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Edited Transcript of BLIN earnings conference call or presentation 15-May-18 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2018 Bridgeline Digital Inc Earnings Call

WOBURN May 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Bridgeline Digital Inc earnings conference call or presentation Tuesday, May 15, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael D. Prinn

Bridgeline Digital, Inc. - Executive VP & CFO

* 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

* Manoj Nadkarni

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for your patience. You've joined Bridgeline Digital's Second Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Chief Financial Officer, Mr. Michael Prinn. Sir, you may begin.

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Michael D. Prinn, Bridgeline Digital, Inc. - Executive VP & CFO [2]

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Thank you. Good afternoon, everyone. I'm pleased to welcome you to our second quarter conference call. Before we begin, I'd 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 result 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 in talking about the company's financial performance. We report our GAAP results as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting our website.

I'll now turn the call over to Ari.

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

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Thank you, Mike, and good afternoon, everyone. In the second quarter of fiscal 2018, we had revenue of $3.7 million, which is about $300,000 lower than our first quarter. The difference is primarily due to lower professional services with customers using more of the out-of-the-box features in our Pro-Series and investments being made with key customer to enhance our product and create new sales opportunity. Recurring revenue is slightly lower compared to Q1 but is up year-to-date. And the long-term nature of our SaaS contract gives us a strong recurring revenue stream that has our strongest gross margins.

Hosting grew by 12% this quarter totaling nearly 20% year-to-date. We expect to add new hosting engagements due to increased requirements in security and regulatory needs, such as American Disabilities Act and General Data Protection Regulation. Our SaaS customers can upgrade their subscription to various enhanced hosting options, and our Perpetual license customers usually look to us for managed hosting with enhanced services to their subscription. SOC 2 certification has been helpful in winning B2B customers and demand for PCI hosting is found in both B2B and B2C engagements.

We continue to see great interest in B2B sector where we have strong competitive edge due to our out-of-the-box B2B features set in our commerce product. In partnership with key B2B customers, Bridgeline is enhancing its products to provide even more competitive features. Some of the key differentiators that help Bridgeline compete so well in the B2B sector are out-of-the-box order attribution, inventory replenishment, customer price tiers, account roles and large order support with freight shipping. In addition to commerce features, our highly customizable managed hosting options proved to be a decisive advantage when selling into B2B accounts.

Traditional commerce B2B market is twice the size of the B2C market, but B2B is a laggard in e-commerce that is rapidly trying to catch up. Now that e-commerce has become commonplace in the new generation of B2B users, expect to make their business purchases online.

We continue to focus on growing sector and expect continuing success winning B2B accounts. Bridgeline presented its latest capabilities at the B2B Online Digital Market conference in Chicago last week, where we found great interest and initiated dialogues with several prospective customers. Few of our larger B2B customers are expanding their web deployment in the Europe right now, where higher regulatory requirements make us a great fit.

We expect to launch both new European sites this summer, which demonstrates not only our capabilities for those regulatory challenges but also our speed to market for large enterprises. These are great revenue opportunities for us.

In addition to the growth of the B2B sector, we continue to see B2C demand. One of our most recent new customers is a health care system servicing 150,000 patients throughout New England, that operates several hospitals and primary care practices as well as a public health department. They help increase their customer engagement. They've engaged Bridgeline to create a multilanguage site with high levels of content for self-help and self-education as well as advanced health blogs and physician directories.

Bridgeline recently engaged with AARP International to enhance its desktop and mobile website. We are partnering with AARP to create an online interactive aging readiness and competitiveness report and an interactive subsite that will provide visitors with access the per country needs feeds and other localized content.

Our Professional Services division launched a customer success team to more deeply understand our customers need and further expand the value we deliver to them. This team has built a strong pipeline of new opportunities within our existing customer base and created additional services products to further help customers, including trading, ADA compliance, GDPR audits and other initiatives.

In our first quarter, we noted that Bridgeline made a strategic investment in the services organization with a key customer. And in the second quarter, we completed that investment, which had a $150,000 impact on Q2 revenue. We paved the way for future sales opportunities and created further improvements to our product line.

