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Edited Transcript of BLIN earnings conference call or presentation 15-May-19 8:30pm GMT

Q2 2019 Bridgeline Digital Inc Earnings Call

WOBURN May 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Bridgeline Digital Inc earnings conference call or presentation Wednesday, May 15, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carole Ann Tyner

Bridgeline Digital, Inc. - CFO & Treasurer

* Roger E. Kahn

Bridgeline Digital, Inc. - President, CEO & Director

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Conference Call Participants

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* Howard Allen Halpern

Taglich Brothers, Inc., Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Bridgeline Digital, Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your hosts for today's conference, Mr. Ari Kahn, Chief Executive Officer; and Ms. Carole Tyner, Chief Financial Officer. Carole, you may begin.

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Carole Ann Tyner, Bridgeline Digital, Inc. - CFO & Treasurer [2]

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Thank you, and good afternoon, everyone. My name is Carole Tyner, and I am the Chief Financial Officer for Bridgeline Digital. I am pleased to welcome you to our fiscal 2019 second quarter conference call.

Before we begin, I would like to remind listeners that during this conference call, comments that we make regarding Bridgeline Digital that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time, and we undertake no obligation to inform you if they do. Results that we report today should not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause Bridgeline's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today.

For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by Bridgeline with the Securities and Exchange Commission. Also, please note that on the call today, we will discuss some non-GAAP financial measures when discussing the company's financial performance. We provide a reconciliation of these non-GAAP measures to our GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting our website.

I would like to turn the call over now to Mr. Ari Kahn, our CEO and President.

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [3]

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Thank you, Carole, and good afternoon, everyone. On our last call, we discussed Bridgeline's 2019 strategy to reduce customer acquisition cost and improve our bottom line by taking advantage of the crowded marketing technology space also known as MarTech. There are over 5,000 MarTech companies, many of which are too small to operate efficiently but have excellent customer bases and technologies. Combining with the right business can enable cross-sale opportunities, stronger gross profit, faster sale cycles and differentiation of the breadth of our product suite.

In our latest quarter, Bridgeline executed 2 acquisitions and a financing to enable additional acquisitions in the future. Bridgeline entered into an asset purchase agreement with SeeVolution, Inc. that included its Celebros search product line and more than 80 e-commerce customers across the Americas and Europe. The Celebros acquisition brought Bridgeline additional SaaS subscription contracts of approximately $1.3 million in recurring revenue and strong gross margins. Based on historical contract renewal rates, Celebros provides a backlog estimated to be $3.8 million in SaaS revenue over the next 3 years.

This acquisition was made for $400,000 in cash, 40,000 shares of common stock and $100,000 over the first 10 months after the acquisition. Celebros is an e-commerce search platform with artificial intelligence, natural language processing and machine learning that helps companies increase revenues by allowing products to be better found on their website. Celebros' technology is based on the same Microsoft platform that Bridgeline has built its Unbound product suite upon, which creates synergies in our delivery of our combined product suite and opportunities for even greater gross margins.

The sales cycle for Celebros is much shorter than Bridgeline's, and we have closed multiple new sales since the acquisition. Each of the Celebros customers is a candidate for Bridgeline's software, and most of Bridgeline's customers are candidates to buy Celebros software.

Shortly after acquiring Celebros, Bridgeline entered into an asset purchase agreement with Stantive Inc. that included its OrchestraCMS product and 40 customers across the Americas and Europe. The OrchestraCMS acquisition brought Bridgeline additional SaaS subscription contracts for approximately $3.5 million in recurring revenue with 85% gross margins plus an estimated $1.7 million in annual professional services. This also included a contractual backlog of over $4.5 million in SaaS revenue, estimated to become $10 million after typical contractual renewals in the next 3 years.

This acquisition was made for $5.2 million in cash. OrchestraCMS is unique in that it is a 100% native Salesforce.com content management system. OrchestraCMS has had a long partnership with Salesforce.com, which Bridgeline has continued. We're excited to work with Salesforce.com to identify and close new customer opportunities going forward.

The OrchestraCMS customer base includes large enterprises in pharmaceuticals, retail and finance. OrchestraCMS SaaS contracts have a strong renewal history, and in recent months, more than 35% of the annual recurring revenue contracted by OrchestraCMS has renewed with 3-year subscriptions rather than the industry's typical 1-year renewal term. This renewal has allowed Bridgeline to further grow its contractual backlog, unlocking the value of the OrchestraCMS acquisition.

