Bridgeline Digital, Inc. (BLIN) Q2 2013 Earnings Report, Transcript and Summary

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 recurring revenue and specifically, subscription and perpetual licensing revenue. Recurring revenue increased 30% and licensing increased an impressive 61%. Our iAPPS revenue grew 9% when compared to Q2 of last year and iAPPS-related revenue is now 78% of our total quarterly revenue, compared to only 64% in the second quarter of last year. Our continued progress of growing our iAPPS-related business and iAPPS ds business is what's going to drive enhanced shareholder value. The increased adoption of both initiatives is enabling Bridgeline to build a more predictable and profitable business model that offers significant customer traction, recurring revenue and scale. I'm happy to report that in the first half of 2013, we sold 148 new iAPPS licenses. As of March 31, Bridgeline has sold a total of 843 enterprise licenses and we have deployed 660 of these. In Q2, Bridgeline won several new iAPPS engagements including Prestwick House, Franklin Square Capital Partners and the National Notary Association. Prestwick House is a premier educational publisher who needed a more scalable and robust e-commerce platform to support its very rapid growth plans for the future. Prestwick House selected iAPPS Commerce to improve overall efficiencies and leverage more sophisticated functionality to ultimately drive and improve online revenue. Prestwick House was particularly impressed with the rich capabilities of iAPPS compared to its previous platform which required a tremendous amount of customization and IT intervention. Franklin Square Capital Partners is a leading investment manager that not only strives to maximize investment returns, but also they claim that they set the industry standard in transparency, investor protection and education via their web products. Franklin selected the iAPPS platform to take these initiatives to the next level and to consolidate 5 different web assets into 1 platform to provide a richer, more engaging experience for its constituents. In turn, Franklin will gain a holistic view of its digital strategy and performance and it'll be -- easily be able to maintain the consistent branding requirements and continue to provide relevant content. Now, I'd like to update you on our strategic e-commerce partnership with UPS Logistics. As most of you know, we have a multiyear partnership agreement in place with UPS to sell our integrated, all-inclusive B2C, B2B e-commerce solution for mid-market and large-market organizations. UPS Logistics selected iAPPS as a partner of choice, which provided enormous validation of the iAPPS Commerce product platform. We launched our marketing efforts and began building our qualified pipeline in June of 2012. And our traditional sales cycles for e-commerce opportunities with UPS Logistics is a 12-month process. However, to date, we have closed and launching multiple sites with UPS Logistics, including GE Healthcare and Triumph Motorcycles. In the second quarter of 2013, we also won Carbon Audio, an audio products and accessory company. Carbon Audio has aggressive growth plans for its product line and it's going to leverage the online channel for this expansion. They required a very strong and robust platform that was pre-integrated with UPS Logistics' global warehouse system, so they can streamline operation, and once again, gain a holistic view of its e-commerce business, including the ability to manage all product details, inventory levels, multiple warehouses, customer relations and account information and generate real-time reporting and tracking order fulfillment. UPS Logistics and Bridgeline has launched a number of marketing initiatives. Our multimillion-dollar qualified pipeline continues to grow and we look forward to continue sharing with you more wins in the coming quarters. Let's discuss our new exciting product iAPPS ds, which stands for Digital Subscription. iAPPS ds has been specifically developed for franchises and the large dealer networks who need to provide superior website tools to their numerous franchisees and dealers while maintaining content and brand control. iAPPS ds enables corporate franchisors to provide a centralized digital marketing structure for their franchisees and dealers and it's a cloud-based multi-tenant SaaS solution that is highly scalable. We believe there is not another web platform solution in the franchise marketplace that can truly compete with the quality, the value proposition and scale of iAPPS ds. This marketplace represents a tremendous growth opportunity for Bridgeline Digital. From a financial perspective, iAPPS ds has the potential to significantly increase Bridgeline's recurring revenue and profitability. This subscription-based model would require each franchise owner or dealer to pay a monthly subscription fee of anywhere -- of somewhere between $40 to $100 per month per franchise, depending on the total volume of the franchise organization. For this, each franchise will receive a self-serviced, pre-templated website that includes iAPPS ds content management, analytics and marketing modules. iAPPS Commerce is also available for an additional incremental monthly fee. We previously disclosed that the UPS Store was one of our first iAPPS ds customers, with over 4,300 franchise locations. Earlier this year, the UPS Store significantly accelerated the time frame by which they needed to transition their site over the iAPPS platform. On March 31, we have sold and deployed 2,050 iAPPS ds licenses to UPS Stores that are running on our premium website platform. We expect to add many more UPS Stores over the next 12 months. The UPS Store is ecstatic with the iAPPS ds platform. This is a major upgrade for them in terms of functionality, ease of use, quality and scale. I'm pleased to make you aware that this week, we will be signing an agreement with a dealer network, who's a leader in outsource sales. The network has a total of 400 locations across North America. We anticipate 200 of those locations to transition onto the iAPPS ds platform at the launch time frame. And the remaining 200 will transition onto iAPPS ds over a following 12-month period. Each location will be paying an above-average ds subscription rate. We expect this iAPPS ds customer will go live this fall. Our qualified pipeline for iAPPS ds is rapidly growing and we will -- we believe that we will gain significant traction with the iAPPS ds product. IAPPS ds has a unique advantage in the franchise and large dealer network markets, which are currently void of robust web engagement management tools at a relatively low monthly cost. Bridgeline has the opportunity to aggressively fill this void while dramatically increasing subscription-based recurring revenue. I'm pleased to report that iAPPS ds is being very well received and our qualified pipeline of opportunities is growing rapidly. And as a result, many of our sales and marketing initiatives are taking hold. We are very excited about the future of Bridgeline Digital. Our iAPPS-related business continues to grow much faster than the markets we address. And in our most recent 3 quarters, we have experienced strong bookings with a growing qualified pipeline in each of the quarters. We believe the opportunities we have with the UPS Logistics partnership and iAPPS ds are significant catalysts for our business. We anticipate and expect these initiatives to be -- to begin to yield more meaningful financial results in fiscal 2014 and beyond. As you know, we have a well-thought-out financial model that we are driving and that financial model has large aspirations for Bridgeline and for iAPPS. However, for the short term, there are a few critical inflection points in our financial model we believe that we're going to hit in future quarters. So let me point a few of these out. When Bridgeline has 1,000 iAPPS enterprise licenses deployed, and that's the key word, deployed, and 4,000 iAPPS ds licenses deployed, our financial model should be driving revenues of approximately $8.5 million per quarter. As I mentioned earlier, as of March 31, Bridgeline has sold a total of 843 enterprise licenses and we've deployed 660 of these. We have on average a 6-month lag from the time we sell an iAPPS enterprise license to deployment. And as you could see, within a few quarters from now, we should be fast approaching that 1,000 iAPPS enterprise licenses sold mark. In addition, as of March 31, we have sold and deployed over 2,000 iAPPS ds licenses. With additional UPS Store purchases of iAPPS ds licenses and by adding other franchises in the coming quarters, we anticipate we'll have a total of 4,000 iAPPS ds licenses sold within the next 4 quarters. Our iAPPS-related business is very healthy, vibrant and growing. It is the future of Bridgeline and it's what going to maximize shareholder value. Our legacy business will not bring any value to our shareholders and is declining rapidly. And you can see also our deferred revenues have increased significantly. Clearly, we are within a few quarters of – I'm sorry, clearly, we are a few quarters off of our overall top line goals. However, Bridgeline's management team is laser focused on executing initiatives that will drive our iAPPS business to the $7-million-per-quarter level. At that $7-million-per-quarter level, we will begin to see positive leverage on our margins. At this time, I'm going to turn the call over to Mike Prinn, our Chief Financial Officer, who's going to provide more detail on our Q2 results. Michael?

