support
        for the SD Card Association's latest SDIO specification,
        substantial performance enhancements, support for Windows CE
        5.0 and Microsoft's next generation Windows Mobile platform,
        and other capabilities. The company is expecting existing and
        new customers to begin adopting SDIO Now! Version 2.0 due to
        its increased functionality and performance;

    --  The company added a number of new SDIO licensees during the
        quarter including: Symbol, Widcomm (Broadcom), Ratoc Systems,
        EOps Technology, SiRF, and Abocom;

    --  Sales of Microsoft embedded operating system toolkits, which
        are typically purchased early in the development process and
        are a forward-looking indicator of Microsoft embedded
        operating system license sales, increased 20% from the third
        quarter of 2004;

    --  BSQUARE completed 20 service engagements as compared to 11 in
        the third quarter. These engagements included software
        development and quality assurance for a Windows Mobile-based
        rugged PDA for use in transportation applications, development
        of Windows CE 5.0-based board support packages for leading
        silicon vendors, Windows CE development for telecommunications
        and industrial devices and several Windows XP Embedded
        development and quality assurance engagements;

    --  Late in the fourth quarter, the company released the BSQUARE
        Audio Manager (BAM). BAM is the first in a series of
        proprietary software technology that the company expects to
        release as a result of intellectual property and know-how
        developed during service engagements. BAM implements the
        entire audio subsystem for a Microsoft Windows Mobile-based
        Smartphone, allowing customers to get to market faster with a
        higher quality audio implementation;

    --  The company introduced two new training packages: Microsoft
        Windows CE 5.0, and Migrating to Windows CE 5.0; and

    --  BSQUARE participated in Microsoft's October announcement of
        the new Windows Embedded for Point of Sale (WEPOS) platform.
        BSQUARE is a systems integrator for WEPOS and will resell the
        platform to device makers and retailers when available in the
        first half of 2005, along with complementary BSQUARE service
        and product offerings.

Commenting on the achievements during the quarter, Crowley noted, "We are committed to running our business profitably as we increasingly focus on our growth initiatives, particularly new proprietary software products. The release of our SDIO Now! 2.0 and the BSQUARE Audio Manager are the first steps of an increased focus on our proprietary software initiatives."

Software Results

Software revenue in the fourth quarter was $6.5 million, including $5.7 million in sales of Microsoft embedded software. This compared to software revenue of $8.6 million in the fourth quarter of 2003 and $8.1 million in the third quarter of 2004, including $7.6 million and $7.4 million in sales of Microsoft embedded software, respectively. Sales of the company's SDIO Now! software product contributed $357,000, $443,000 and $578,000 to software revenue in the fourth quarters of 2004 and 2003, and the third quarter of 2004, respectively. The company realized $325,000 in revenue from non-SDIO proprietary software products in the fourth quarter of 2004, mainly generated through a sale of the company's Smartbuild reference design to a military supplier.

Crowley commented, "Fourth quarter sales of Microsoft embedded operating systems were off $1.7 million from the third quarter, the majority of which related to lower-than-anticipated order volumes from our largest customer, which unexpectedly lowered inventory levels. But, we had a strong quarter in sales of BSQUARE proprietary products, even as sales of SDIO Now! declined as expected, while customers transition to the newly released version 2.0. The revenue generated through the sale of our Smartbuild reference design is a good example of the type of opportunity that we will capitalize on via the reference solutions we will bring to market later this year. By providing our customers with integrated solutions, they can get to market faster with greater functionality. We also believe that these types of solutions will drive additional professional service opportunities as customers will look to us for expertise in customizing these solutions."

