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Edited Transcript of BLIN earnings conference call or presentation 14-Aug-19 8:30pm GMT

Q3 2019 Bridgeline Digital Inc Earnings Call

WOBURN Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Bridgeline Digital Inc earnings conference call or presentation Wednesday, August 14, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Gerard Downey

Bridgeline Digital, Inc. - Executive VP, 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 thank you for standing by. Welcome to the Bridgeline Digital Third Quarter 2019 Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded.

Now it's my pleasure to turn the call to Mark Downey, Chief Financial Officer for Bridgeline.

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Mark Gerard Downey, Bridgeline Digital, Inc. - Executive VP, CFO & Treasurer [2]

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Thank you, and good afternoon, everyone. My name is Mark Downey, and I am the Chief Financial Officer for Bridgeline Digital. I am pleased to welcome you to our fiscal 2019 third 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, technical, 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 Digital 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 financials in our earnings release. You can obtain a copy of earnings release by visiting our website.

I would now like to turn the call over to Ari Kahn, our President and Chief Executive Officer.

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

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Thank you, Mark, and good afternoon, everyone.

In our second quarter this year, Bridgeline acquired 2 companies, Stantive and SeeVolution. It has transformed our company's market position and financial status. These acquisitions brought us the Celebros and OrchestraCMS products and more than doubled our customer base and doubled our backlog of annual recurring revenue. They brought artificial intelligence technologies into our product suite and helped establish a partnership with Salesforce.com that has made a substantial impact on our company's sales pipeline and ability to win competitive sales opportunities. With OrchestraCMS and Celebros, Bridgeline now has over 200 customers and a projected backlog of $27 million in recurring revenue over the next 3 years using historical renewal rates for the new products.

As discussed on our previous conference call, most revenue associated with Stantive contracts could not be recognized until the first anniversary of that acquisition. So our recognized revenue on those licenses will grow each quarter until February 2020, which should result in the company seeing sequentially increasing SaaS revenue quarter-over-quarter and drive a stronger bottom line.

By combining these 3 companies, we have not only improved our competitive position in the market and locked in stronger recurring revenue going forward, we have also found substantial operational synergies. We created $4 million in annual operating improvements, with all restructuring charges being reflected within our third quarter results. No restructuring costs going forward. Integration is now complete, and we expect no future restructuring initiatives. Furthermore, we found combined technical synergies that are expected to improve our gross margins, and our gross margins on our new OrchestraCMS licensing platform are over 85%.

With these operational improvements, Bridgeline has paved a way to become a profitable software company in 2020, after which we'd recognize all deferred Orchestra license revenue. This is uniquely strong financial position for marketing technology SaaS business of our size, and we intend to leverage this strength to become a market leader in the broader marketing technology space.

Integration of the 3 businesses was completed very quickly due to the natural synergies between the companies' technology and customer bases. In the short time frame, Bridgeline launched 15 customer websites, 7 of which were on our newly acquired product lines.

Our new customers are renewing their licenses and agreeing to multi-year renewals, which has brought our contractual backlog from $6.6 million to approximately $10 million. And when renewals are projected, the 3-year backlog grew from $13.4 million to $27.4 million, of which $14 million is from new customers acquired.

Renewals include one of the 5 largest chains of pharmacies in the United States with over 10,000 store locations and a global biopharma company with over $20 billion in revenue and 20,000 employees.

On Celebros acquisition, Bridgeline had only a small partner program with most sales being sourced from direct marketing efforts. Today, we have partnerships with Salesforce, Shopify, Magento, Microsoft and UPS, all of them adding to our pipeline.

In the first quarter, post acquisition of the combined companies, our sales pipeline has expanded significantly, and we closed 6 Celebros sales alone, which are nearly pure license sales and add to our SaaS backlog.

We also won a new manufacturing customer who is making the transformation from a pure B2B company into a B2B and B2C business with over $0.5 million initial investment in Bridgeline Technologies to achieve its goal.

Bridgeline has helped many companies make this transformation in many years, especially in the manufacturing sector, and our new software establishes an even stronger position for this market.

Bridgeline now has several health care customers with over $650,000 of annual recurring SaaS revenue, including 3 top tier pharma customers and 5 major hospitals. Franchises, brand networks and chains have long been a differentiating strength for Bridgeline, and we are now even stronger in that segment. We now have over $1 million in annual recurring revenue in brand networks alone.