Bridgeline has seen an increase in referrals from channel partners and has begun expanding its channel network with reseller agreement and -- for digital agencies and system integrators. In these partnerships, we expect to be included in more sales opportunities with our partner performing some of the professional services for engaged -- to reach engagement.

And the license revenue coming to Bridgeline, investments in our product, especially enhancements to core templates and other marketing capabilities added in version 6.0 have made our software even more compelling for partner channel sales.

In October, rereleased version 6.0 of our product suite, which included an updated user interface with more flexible content authoring enhanced search and new marketing campaign builder. Version 6.0 also includes improvements for multilanguage and multicurrency e-commerce sites, which tie in well with our GDPR-hosting capabilities and were the foundation for the 2 commerce sites that we're launching in Europe this summer.

This year, we are further investing in our software with several B2B enhancements, specifically requested by new B2B customers. These capabilities further differentiate us in the B2B market to drive greater revenue from those customers. And at this time, I'd like to turn the call over to our Chief Financial Officer, Mike Prinn, who'll provide more details on the financial results of our second quarter. Mike?

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Michael D. Prinn, Bridgeline Digital, Inc. - Executive VP & CFO [4]

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Thanks, Ari. So let me go through the results of operations for the second quarter of fiscal 2018 ended March 31. Total revenue for the second quarter of fiscal 2018 was $3.7 million compared to $4.0 million in the second quarter of last year. We get some additional color around the different parts and pieces of revenue. So our service revenue was $1.9 million in the second quarter of fiscal 2018 compared to $2.2 million in the second quarter of last year. The decrease in service revenue is primarily attributable to time that we strategically encouraged to provide capabilities to a key customer that creates future revenue opportunities for us as well as improvements to our software. We talked about this a little in Q1 as well. And I'm pleased to report, we successfully launched the customer website in March and the investments made by Bridgeline are now complete for this customer in opportunity. This made up most of the decrease in the service revenue from Q2 of this year compared to Q2 of last year and most of the decrease in our overall revenue number.

Subscription of perpetual license revenue for the second quarter of fiscal 2018 decreased to $1.5 million compared to $1.6 million in the second quarter of fiscal 2017.

SaaS revenue decreased 6.3% to $1.3 million in the second quarter of fiscal 2018 compared to $1.4 million in the second quarter of last year.

Our hosting revenue increased 12.4% from $261,000 in the second quarter of last year to $293,000 in the second quarter of this year. As you saw, the perpetual license engagements that we closed in fiscal 2017 generate hosting revenue. All of our perpetual customers in recent years have also chosen Bridgeline to host their website. We're excited about the growth in this piece of our recurring revenue, because of the great value our customers derive from it and hosting is also a high margin revenue stream for us because of internal efficiencies.

Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual and hosting decreased 3.9% to $1.7 million in the second quarter of fiscal 2018 compared to $1.8 million in the second quarter of last year.

The decrease in the SaaS license and recurring revenues is attributable to 1 customer that migrated off our platform. This customer had a change in ownership and the parent company determined that this business as well as other subsidiaries should migrate to a common content management platform.

Our annualized recurring revenue, or ARR, at the end of second quarter, was approximately $6.9 million. And as a reminder, our new engagements are typically 3 years with 1-year auto-renewals.

Gross margin for the second quarter was 49.1% compared to 57% in the second quarter of last year. This is lower than the second quarter last year and lower than where we've been recently. Our gross margin decrease can be primarily attributable to our services gross margin. Our services gross margin decreased to 32.7% in the second quarter this year compared to 46.8% in the second quarter of fiscal 2017. The reason for this unusually low service margin is a strategic investment that we mentioned earlier for a key customer. We expect to see much more improved services margin in our third and fourth quarter.

Our operating expenses were reduced by 12.7% to $2.4 million for the second quarter of fiscal 2018 compared to $2.7 million for the second quarter of fiscal 2017. We've continued to make improvements to our facilities cost over the past few quarters, which has helped drive the decrease each quarter. In the second quarter, we did incur a restructuring charge of $181,000. This is related to our corporate facility in Burlington. We've spoken in prior quarters about the excess base that we have and our intent to sublease. In the second quarter, we completed a lease restructuring and incurred some expense in terms of commission and moving expenses. Also, about $60,000 of the $181,000 restructuring fee was a noncash charge related to writing off the value of the leasehold improvements in the portion of the states that we gave up. We're pleased with our restructured lease. As on a go-forward basis, it will reduce our operating expenses by about $75,000 per quarter. The restructuring of our leases has also led to the reduction in depreciation and amortization expense in the second quarter. We'll continue to see this number decrease in future quarters.