With OrchestraCMS and Celebros, Bridgeline now has over 200 customers compared to just 85 prior to the acquisitions and over $11 million in contractually committed backlog. And based on historical contract renewal rates, we expect over $25 million in recurring revenue over the next 3 years. Because OrchestraCMS and Celebros customers often make advanced payments of up to 1 year for their subscriptions, the transaction accounting will recognize a portion of revenue from the newly acquired SaaS agreements initially, and SaaS revenue from these customers will increase over the next 12 months as they renew their subscription agreements. Because of synergies in SaaS hosting and our partnership with Salesforce.com, we expect to report increasing gross margins over the same period.

Most importantly, we're excited to explore new ways to add value to our 200 customers with the expanded product line and to increase revenues with lower customer acquisition costs as a result. We also expect our partnership with Salesforce.com to attract new business and further reduce customer acquisition costs.

This quarter, Bridgeline executed a private placement of approximately $10 million. The proceeds from the private placement were used to acquire OrchestraCMS, retire all of our debt and fund future operations. The private placement included over $20 million of warrant coverage, which is expected to result in additional cash proceeds for the company. In fact, over $400,000 of warrants have been exercised since the private placement. Bridgeline's strategy of growth through acquisition is intended to continue through 2020. And the proceeds -- the cash proceeds from this capital raise and the warrant exercise is expected to be helpful to fund future strategic opportunities.

Thanks to recent acquisitions, Bridgeline now has several multibillion-dollar pharmaceutical customers. One pharmaceutical, OrchestraCMS customer, recently renewed their SaaS contract for a 3-year term valued at nearly $700,000, and Bridgeline now has over $650,000 in annual recurring SaaS revenue in the health care sector, including 3 top-tier pharmaceutical customers and 5 major hospitals. Bridgeline won a new customer in the health care sector just this month with one of our products from the acquisition.

Another important recent win that resulted from our acquisition is from one of the world's largest convenience store chains who increased their license and contractual -- and contracted additional services, with the contract valued at over $300,000. Franchises, brand networks and chains have long been a differentiating strength for Bridgeline, and Bridgeline expects over $1 million in annual recurring revenue in this sector for the combined businesses.

Bridgeline has added over $1 million in recurring revenue in the finance sector as a result of the acquisitions. This is in addition to the several finance and banking customers who have been longtime customers of Bridgeline. And the company now has over $1.5 million in contracted annual recurring revenue in this sector, with most of the revenue contractually committed through 2021.

Due to transition accounting of deferred revenue in the acquired SaaS contracts, Bridgeline will be reporting increasing amounts of revenue from the new SaaS contracts each month for the first 12 months after the acquisition as contracts are renewed. Very little revenue from the acquisition is recognized in our second quarter, and more will be included as Bridgeline each quarter until the end of the 12th month, at which time all SaaS contracted revenue will be recognized as Bridgeline revenue. We expect to reach approximately $10 million in annual recurring revenue for the current customer base and over $15 million in total revenue.

Bridgeline will continue to evaluate contracting opportunities like Celebros and OrchestraCMS. And we believe there are many great values in the $3 million to $10 million range that would be a great fit for Bridgeline.

And at this time, I would like to turn the call back to our Chief Financial Officer, Carole Tyner, who will provide more details of the financial results for the second quarter.

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Carole Ann Tyner, Bridgeline Digital, Inc. - CFO & Treasurer [4]

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Thanks, Ari. For today, I'll review the financial results for the quarter ended March 31, 2019.

First, I'd like to talk about revenue. Total revenue for the second quarter of fiscal 2019 was $2.2 million compared to $3.7 million in the second quarter of last year. The following are the details of the various components of this revenue. Total license revenue, comprised of subscription-based licenses or SaaS licenses and perpetual licenses, was $1.0 million for the second quarter of fiscal 2019 compared to $1.5 million in the second quarter of fiscal 2018. The decrease in revenue was primarily from a decline in SaaS revenue due to a large customer choosing not to renew one of its SaaS subscriptions, which we explained in our previous earning calls. Also contributing to this decline was a price reduction for another larger customer's contract to a change in their business model. SaaS revenue was $940,000 in the second quarter of fiscal 2019 compared to $1.3 million in the second quarter of fiscal 2018.

