Good day, ladies and gentlemen, and welcome to Bridgeline Digital's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to hand the conference over to Ms. Kim Brown, Director of Communications. Ma'am, you may begin.

Thank you, and good afternoon, everyone. I am pleased to welcome you to our 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 expectation 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 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 would also like to remind you that the audio and the transcript of this call will be available for replay. You can find that information on the Investors section of our web page. At this time, I would like to turn the call over to Bridgeline Digital's President and CEO, Thomas Massie.

Thank you, Kim, and good afternoon, everybody. During the second quarter, Bridgeline continued to execute against its long-term strategic plan and to strengthen and grow its iAPPS business model. Before I walk through some of our business accomplishments, I'd like to review our second quarter of fiscal 2013 financial results at a high level. For the third straight quarter, I'm pleased to report that we achieved strong new bookings growth. In Q2, we booked $7.1 million, representing a 19% increase compared to Q2 of last year. I'm also pleased to report that the average size of an iAPPS enterprise engagement has more than doubled. Our historical average iAPPS enterprise engagement was approximately $120,000. And in the second quarter, it was well over $300,000. Over the long term, this is exciting for Bridgeline as our customer base continues to improve, both from a quality and engagement value perspective. While this trend is very positive and it builds our backlog, it also extends our implementation and our revenue recognition time frames. Not surprising, larger engagements take longer to implement. They tend to be more complex and occasionally, they do manifest unwanted customer delays as they make strategic decisions around the direction of their web assets. As a result, our revenue in fiscal 2013 will be lower than we originally anticipated. It's important to note that in addition to the impact of long term -- longer implementation cycles, we also shedded (sic) [shed] approximately $2 million of iAPPS -- non-iAPPS legacy business in the first half of 2013 compared to the first 6 months of 2012. This was a 38% decline. And for the full year, we expect to shed approximately $4 million of non-iAPPS related revenue. Taking a closer look at Q2 revenue, you will see a very healthy increase in both…

Thank you, Thomas. Good afternoon, everyone. I'm going to review the results of operations for the second quarter ended March 31, 2013. Second quarter revenue was $6 million compared to $6.7 million in Q2 of last year. As we anticipated, revenue came in lower than the prior period as a result of multiple factors that Thomas just highlighted, including longer implementation periods for the larger deals we've booked over the past 3 quarters, some unwanted customer delays related to these complex projects and the fact that we shed approximately $1 million of non-iAPPS legacy revenue compared to the second quarter of 2012. We remain committed to transitioning our model and growing our iAPPS business and it's important to note that in the second quarter, 78% of our total revenue was iAPPS-related compared to 64% in the second quarter of last year. Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, increased 30% in the second quarter of 2013 to $1.3 million, as we continued to see an increased demand for our iAPPS Product Suite and the benefit of our first iAPPS ds customer. And our subscription and perpetual license revenue increased 61% in the second quarter. I'd also like to highlight that our deferred revenue on the balance sheet grew 172% year-over-year, to just under $3 million, representing a significant increase and is indicative of our growth in iAPPS ds and recurring revenue. A vast majority of this deferred revenue is high margin that will be recognized over the next 12 months. Our iAPPS-related revenue increased 9% to $4.7 million in the second quarter of 2013, compared to $4.3 million in the second quarter of 2012. As Thomas mentioned, we're starting to see that our iAPPS engagements are expanding in both scope and size.…

[Operator Instructions] And our first question comes from Howard Halpern from Taglich Brothers.

I just really have one organizational-type question. How has your organization evolved since this ramp up in iAPPS in terms of the individual offices compared to maybe a unified corporate structure?

Well, we -- as we entered the fiscal year of 2013, we dismantled the independent general management role or individual office model that we operated under for the last several years. And we created teams of excellence across the company where we have 1 head of global services, 1 head of iAPPS success, 1 head of business development, head of finance, head of R&D, et cetera. So all the field – now they operate as field offices and each field office has business development personnel, critical customer-facing personnel, project managers, some front-end designers, could be a technical architect, things like that, at each office. Some offices will have maybe a few .NET developers as well, but we have centralized our iAPPS support group in Burlington and we've also are putting more resources into our Atlanta office making that more of an onshoring .NET development center as well.

And that change should help productivity and scheduling of implementations over time?

It definitely will help productivity and scheduling implementations of all of our engagements over time. The last 6 months has -- we have been in the transition process with the organization. We're implementing very brand-new project management standards and guidelines and implementing new software that's was going to provide us with more scale and more accountability as well. But it's definitely the absolute right thing to do long term strategically for the company and to maximize the success of iAPPS-related engagements.

And our next question comes from Mark Stafford from Stafford Capital.

Will you guys be doing another offering soon?

Well, Mark, as you can see, we generated almost $600,000 of cash from operations in the second quarter. However, we're always evaluating our capital equipment resources and our other strategic opportunities. And that's probably all we'll say at this point.

[Operator Instructions] And our next question comes from Jason Revland with Blueprint Capital.

As far as the balance sheet is concerned, if you were to raise money, would it be for an acquisition? Or would it be to sort of strengthen working capital? Just speaking hypothetically.