Software revenue for the full-year 2004 was $28.4 million, including $25.1 million in sales of Microsoft embedded software and $1.8 million in sales of SDIO Now! This compared to software revenue of $28.2 million for the full-year 2003, which included $24.6 million in sales of Microsoft embedded software and $1.6 million in sales of SDIO Now! Sales of Microsoft embedded operating systems were relatively flat year-over-year because of two quarters in 2004 during which order volumes from BSQUARE's largest customer declined, as well as increased competition from other authorized distributors in the North American marketplace. The company expects sales of Microsoft embedded operating systems to rebound in the first quarter of 2005.

Software gross margin was 24% for the quarter, compared to 20% and 21% for the fourth quarter of 2003 and the third quarter of 2004, respectively. The increase in margin in the fourth quarter of 2004 was driven by high-margin BSQUARE software products comprising a larger percentage of overall software revenue. For the full-year 2004, software margin was 23%, compared to 24% in the prior year.

Service Results

Service revenue for the quarter was $2.4 million, compared to $2.1 million in the fourth quarter of 2003 and $2.4 million in the third quarter of 2004. "We are not happy with the performance in our service revenue line," Crowley commented. "While we have added sales capacity during the year, we have yet to demonstrate sustainable growth in this area. However, activity levels are picking up and several of the service projects we completed this quarter were feasibility studies that we expect will lead to follow-on work. We expect improvement in the service revenue line in the first quarter of 2005. One of our focuses for 2005 is to strengthen sales management and execution in this area."

For the full-year 2004, service revenue was $10.6 million, compared to $9.4 million in the prior year. The year-over-year increase stemmed from several large Smartphone development projects in 2004, not present in 2003.

Service gross margin was 22% in the fourth quarter of 2004, compared to (16)% in the fourth quarter of 2003 and 24% in the third quarter of 2004. For the full-year 2004, service gross margin was 24%, compared to (4)% in the prior year. The improvement in margin year-over-year reflects substantial improvements in the areas of contract management, pricing, and resource utilization.

Operating Expenses and Other Financial Items

During the quarter, selling, general and administrative and research and development expenses were $2.1 million, compared to $3.1 million in the fourth quarter of 2003 and $2.4 million in the third quarter of 2004. The decrease in quarterly operating expenses is attributable to a variety of items including lower facility costs, headcount costs, professional fees and closure of the company's Japan operation. The total decrease in operating expenses from the third quarter was $220,000, of which the majority was attributable to lower facility expenses relating to headquarter move costs present in the third quarter and related items.

For the year-ended 2004, selling, general and administrative and research and development expenses were $10.0 million, compared to $14.4 million in 2003, a decrease of $4.4 million, or 31%. The decrease in operating expenses year-over-year related to a variety of factors noted previously.

Scott Mahan, BSQUARE's chief financial officer, commented, "We have made substantial progress right-sizing our operating expenses but we do not expect expenses to continue decreasing in the future. We expect to incrementally invest in research and development in the coming year to support our proprietary products initiatives. Additionally, we foresee some incremental costs associated with Sarbanes-Oxley compliance but we have not had time to fully analyze the implications of the SEC compliance extension announced yesterday. We don't foresee significant investments in our sales organization in 2005, and any investments will likely take place internationally to capitalize on that growing segment. Further, we see room for margin improvement in the services area driven by capacity availability and other factors." The company has not yet finished its financial assessment of the implementation of FAS123R (Share-Based Payments) addressing stock option accounting, which will be adopted on July 1, 2005.

The company's cash and cash equivalents and short-term investments declined by $1.2 million during the quarter, ending at $12.9 million as of December 31, 2004, of which $1.2 million was restricted. This decrease was attributable to the decline in sales of Microsoft embedded operating systems during the quarter, the timing of those sales within the quarter, and the resulting impact on royalty payments to Microsoft. The royalty payable to Microsoft decreased by $1.9 million at December 31, 2004, as compared to September 30, 2004. Additionally, the company made the last of its quarterly lease restructuring payments of $285,000 during the quarter. The non-restricted portion of the company's cash and cash equivalents and short-term investments increased by $280,000 during the fourth quarter due to the cancellation of letters of credit supporting its former headquarters location. The company has no outstanding debt.