Our hosting revenue decreased from $293,000 in the second quarter of 2018 to $241,000 in the second quarter of this year. Our recording -- recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, decreased to $1.3 million in the second quarter of fiscal 2019 compared to $1.7 million in the second quarter of last year. This decrease was driven by the decline in SaaS revenue, as previously mentioned.

Our annualized recurring revenue or ARR in the second quarter was approximately $8.9 million. Our new engagements are typically 3-year contracts with 1-year auto renewals, except for our new acquisition with Stantive, which we're seeing have 3-year renewals.

Our services revenue was $911,000 in the second quarter of fiscal 2019 compared to $1.9 million in the second quarter of last year. As longer-term projects started to wind down, the decrease in new engagements impacts overall services revenues. The percentage of revenue associated with SaaS licenses relative to services is expected to continue to increase.

Total revenues from acquired businesses comprise approximately 13% of total revenues. Please note this does not represent a full normalized quarter. For the first reason is that Stantive was acquired in the middle of March, and Celebros was in the middle of February as well as the accounting transaction for deferred revenue, as already explained earlier in the call.

Our gross margins for the second quarter were 35.9% compared to 49.1% in the second quarter of last year. The decline in the margin is due to the decline in license revenue as well as the decline in services margins. Thanks to recent acquisitions, we expect gross margins for SaaS licenses to increase.

Moving on to operating expenses. Including restructuring and acquisition-related expenses, operating expenses increased to $2.5 million for the second quarter of fiscal 2019 compared to $2.3 million for the second quarter of fiscal 2018. Driving some of this increase is the added headcount from the 2 acquisition as well as increasing our sales infrastructure.

Interest and other expenses was impacted this quarter as well. In March, we concluded the sale of 10,227.50 units of Series C preferred stock and associated warrants for gross proceeds of $10.2 million. The net proceeds of that single transaction were allocated to each of the financial instruments based on their fair values, which were comprised of the preferred stock and the warrants. Due to accounting rules, the allocation of the purchase price was allocated to the warrants first, with any residual proceeds allocated to the preferred stock. The original valuation of the warrants was $21.5 million, and the proceeds were $10.2 million, which resulted in a noncash charge to operations of $10.3 million. The warrants will be revalued at each balance sheet date, with a change in fair value equivalent to noncash income or expense depending on the valuation fluctuations quarter-to-quarter.

Moving to the bottom line. Our net loss is $12.5 million in the second quarter of fiscal 2019 compared to $680,000 in the second quarter of fiscal 2018. As mentioned, this $12.5 million includes restructuring and acquisition-related expenses of $304,000, a write-off of unamortized debt and cost to discharge the loans that we now have 0 debt in the amount of $221,000 and as well as the warrant expense for the Series C preferred of $10.3 million that I explained earlier, also noncash. Excluding all of these charges, net loss for the quarter was $1.7 million.

Our non-GAAP adjusted net loss was $1.8 million or a loss of $0.06 per diluted share in the second quarter compared to a non-GAAP adjusted net loss of $306,000 or a loss of $3.62 per diluted share in the second quarter of last year. Our adjusted EBITDA for the second quarter of 2019 was a loss of $1.5 million compared to a loss of $185,000 in the second quarter of fiscal 2018.

I'd now like to talk a little bit about our balance sheet. At March 31, the company had cash and accounts receivable of $4.2 million. This is significantly greater that we've had -- than the past few quarters, mainly attributable to the raise that we had in March. Our total assets were $16.1 million, and our total liabilities were $24 million. There's no debt on the balance sheet as of March 31, 2019. During the quarter ended March 31, we raised a net $8.9 million, which we used to acquire businesses, pay down our line of credit to 0 and pay off our loan to Montage Capital.

As I discussed earlier, the company recorded a liability of $25.5 million for the warrants issued in the Series C preferred. These are adjusted at each balance sheet date, and the value for March 31 of these warrants was a net $20.5 million. Thank you all for listening.

And at this time, I'd like to open the call up to questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Howard Halpern with Taglich Brothers.

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Howard Allen Halpern, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [2]

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I have a couple of questions. In terms of restructuring, are we pretty much done for the year in restructuring costs?

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [3]

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There'll be some additional changes to it, especially if we do another acquisition that could happen there. But in terms of the -- and in Q3, most of the restructuring from these 2 acquisitions has happened. So in Q3, there'll be some additional restructuring because we basically did the 2 acquisitions in mid-March. And then that'll be it unless there'd be another acquisition.