Moving to the bottom line. Our net loss is $680,000 compared to $530,000 in the second quarter of fiscal 2017. Our non-GAAP adjusted net loss was $306,000 or a loss of $0.07 per diluted share in the second quarter compared to non-GAAP adjusted net loss of $114,000 or a loss of $0.03 per diluted share in the second quarter of last year.

Our adjusted EBITDA for the second quarter of 2018 was a loss of $185,000 compared to a gain of $22,000 in the second quarter of fiscal 2017.

Turning to the balance sheet quickly, at March 31, the company had cash and accounts receivable of $3.6 million, total assets of $17.2 million and total liabilities were $6.8 million. Our total debt at March 31 was $2.7 million comprised of $2 million outstanding on our line of credit and the remaining amount related to our term note.

Now I'd like to wrap up with some financial outlook for the remainder of the fiscal year. So we expected our revenue for fiscal 2018 will be between $15 million to $15.5 million, and we expect to generate adjusted EBITDA between negative $500,000 and positive $100,000 for the full year of fiscal 2018.

Thank you, and at this time, I'd like to open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Howard Halpern of Taglich Brothers.

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

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Could you talk, maybe a little bit, about your active customer pipeline that your sales force is actually working on? And how was it weighted more towards the B2B, B2C? Can you talk about what's in the pipeline basically?

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

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Yes, we are seeing more on the B2B side than on the B2C, and we're also seeing larger deals nowadays. So most of the customers in our forward-looking pipeline, I would say, about 60% of them are B2B. And that generally, we're seeing deals with an initial engagement in the $400,000-plus range. And that's a bit little bit different than last year where we were looking at smaller engagements. I'm not sure exactly why, but last year, a lot of our engagements were initial engagements in the $250k range. The -- we are seeing a number of deals that have been brought to us from channel partners. So we're making a focus on that. We don't have a very large channel program right now. But we're expanding that, that we signed 2 channel partners just last quarter and that's going to be part of the forward pipeline.

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

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Okay. And have you structured the sales force any differently or different type of salesperson to go after B2B rather than B2C?

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

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Well, it's not so much of a different type of salesperson, but the marketing venues are a little bit different. We're -- for instance last week, we're in Chicago at B2B Online Manufacturing Expo. So in terms of lead gen, that's a little bit of a different deal. Now when you're in the B2B sales cycle, it is more of an enterprise sales cycle and you need to have a seasoned rep that can have an executive conversation, but we already had a team that was built around that profile, so that didn't require change from us.

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

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Okay. And now as a consequence of -- a good consequence as of larger value deals, is there any kind of constraints on how many deals you can start in the pipeline, I guess, based on what you're workforce is at this point?

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

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Yes. Well, the B2B sales cycle is the longest sales cycle. It tends to be in more of the 6-month range and compared to 4, and they tend to be a little bit bigger. In terms of the overall product for sales rep, that's not changing. In B2B sales, although they take a little bit longer, they stall out a number of times in the middle of the sales cycle. So the sales rep is able to manage more deals in this pipeline because you have periods of inactivity.

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

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Okay. But also in terms of deployment, do you have enough -- if a -- which will be a good way if you had a bunch of deals hit almost at the same time or can you manage when the deals might have to start deployment, do you have enough staffing consultants as such to get the deals going?

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

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Right. So what we've done is, we don't internally have enough to manage a bunch of B2B simultaneous deployments. And what we did to that extent was created a systems integrator partner network that we use as a bench. So our internal people as a top-level architect build at the top dollar with an average build rate of close to $200,000 an hour, which is an average for our team members. And then we're able to augment that staff and even mark out significantly the partner network, and that model will continue. We'll grow and expand our services team as demand grows, but we'll also grow that network. Right now, we've got, I think, a little bit more than 20 people services people in-house. And in terms of outside network, we're probably in the low teens.

