Bridgeline Digital, Inc. (BLIN) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Bridgeline Digital Fourth Quarter 2013 Earnings Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now, I'd like to turn it over to your host, Chief Financial Officer, Michael Prinn.

Thank you, and good afternoon, everyone. I'm pleased to welcome you to our fourth quarter and fiscal year end 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 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. At this time, I'd like to turn the call over to Bridgeline Digital's President and CEO, Thomas Massie.

Thanks, Mike, and good afternoon, everyone. I'm pleased to report that Bridgeline continues to execute against its long-term strategic plan, to strengthen and grow a high traction, scalable iAPPS business model. When reviewing 2013 financial results, it’s important to put in perspective how the results relate to our strategic business objectives. Although we experienced some volatility in fiscal 2013, our strategic business fundamentals remain steadfast and our future is bright. As we executed our initiatives of continuing to build a high traction, scalable iAPPS business model, Bridgeline's legacy business in fiscal 2013 declined 44% when compared to 2012. In the fourth quarter alone, Bridgeline's legacy business declined 60% year-over-year. The legacy business is very difficult to predict and the decline was greater than anticipated. However, we remain laser-focused on building a long-term value by growing our core business around our digital engagement's platform, iAPPS. In Q4 of 2013, our core business revenue grew 30% and for the entire fiscal year, our core business grew 16%. In Q4 of 2013, subscription and perpetual license revenue increased 117% and for the entire fiscal year, it grew 60%. In Q4 2013, recurring revenues increased 36% and for the entire fiscal year, recurring revenues grew 21%. From 2010 to 2012, our historical average of an initial iAPPS enterprise engagement was approximately $120,000. And in fiscal 2013, it more than doubled to $300,000. Over the long-term, this is exciting for Bridgeline, as our customer base continues to improve from both a quality and engagement-value perspective. Our qualified pipeline of iAPPS opportunities has soared to over $40 million. This is up from $22 million just one year ago. Bridgeline continues to win 70% of the proposals we submit. And in fiscal 2013, customers like the UPS Store, Disney, Qualcomm, Web MD, Teradyne, Le Sportsac, Lighting Science, Cartronics, All Scripps, McGraw-Hill, and Ann Taylor, all selected iAPPS for their mission-critical websites or their web store requirements. In fiscal 2013, Bridgeline booked over $21 million of iAPPS business, sold 250 iAPPS enterprise licenses and sold over 2,200 iAPPS ds licenses. As most of you know, Bridgeline's enterprise business development team has a partnership in place with UPS Logistics to sell our integrated, all-inclusive B2C, B2B, eCommerce solution for midmarket and large market organizations. UPS Logistics selected iAPPS as its partner of choice, providing validation of the iAPPS commerce value proposition. In fiscal 2013, we closed multiple iAPPS-driven B2C and B2B commerce customers with UPS Logistics, including customers like GE Healthcare, Triumph Motorcycles, Qualcomm, Web MD and Lighting Science. Let's now discuss the billion dollar market opportunity in the franchise and large dealer network, digital engagement marketplace. iAPPS ds was specifically developed for franchises and large dealer networks, who need to provide superior website engagement tools to their numerous franchisees and dealers, while maintaining content and brand control. iAPPS ds enables corporate franchises to provide a centralized digital marketing structure for their franchisees or dealers, and it's a cloud-based, true multi-tenant solution that's highly scalable. We believe there is not another platform solution in the franchise market place that can truly compete with the quality, value proposition and scale of iAPPS ds. Our iAPPS ds subscription model requires a franchise or dealer to pay a monthly subscription fee of anywhere between $40 to $100 per month, depending on the number of locations. So an iAPPS ds customer deployed with 2,000 locations could add approximately $1.2 million a year in high-margin SaaS recurring revenues to Bridgeline. And an iAPPS ds customer that deploys, say 400 locations, could add approximately $350,000 a year in high-margin SaaS recurring revenues. In fiscal 2013, we launched our first iAPPS ds customer, the UPS Store. And we recently closed a large dealer network customer named SidCorp, who has over 400 locations. The sales cycle for iAPPS ds is a 12-month cycle, and we believe the average iAPPS ds engagement will be a multi-year engagement, driving approximately on average, $600,000 a year in SaaS revenue. In just 12 months, our qualified pipeline for iAPPS ds has grown from $3 million to over $20 million. We look forward to sharing with you additional iAPPS ds wins in the coming quarters. To accelerate Bridgeline's time to market in the franchise marketplace, we strategically acquired ElementsLocal at the end of fiscal 2013. ElementsLocal developed a SaaS distributed website platform for the franchise marketplace that incorporated brand reputation management tools, web content management, social media, eMarketing and web analytics. ElementsLocal was a respected web platform brand in the franchise market that has over 3,200 franchises on their web platform. Over the past 4 years, ElementsLocal experienced a 95% retention rate, with customers such as Sport Clips, Maaco, Glass Doctor, Provision and Molly Maids. Throughout 2014, Bridgeline plans to migrate ElementsLocal customers onto iAPPS ds. In fiscal 2013, we launched iAPPS 5.0. This is the largest upgrade of iAPPS, since we launched the integrated platform in 2008. And recently, we announced our fifth iAPPS module, iAPPS Social, harnessing the growing influence of social media as a business channel by easily enabling our customers to identify, engage and capitalize with ongoing conversations taking place, not just across social media outlets, but throughout the entire web. In fiscal 2013, Bridgeline made significant capital investments and improvements into the iAPPS co-managed Network Operation Center, so we can support the planned vision and scale of driving tens of thousands of iAPPS-driven websites, micro sites or web stores, not just a few thousand. In fiscal 2013, we increased the size of our iAPPS enterprise sales force and our iAPPS franchise sales force. Today, we have 24 business development professionals touting iAPPS daily, increasing our qualified pipeline and increasing the number of proposals issued. In turn, we believe this will drive strong organic revenue growth for 2014 and beyond. Lastly, in fiscal 2013, we made strategic investments in creating the iAPPS Success Group, or what we call ISG. This team is dedicated to maximizing the success of every iAPPS-driven website or web store, post launch, helping our valued customers to truly drive a quality digital engagement. In 2013, we were excited to learn that iAPPS-driven websites or web stores were the recipients of 26 various industry-related awards. Our iAPPS-related business is healthy. It's vibrant and it's growing. It is Bridgeline's future and it's what's going to maximize all shareholder value. Our legacy business has declined faster than anticipated and our deferred revenues have increased significantly year-over-year. In the short-term, management is laser-focused on executing initiatives that will drive our business to over $7 million a quarter in revenue. At the $7 million quarter revenue level, we will begin to see positive leverage to our margins. With annual revenues of $28 million, our model generates approximately $1 million of EBITDA. With annual revenues of $36 million, our model generates over $3 million a year of EBITDA, and we achieve GAAP breakeven. And with annual revenues of over $40 million, our model will generate over $5 million a year of EBITDA, and we will generate meaningful GAAP income. At this time, I'd like to turn the call over to our Chief Financial Officer, Mike Prinn, who will provide you with more details of our fiscal 2013 financial results. Mike?