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Howard Allen Halpern, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [4]

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And in terms of the 2 acquisitions that you did do, assuming no additional new customers, which, of course, should happen, what should we look for in the revenue add in the upcoming 2 quarters?

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [5]

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Right, right. So we -- the combined recurring revenue, contracted recurring revenue becomes $9.5 million in ARR. However, from a transaction accounting perspective, some of the deferred revenue from the 2 acquisitions, which totals about $4.8 million in ARR is not going to be recognized. So that's going to increase each month. And by the end of 2019 calendar year, most of the deferred revenue will then -- will be written off, and we'll be getting credit for all the revenue that we acquired. But you'll see less revenue in Q3 and in Q4 than what's represented by what we actually acquired.

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Howard Allen Halpern, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [6]

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Okay. Okay. And can you talk a little bit about -- I guess the new acquisition, the larger one is on the Salesforce.com platform. How does the cross-selling between Bridgeline and that -- how will that work? And are you seeing any traction in the cross-selling?

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [7]

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Right. So the -- so we've got 2 different new sales channels, right, that exist. One of them is with Salesforce.com, and one of them is cross-sales within our customer base. Salesforce.com has been working with Stantive for more than 5 years and has brought Stantive into several very large customers. And we are -- we extended that partnership. So now Bridgeline is a partner with Salesforce.com. We inherited all the credit that Stantive had and have deals in our pipeline right now from Salesforce.

In addition to that, we've got cross-sale opportunities. So today, essentially none of our customers have more than 1/3 of our products. So most customers don't have any Stantive and Bridgeline products, Bridgeline don't have Stantive and Celebros, so on and so forth. We've already seen some cross-sales happen from Celebros into other customers. We've got deals in our pipeline now. The Bridgeline and Stantive sales cycles are much longer. The Celebros sales cycle is relatively short, and we've already started new sales with Celebros and brought them all the way to closure just in the short number of weeks when we've owned that business.

So what I expect to see going forward in addition to cross-sales and the Salesforce deal is that we'll have a lot of sales activity happening from Celebros sales and then eventually those new deals also upselling. So that will augment our direct sales channel.

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Howard Allen Halpern, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [8]

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Okay. And from the acquisitions, too, can you talk a little bit about your sales team and how you might start to reorganize it, what the size is and what you envision it going forward into fiscal 2020?

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [9]

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Right, right. So there's -- prior to these acquisitions, we essentially had a direct sales organization, and that was it. It was selling direct, generating our leads and selling it. Now in addition to that, we've added a channel sales team, and our previous VP of Sales, Tom McGourty, is running that team. They are partnering with Salesforce.com but also with Magento, which is now Adobe, and partnering with Microsoft Azure. Those are both partners that had generated a lot of sales for the Celebros products. So they're going to be responsible for bringing in new deals in that way. And then also, we've created a customer success team that's responsible for finding cross-sale opportunities and expanding existing accounts.

So we've really got 3 different sales organizations right now. And all in all, we have -- we've hired a lot of people very recently in these orgs. I think 1, 2, 3, 4 -- probably about 9 people in those teams, more or less.

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Howard Allen Halpern, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [10]

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Okay. So we could look for the operating -- the baseline operating expenses that you talked about at around $2.5 million that should increase. That has over -- that should increase immediately, but it'll increase slightly as sales start to ramp?

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [11]

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It'll increase slightly as sales start to ramp. And then also, we -- the revenues, even if we didn't make any sales, you would see increasing revenues quarter-over-quarter for the next 2 quarters as we wind out some of the deferred revenue that was in the acquisition.

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Howard Allen Halpern, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [12]

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Okay. Okay. Well, let's hope all this stuff comes together and you find a couple more and take this company going forward.

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [13]

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Great. Thank you. Thank you, Howard.

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Operator [14]

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(Operator Instructions) I'm not showing any further questions at this time. I would now like to turn the call back over to Ari Kahn for any closing remarks.

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [15]

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Thank you. We appreciate the support and patience from our shareholders, and it's our goal to continue building a scalable business model, which in turn will build shareholder value. Thank you for joining us today, and we look forward to speaking again on our Q3 2019 conference call. Bye, everybody.

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Carole Ann Tyner, Bridgeline Digital, Inc. - CFO & Treasurer [16]

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Thank you.

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Operator [17]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.