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Operator [10]

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Your next question comes from the line of Manoj Nadkarni of CIG.

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Manoj Nadkarni, [11]

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Yes. So in the investor conference in New York a couple of weeks ago, you showed backlog of $18 million spread over 36 months, I assume that was at the end of December 2017. May I ask you how have your backlogs changed as of the end of March quarter?

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Michael D. Prinn, Bridgeline Digital, Inc. - Executive VP & CFO [12]

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Yes, our backlog is just -- is slightly less than that, nothing material. So I think, those numbers are pretty consistent and it's just a reminder that was sort of a 36-month backlog. So there was a service fees that's a little smaller than it was, but the -- everything you saw for sort of license hosting and maintenance. There's really been minimal change.

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

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Yes, the backlog kind of slides up and down as we complete projects, so things come out of the backlog and come back in.

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Manoj Nadkarni, [14]

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Yes. And if I remember correctly, there were about $8 million-or-so in backlog that was 12-month duration. So that would be recognized -- so from the December, that would be recognized during the current calendar year, right?

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

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Correct.

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Michael D. Prinn, Bridgeline Digital, Inc. - Executive VP & CFO [16]

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Correct, correct. I think I'm saying -- I'm trying to say the same thing in different way. If the number hasn't changed much from March 31, that number is going to be over the last 2 quarters of this fiscal year and in the first 2 quarters of our fiscal '19. But I think we're saying the same thing in the next 4 quarters.

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Manoj Nadkarni, [17]

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Okay. And Ari, you gave an example of developing smart oil cap for Perkins, one of your customers. To me, this seems like an IoT, or Internet of Things, type application. Is this just for 1 customer or do you see more business along these lines from other customers in future?

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

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Yes, we do expect to see more business along these lines, especially in the B2Bs phase and the manufacturing space, where individual devices are being shipped, more and more frequently, and everything from warehouses and logistics to the end-user products. We've got a couple of conversations that are going on right now with the customers that are not doing exact same thing that Perkins did, but other similar things. That's a trend that we expect to continue in some of the innovations that we made alongside of Perkins rolled into our product are going to enable us to win more of those opportunities.

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Manoj Nadkarni, [19]

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Okay. So this is more so for winning new business or extra business from existing customers rather than adding revenues to your existing contract, any color?

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [20]

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It will do both. So even within our existing contract, these customers are continually updating their implementation to be more and more competitive. We have a team, we call it customer success team, which is dedicated to helping our customers understand future opportunities for their site and engage them to do new things. So we share with all of them, examples like the Perkins one, and hopefully, that creates opportunities for them to expand their project.

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Manoj Nadkarni, [21]

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Very good. Also, question on your balance sheet. Did you improve upon your balance sheet, especially in terms of debt? I don't have the numbers from last year or how does it compared to last year?

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Michael D. Prinn, Bridgeline Digital, Inc. - Executive VP & CFO [22]

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Compared to year-end, the debt is pretty much the same. It's $2.7 million compared to $2.5 million. So it's 2 pieces. There is a $1 million term note that we have outstanding. We drew upon that in October, so that's new. And then the accounts receivable baseline credit is a maximum of $2.5 million, but we only had about less than $2 million outstanding at year-end. So just minor fluctuations.

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Manoj Nadkarni, [23]

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Okay. And your ARR, or the annual recurring revenues, you're running around $7 million a year on that. Should we expect it to -- and that's roughly what about 40%-or-so or maybe more than 40% of your revenues -- total revenues. Should we expect it to stay around that level? Or do you see that building up, any color?

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Michael D. Prinn, Bridgeline Digital, Inc. - Executive VP & CFO [24]

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Yes. I think, so $6.9 million is the number that we gave on the call. And I think that's just a good rate as of today. And as we win deals and if we have any customer attrition, I think we'll just continue to keep you posted on that basically every quarter.

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Operator [25]

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At this time, I'd like to turn the call back over to Ari Kahn for any closing remarks. Sir?

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Roger E. Kahn, Bridgeline Digital, Inc. - President, CEO & Director [26]

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Great, thank you. We appreciate the support and patience of 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. We look forward to speaking again, in August, on our Q3 2018 conference call. Thanks.

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Operator [27]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.