We have over $1.5 million in recurring revenue in the finance sector and most of the revenue is contractually committed through 2021. The company now has a great path towards being a profitable business in 2020. And our ability to recognize all revenue from the acquired customers is achieved within our strong presence in key markets and great differentiating technologies and partners for top line growth. We're very excited about our future.

At this point, I would like to turn the call over to our Chief Financial Officer, Mark Downey, who will provide more details of the financial results for our third quarter.

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Mark Gerard Downey, Bridgeline Digital, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Ari. Today, I will review our financial results for the quarter ended June 30, 2019. Total revenue for the quarter ended June 30, 2019, was $2.7 million compared to $3.1 million for the same period last year.

The following are the various components of revenue. Recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, increased 5% to $1.6 million for the quarter ended June 30, 2019, from $1.5 million for the same period in 2018.

Accounting rules dictate that the full contract is not recognized upon acquisition. And therefore, only a portion of the revenue associated with the OrchestraCMS will be recognized. Upon the first annual license payment of these acquired contracts, we will be able to recognize the full value of the contract over the term of the license.

SaaS revenue, which represents 78% of the June 30, 2019, quarterly recurring revenue, increased 8% to $1.2 million from $1.1 million or 76% of the June 30, 2018, quarterly recurring revenue.

Hosting revenue increased 4% to $300,000 or 9% of total revenue for the quarter ended June 30, 2019, from $200,000 or 8% of total revenue for the same quarter last year.

Services revenue was $1.1 million or 42% of total revenue for the quarter ended June 30, 2019, compared to $1.6 million or 51% of total revenue for the same period last year.

Bridgeline's focus is on increasing license revenue in some of its newer products, such as the Celebros product line require a little or no services to implement. This focus, along with the company's new partnerships and customers' ability for self service, are expected to further increase our license-to-service ratio over time.

Our annualized recurring revenue or ARR for the quarter ended June 30, 2019, is approximately $8.5 million. New engagements are typically 3-year contracts with 1-year auto renewals. However, some of our OrchestraCMS customers have elected multiyear renewals. Our contractual backlog is approximately $10 million and is projected to be $27.4 million based on historical renewal rates.

Total revenues from our 2 acquired businesses comprised approximately 36% of the total revenues for the quarter ended June 30, 2019. It's important to note that this does not represent a full normalized quarter because, as mentioned above, to purchase accounting principles, acquired deferred revenue contracts are not realized at their full value upon acquisition date.

Now we'll talk about operating expenses. Operating expenses for the quarter ended June 30, 2019, decreased 40% to $4 million from $6.7 million for the same period last year. Included within these amounts are restructuring and acquisition-related costs of $900,000 for the period ended 2019. Note that a goodwill impairment charge of $4.6 million occurred last year for the same period ended 2018.

Naturally, the added headcount from the 2 acquisitions increased costs and we also increased our sales infrastructure. The restructuring charges applicable to these changes have been executed in this quarter, and we will see a reduction in overall operating expenses that will more closely align with our revenues in future periods.

Interest and other expenses. As mentioned on our previous earnings call in May, we concluded the sale of 10,227.5 units of Series C preferred stock and associated warrants for a gross proceeds of $10.2 million. The net proceeds for that transaction were allocated to each of the freestanding financial instruments based on their fair values, which were comprised of the preferred stock and warrants.

Due to fair value derivative accounting rules, the original fair market valuation of the deferred stock and warrants at March 31, 2019, was $21.5 million, less the proceeds received at $10.2 million, resulting in a noncash charge to other expense of $11.3 million in March.

On June 30, the derivative warrants were independently revalued, resulting in a $10.1 million noncash gain to other income. The net result of these 2 noncash transactions resulted in an overall net charge to income of $100,000 for the 9 months ended June 30, 2019. Adjusted EBITDA, non-GAAP adjusted net income and GAAP income.

Net income for the quarter ended June 30, 2019, is $7.3 million, inclusive of a noncash gain to other income attributable to the change in fair value of certain derivative warrant liabilities of $10.1 million and restructuring and acquisition-related costs of $900,000 compared to a net loss of $5.2 million for the quarter ended June 30, 2018. Adjusted EBITDA loss for the period ended June 30, 2019, is $1.6 million compared to $300,000 for the same period in 2018. Our non-GAAP adjusted net income for the period ended June 30, 2019, is $8.6 million or earnings of $4.21 per diluted share compared to non-GAAP adjusted net loss for the same period in 2018, of $300,000 or a loss of $4.06 per diluted share.