Growth Initiatives

"As we discussed last quarter, our growth strategy is to provide proprietary products to our OEM and ODM customers," Crowley noted. "Our customers are asking for solutions to help them manage the increasing complexity of device development and speed their devices to market. In addition to our previously announced SDIO Now! and BAM efforts, the company is devoting resources to other 2005 product growth initiatives which will begin to roll out in the second half of the year. Our customers want to focus their efforts on differentiating their products, and continue to look to companies like BSQUARE to provide the device reference solutions with integrated middleware technologies that they can build upon."

Conference Call

Management will host a conference call on March 3, 2005, at 5:00 p.m. Eastern time (2:00 p.m. Pacific time) to discuss the company's results. To access the call, please dial 800-218-4007 or 303-262-2130 and reference "BSQUARE" or conference 11022231. A replay will be available for one week following the call by dialing 800-405-2236 or 303-590-3000; reference conference ID 11022231. A live and replay webcast of the call will be available at in the investor relations section.


BSQUARE is a leading global provider of software, engineering services and consulting for the smart device market. Since 1994, BSQUARE has provided world-class device makers with the building blocks necessary to design, develop, and test innovative products quickly and cost effectively. A sample of BSQUARE customers includes Motorola, Hewlett-Packard, Texas Instruments, NEC, Sierra Wireless, HTC, Microsoft and others. BSQUARE is one of Microsoft's largest value-added partners worldwide for Windows Embedded software, a Gold-level Systems Integrator of the year and a leading Windows Mobile solutions provider for Smartphone and Pocket PC. BSQUARE is a Texas Instruments-licensed Independent OMAP(TM) (Open Multimedia Application Platform) Technology Center. The company's SDIO Now! technology has been adopted by top-tier smart device makers around the world. For more information, visit BSQUARE at or call 888-820-4500.

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 statements relating to our projected financial results and proprietary products strategy. The words "believe," "expect," "intend," "anticipate," variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Our forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict and could cause actual results to differ materially from those projected. Factors that could affect our actual results include a decline in the market for our products, technology licenses and services; a decline in the market for Windows-based or other smart devices or the failure of this market to develop as anticipated; adverse changes in macro-economic conditions; our ability to successfully implement, execute and make adjustments in our business strategy, business model or product offerings to meet the needs of our current, new and potential customers; risks associated with the effects of our restructurings; our ability to successfully support our operations; competition; and intellectual property risks. A more detailed description of certain factors that could affect actual results include, but are not limited to, those discussed in BSQUARE's Annual Report on Form 10-K for the year ended December 31, 2003 in the section entitled "Risk Factors" and in our subsequent Quarterly Reports on Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release. We undertake no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date of this release or to reflect the occurrence of unanticipated events.

                          BSQUARE CORPORATION
                 (in thousands, except share amounts)

                                             December 31, December 31,
                                                 2004         2003
          ASSETS                            ------------ -------------
Current assets:
 Cash and cash equivalents                  $     4,943  $      5,700
 Restricted cash                                    ---         3,906
 Short-term investments                           6,800         8,139
 Accounts receivable, net of allowance for
  doubtful accounts of $222 in 2004 and $320
  in 2003                                         4,841         6,263
 Current assets of discontinued operations          ---         2,401
 Prepaid expenses and other current assets          547           856
                                             -----------  ------------
  Total current assets                           17,131        27,265
Equipment, furniture and leasehold
 improvements, net                                  784           640
Restricted cash                                   1,200           ---
Non-current assets of discontinued
 operations                                         ---         1,660
Other assets                                         16           548
                                             -----------  ------------
  Total assets                              $    19,131  $     30,113
                                             ===========  ============


