BSQUARE (BSQR)

Gross Profit and Gross Margin Results

Overall gross profit was $3.4 million for the quarter, or 21% of total revenue, as compared to $4.4 million, or 27% of total revenue, in the prior year, with the gross profit decline attributable to a $1.4 million decline in service gross profit due largely to the Ford project. The overall gross margin decline was driven by a 16 percentage point decline in service gross margin. Third-party software margin was 17% for the quarter compared to 15% in the prior year. Proprietary software gross margin was 84% this quarter, down from 97% in the prior year due to amortization of intangible assets associated with the TestQuest acquisition. Service gross margin was 17% for the quarter, compared to 33% in the prior year. The service gross margin decline was primarily attributable to the Ford project overruns. Overall gross profit was $12.2 million, or 25% of total revenue, for the first nine months of 2009 compared to $12.7 million, or 26% of total revenue, in 2008. The decline in overall gross profit and margin for the nine-month period was driven by the same factors impacting this quarter.

Gross Profit and Gross Margin Results

Overall gross profit was $4.4 million for the quarter, or 27% of total revenue, as compared to $3.7 million, or 24% of revenue, in the prior year, with the increase driven by increases in both service and proprietary software gross profit, partially offset by lower third-party software gross profit. Third-party software

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margin was 16% for the quarter compared to 15% in the prior year. Proprietary software gross margin was 88% this quarter, down from 90% in the prior year due to amortization of intangible assets associated with the TestQuest acquisition. Service gross margin was 28% for the quarter, compared to 31% in the prior year. The decrease was driven by the year-over-year bill rate decline, which had the effect of reducing service margin by six percentage points. Overall gross profit was $8.8 million, or 27% of total revenue, for the first half of 2009 compared to $8.4 million, or 25% of total revenue, in 2008.

Gross Profit Margin Results

Overall gross profit was $4.4 million for the quarter, or 27% of total revenue, as compared to $4.5 million, or 27% of revenue, in the prior year, with the gross profit decline driven by a $478,000 decrease in third-party software gross profit which was largely offset by higher service gross profit. Third-party software margin was 16% this quarter and in the prior year. Proprietary software gross margin was 87% this quarter, down from 99% in the prior year due to amortization of intangible assets associated with the TestQuest acquisition. Service gross margin was 29% for the quarter, compared to 34% in the prior year. The decrease was driven by the year-over-year bill rate decline which had the effect of reducing service margin by seven percentage points.

Gross Profit Margin Results

Overall gross profit was $2.5 million, or 24% of total revenue, for the quarter, compared to $2.2 million, or 25%, and $1.9 million, or 19%, in the second quarter of 2004 and first quarter of 2005, respectively.

Software gross margin was 25% for the quarter, compared to 25% and 21% for the second quarter of 2004 and first quarter of 2005, respectively.  The higher software margin this quarter, as compared to the first quarter of 2005, was driven by sales of high-margin proprietary software products comprising a larger percentage of overall software revenue.  Third-party software margin was approximately 14% this quarter, two percentage points lower than the second quarter of 2004 and identical to the first quarter of 2005.  Service gross margin was 23% this quarter, compared to 24% and 15% in the second quarter of 2004 and first quarter of 2005, respectively.  The increase in service gross margin, as compared to the first quarter of 2005, was attributable to higher revenue volume on a slightly lower service cost of sales base.  Scott Mahan, BSQUARE’s chief financial officer, commented, “For several quarters we have discussed the fact that we have been under capacity in our service delivery organization.  This quarter we were able to leverage that available capacity as we grew service revenue with no resulting increase in costs.”

Gross Profit Margin Results