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. Historically, we reported that our average initial engagement is approximately $120,000. However, over the past quarter, the average iAPPS engagement has increased to approximately $300,000, causing longer delivery cycles. And finally, we're pleased to report that we sold 148 new enterprise iAPPS licenses through the first 6 months and approximately 500 iAPPS ds licenses in the second quarter. I also, at this time, wanted like to give some color around the typical composition of our bookings and I'll use an $8-million bookings quarter as an example just to demonstrate to people the lag between bookings and revenue. So on an $8-million bookings quarter, approximately $5 million is in services and those are typically delivered and the revenues recognized within a 12-month period. The remaining $3 million is in iAPPS enterprise and iAPPS ds licenses, SaaS subscriptions and related hosting and that's recognized over a 12- to 24-month period. So the mix of our bookings has shifted recently to a greater percentage of recurring revenue, which is apparent in our 30% increase in recurring revenue from the second quarter of 2013 compared to the second quarter of last year, as well as the increase in our deferred revenue. Our gross profit for the second quarter was 53% compared to 56% in the second quarter of last year. The year-over-year decrease can be attributed to overall lower revenue due to project delays and lower number of iAPPS perpetual revenue in the quarter. We believe this is a minor setback and that the gross margin improvements we saw in 2012 will return in future quarters once our revenue increases and our billable resource utilization improves. In addition, as iAPPS ds revenue recognition increases, our gross profit margin will be positively impacted. Bridgeline generated $17,000 of adjusted EBITDA in Q2, compared to $524,000 in the second quarter of last year. Our non-GAAP adjusted net loss was $417,000 or a loss of $0.03 per share, compared to net income of $120,000 or $0.01 per diluted share in the second quarter of last year. Our GAAP net loss is $687,000 in the second quarter, compared to $166,000 in Q2 of last year. Pleased to report that cash flow generated from operations was $594,000 in the second quarter, compared to a use of cash of $55,000 in the prior period. Turning to the balance sheet at March 31, the company had total assets of $33.7 million, cash of $1.8 million and receivables of $3.7 million. In Q2 our DSO was 64 days. This is 2 weeks better than industry average, and is a testament to the health of our blue-chip customer base. And we had approximately $4 million outstanding under our line of credit at March 31, 2013. Turning to our fiscal 2013 outlook. As Thomas mentioned, we're a couple quarters behind from a top line growth perspective due to larger engagements and longer implementation cycles. Total revenue in fiscal 2013 is expected to be in the range of $25 million to $26 million. We expect fiscal 2013 iAPPS-related revenue to be approximately $19 million to $20 million and this is up from $16.5 million in fiscal 2012. This revenue projection also includes a projected reduction of non-iAPPS-related legacy revenue of approximately $4 million. In addition, fiscal 2013 bookings are expected to be approximately $30 million and that's up from $26 million in fiscal 2012. In addition to revenue guidance, we expect to generate positive adjusted EBITDA for fiscal 2013. At this time, I'd like to open up the call to Q&A and just want to make the audience aware that Thomas is conducting the call remotely, and I'm at our headquarters in Burlington, Mass. So I apologize in advance if we step over each other a bit in Q&A. Operator?

[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.