Current liabilities:
 Accounts payable                           $     1,340  $      3,541
 Other accrued expenses                           2,880         3,016
 Accrued compensation                               878         1,063
 Accrued legal fees                                 534           576
 Deferred rent                                      375            --
 Accrued restructuring costs and other               --         1,433
 Deferred revenue                                   390         1,146
                                             -----------  ------------
  Total current liabilities                       6,397        10,775

Shareholders' equity:
  Preferred stock, no par value:
   authorized 10,000,000 shares; no shares
   issued and outstanding                            --            --
  Common stock, no par value: authorized
   150,000,000 shares, issued and
   outstanding, 38,132,479 shares in 2004
   and 37,503,176 shares in 2003                118,350       117,889
  Accumulated other comprehensive loss             (406)         (392)
  Accumulated deficit                          (105,210)      (98,159)
                                             -----------  ------------
  Total shareholders' equity                     12,734        19,338
                                             -----------  ------------
  Total liabilities and shareholders'
   equity                                   $    19,131  $     30,113
                                             ===========  ============

                          BSQUARE CORPORATION
                 (in thousands, except per share data)

                                    Three Months      Twelve Months
                                        Ended              Ended
                                     December 31,       December 31,
                                  ----------------- ------------------
                                    2004     2003     2004      2003
                                   -------  -------  -------  --------
                                (unaudited)        (unaudited)
 Software                         $ 6,524  $ 8,593  $28,364  $ 28,163
 Service                            2,406    2,092   10,556     9,379
                                   -------  -------  -------  --------
   Total revenue                    8,930   10,685   38,920    37,542
                                   -------  -------  -------  --------
Cost of revenue:
 Software                           4,933    6,835   21,893    21,401
 Service                            1,880    2,423    7,977     9,740
                                   -------  -------  -------  --------
   Total cost of revenue            6,813    9,258   29,870    31,141
                                   -------  -------  -------  --------
    Gross profit                    2,117    1,427    9,050     6,401
                                   -------  -------  -------  --------
Operating expenses:
 Selling, general and
  administrative                    1,857    2,940    9,176    12,609
 Research and development             276      128      855     1,768
 Amortization of intangible
  assets                               --       --       --        50
 Impairment of goodwill and other
  intangible assets                    --       18       --       453
 Restructuring and other related
  charges (credit)                     --     (543)      40    (2,960)
                                   -------  -------  -------  --------
    Total operating expenses        2,133    2,543   10,071    11,920
                                   -------  -------  -------  --------
Loss from operations                  (16)  (1,116)  (1,021)   (5,519)
Other income (expense), net            42      105      237     1,059
                                   -------  -------  -------  --------
Income (loss)  from continuing
 operations before income taxes        26   (1,011)    (784)   (4,460)
Provision for income taxes             (3)      (6)     (11)      (75)
                                   -------  -------  -------  --------
Income (loss) from continuing
 operations                            23   (1,017)    (795)   (4,535)
Income (loss) from discontinued
 operations                            56   (2,656)  (6,256)   (9,449)
                                   -------  -------  -------  --------
Net income (loss)                 $    79  $(3,673) $(7,051) $(13,984)
                                   =======  =======  =======  ========

Basic and diluted loss per share:
   Income (loss) from continuing
    operations                    $  0.00  $ (0.03) $ (0.02) $  (0.13)
   Income (loss) from
    discontinued operations       $  0.00  $ (0.07) $ (0.17) $  (0.25)
                                   -------  -------  -------  --------
   Basic and diluted income
    (loss) per share              $  0.00  $ (0.10) $ (0.19) $  (0.38)
                                   =======  =======  =======  ========
Shares used in calculation of
 loss per share:
   Basic                           38,027   37,474   37,855    37,270
                                   =======  =======  =======  ========
   Diluted                         39,473   37,474   37,855    37,270
                                   =======  =======  =======  ========

    CONTACT: BSQUARE Corporation
             Scott Mahan, 425-519-5900

    SOURCE: BSQUARE Corporation