Well, as Mike said, I mean, we're not -- I don't think we're in the business of speaking hypothetically. I think we're very good expense managers. And as you could see, we definitely are driving our iAPPS business where our growth is outpacing the market. And we're going to continue to drive that. With that said, we did generate almost $600,000 of cash from operations last quarter. And we're always evaluating. We're evaluating our capital equipment requirements and we're evaluating strategic opportunities. If anything proposes itself that is something that we can't currently handle with our current level of on-hand cash, obviously, we'll look to our banks. We're very dilution sensitive at this point. Obviously, dilution is -- unwanted dilution at these levels is something that we would prevent.

Right, you've got some line of credit availability, so in theory, you could tap into that before doing something that you really wouldn't prefer to do.

Correct.

And as far as the capital equipment, can you elaborate on what that would be defined as? I sort of think of you guys as more of a Software-as-a-Service company, so I'd hate to walk away with the wrong impression when you said capital equipment needs.

It's more, Jason, it's more as we grow our iAPPS ds business and our SaaS customers, it's our network operation center and our infrastructure.

And if you look at historically, I mean we've invested anywhere some $300,000 to $1 million a year in capital equipment.

I guess you need to have computers to power what you do at the end of the day. So I guess that makes sense.

Yes, you have to have an infrastructure that can scale. And if you think about it, right, we're obviously, we're here to build a $100-million business and to do that, you got to have say, 30,000 iAPPS ds licenses and you're going to have about 1,200 mission-critical websites or web stores running in your SaaS environment. And that requires a lot of capital equipment to drive that kind of environment.

Great. And the last question I have is ds related, which I think is a very exciting opportunity for you guys. Do you ever issue any sort of color on the size of the companies in your ds pipeline? I mean, could you give us a better sense of getting to that proposed revenue level that you kind of hint at?

Well, I think as we've always said, we're focused on middle market. We're very -- there's a tremendous amount of opportunity and market share available in the mid-market. Of course, we do have also large market opportunities in our portfolio of customers. But the range of our pipeline, we focus in the ds space. The franchise space alone, the franchise and multi-dealer network for Bridgeline is a $1-billion-revenue opportunity for the company, that's how large it is of an opportunity. So it's -- you're right, it's wildly exciting. And the kind of companies that are in our pipeline, which is growing extremely rapidly, is opportunities. We focus on locations that have 100 locations or greater. And so we have a plethora of opportunities that are in our qualified pipeline that are couple hundred locations, 400 locations, 600 locations, and then we have multiple opportunities with 4,000 locations, and we have some more opportunity that have as many as 9,000 or 10,000 locations as well that are currently in our qualified pipeline.

And our next question comes from Walter Ramsley from Walrus Partners.

Thomas, Mike, I just had a couple of questions. The UPS joint venture, not the ds part but the, like actual logistics. Can you spend a minute and just describe how that thing is organized now and what's going on there? I mean, it seems like you've gotten some business but the potential struck me, anyway, as though it could have been a lot more up to this point anyway.

Well, I think it's – I think we've always said that the sales cycles are 1 year. We have not even hit our 1-year anniversary from the time that we've launched the partner -- the time we launched the solution to the market was in June of last year. So we haven't even reached that 1-year milestone, Walter, of what it takes from a sales-cycle perspective. So the pipeline has been building. As we go out, we are shoulder to shoulder with UPS Logistics overlay teams for the retail team, manufacturing and high technology sales overlay teams. And we've been doing that for the last 10, 11 months since we launched the partnership in June. So but I think it's a very promising, very promising sign that even though the sale cycles are 1 year, we've already have closed 3 engagements before those traditional sales cycles. And we also feel that once we pass that 1 year mark, we will be closing more engagements next -- the following 12 months clearly, than we have in the last 11 months.

Yes. I'm not trying to be critical. I was just trying to make sure I understood if Bridgeline was doing most of the heavy lifting on the sales side or if UPS was or who's out there, drumming up the business.

It is an equal effort and I will say there are big -- obviously, a $60-billion -- $53-billion machine of just a fantastic company to work with. And I think the last probably 4 months, we have seen accelerated marketing initiatives on their end which we're really excited about. We have been shoulder to shoulder with their sales teams in various opportunities and making proposals and building that pipeline. But I think we'll see, once again, once you get past that 12-month sales cycle, I think you'll see us announce a lot more activity and closing of more engagements once we pass the 12 months.

Okay. And can you take a minute and just kind of summarize the competitive environment at this point?

Well, I'm glad that we're outgrowing the market. I mean, the market grows at about 10%, 11%, and we're outpacing that, which means we're taking away share. And we do not have pricing pressure on any of our products, on iAPPS enterprise or ds. We're priced at the 60th percentile for the most part when compared to our peer group companies. We're not the most expensive. We're not the cheapest. We do have value-selling approach and it is competitive. We're only always in the mix of opportunities with our competition. We continue to win 70% of the proposals we submit. So our value proposition is strong and we don't really -- I would say, 19 out of 20 opportunities don't have any pricing pressure at all, Howard -- I mean, Walter.

[Operator Instructions] And I'm showing no one in the queue at this time.

All right. Well, I want to thank everybody for joining us today for our earnings call. If anybody has any additional questions, Mike and I are always available to talk privately, so please reach out to us via e-mail. You can find our e-mail addresses actually up on the bridgelinedigital.com website under the Leadership section. We're very excited about our future. We're very excited about continuing driving iAPPS and we're very excited to drive our business model to get to those key short-term inflection points, which I know all of our shareholders are looking forward to that to happen. Thank you for your support, and go Bruins.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.