Turning to a review of Bridgeline's balance sheet. At June 30, 2019, the company had cash of $1.3 million and accounts receivable and unbilled receivables net of $1.7 million. Our total assets are $13.2 million and total liabilities are $10.1 million. There is no debt on the balance sheet as of June 30, 2019.

Thank you all for listening. And at this time, we would like to open the call up to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question from the line of 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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With, I guess, the restructuring complete, I guess, you go over a little bit of now, what -- since you have now all 3 units, what's the average sales cycle time and then implementation once a customer is acquired?

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

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Sure, sure. So the Celebros product line has an average sales cycle of 2 or 3 weeks. Similarly, we made 6 sales in 12 weeks in our third quarter, so I guess that's a 2-week average. And there's very little implementation effort on that because -- maybe a week worth of implementation. On both the OrchestraCMS and the Bridgeline Unbound, the sales cycles there are 4 to 6 months, with implementation time in the 6-month range as well. The Orchestra sales, we tend to come into those deals later in the sales cycle because we're being introduced by Salesforce.com in many cases. So the sales cycle might already be 2 months in before we enter that, resolving in really just 1 month of our participation.

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

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Okay. Okay. And now I guess in terms of really nice outlook for 2020, what -- for modeling purposes, I guess what would you estimate -- what top line revenue would get you to operating income or operating breakeven?

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

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Sure. So we're going to have top line income in the $5 million range to be generating net income, and most of that revenue is kind of locked-in already. We are not recognizing all of that yet because of this transaction accounting on the acquired contracts. But the first anniversary for all the acquired contracts is February 2020. And at that point, based on what we have already, we're going to be pretty close there, and we think that we're going to be generating a positive net income early in 2020. And also, we've got no debt on the books right now. We finished the quarter with a decent cash balance and do not anticipate doing any equity raise or anything between now and then, possibly establishing the ARR credit line or something, but that would be it.

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

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Okay. And now that you've sort of established this industry prong platform, are there any -- is there a pipeline that you're looking at, a potential bolt-on type acquisitions that could leverage what you've done?

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

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Right. Well, we're being approached by companies regularly, like more than once a month to review us acquiring them. So we're seeing a lot of activity there. And we were able to integrate these businesses very quickly within 3 months. The company operates as a single company. So from an operational perspective, integrating another $2 million to $5 million business would not be a problem at all. That said, we want to establish a couple of quarters of showing our bottom line results. We think that, that's going to be meaningful to investors. So our primary focus is operations right now, with more of an opportunistic review of incoming acquisitions. We do think that strategic acquisitions are a key part of our future. And in 2020, we'll make an even greater concerted effort to review opportunities.

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

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Okay. Well, keep up the great work. It seems like the transformation is going as planned.

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

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Great. Thank you.

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Operator [10]

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(Operator Instructions) Our next question is from Carol Lee with [Accord Partners.]

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Unidentified Analyst, [11]

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We just have a few question on the goodwill impairment and financial. Can you repeat what the goodwill impairment is for this quarter? And then go and explain why you've had the goodwill impairment costs you've had for the past like 5 quarters?

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [12]

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Sure. So we did not have a goodwill impairment this quarter. We had a goodwill impairment the same period last year. And those -- that impairment is really just based on our stockholders' equity versus the share price. So it was a noncash event and had nothing to do with operations or revenues or anything like that.

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Unidentified Analyst, [13]

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Okay. So going a little further on that. I think for your quarter 2 10-Q and like the goodwill portion, you kind of noted that some of the goodwill impairment costs came from the OrchestraCMS acquisition. So are you saying that, that's not true?

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [14]

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Are we looking at previous quarters?

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Unidentified Analyst, [15]

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Yes. Quarter 2 for this year.

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [16]

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So that will be -- I got to pull up last quarter to look at that. So this quarter Q3, there's none. And in Q2, it's really related to the same thing. So we did a capital raise in Q2 that changed stockholders' equity and the market price of the stock is what -- in both the goodwill impairment. So it was the same thing I was talking about a year ago.

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Operator [17]

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And sir, I'm not showing any further questions in the queue. I would like to turn the call back to Ari Kahn, the President and Chief Executive Officer, for his final remarks.

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [18]

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Great. Thank you. Well, we appreciate the support and patience of all 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 you speaking again on our Q4 fiscal '19 conference call.

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Operator [19]

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And with that, ladies and gentlemen, we thank you for participating in today's conference. You may now disconnect. Have a wonderful day.