Thanks, Thomas. I'm going to review the results of operations for the fourth quarter and the year ended September 30. Fourth quarter revenue was $6.7 million compared to $6.7 million in Q4 of last year. Although the overall revenue numbers is flat, I'd like to highlight the following. Our subscription and perpetual license revenue increased 117%, compared to the fourth quarter of last year. This significant increase was a result of an increased demand in our iAPPS platform, as well as a revenue from our iAPPS ds customer, and lastly the incremental revenue from our August acquisition of ElementsLocal. Revenue from our core business, so iAPPS and the ElementsLocal local platform, increased 30% to $5.8 million in the fourth quarter, from $4.5 million in the fourth quarter of last year. This increase is significant as it reinforces our messaging that all of our new business development opportunities are focused on the iAPPS solution. For the fourth quarter, our core business revenue made up approximately 80% of our total quarterly revenue. This compares to about 67% of our quarterly revenue in the fourth quarter of last year. We expect that this percentage will continue to increase as we head into our fiscal 2014. And within the next quarter or 2, you'll see our core business be 90% or greater of our total quarterly revenue. Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, increased 36% in the fourth quarter of 2013 to $1.5 million, as we continue to see an increased demand for our iAPPS Product Suite. We expect to continue to see an increase in our recurring revenue number in future quarters, as we integrate our second iAPPS ds customer, as well as the incremental revenue from our ElementsLocal acquisition as we migrate their customers to the iAPPS platform. Revenue from our non-iAPPS or legacy business decreased by approximately 60%, when compared to the fourth quarter of last year. We're now at a point where our quarterly revenue of legacy business is less than $1 million per quarter. We'll continue to see a decline in our legacy business, but at this point, we've transitioned through most of the decline and we'll probably continue to have anywhere from $500,000 to $1 million of legacy revenue per quarter from existing customers, with the intent that most of these customers will eventually become iAPPS customers. So on an annual basis our revenue for fiscal 2013 was $24.5 million, compared to $26.3 million for fiscal 2012. This decline was due to our non-iAPPS revenue decreasing by 44%, or $4.3 million in fiscal 2013 compared to fiscal 2012. However, the $24.5 million in fiscal 2013 revenue included an increase in our core business of 16% compared to fiscal 2012. Additionally, on an annual basis, our subscription of perpetual license revenue increased by 60% to $4 million in fiscal 2013, compared to $2.5 million in fiscal 2012. Our recurring revenue increased 21% in fiscal 2013 to $5.1 million, compared to $4.2 million in fiscal 2012. Turning to gross margin. Our gross margin for the fourth quarter was 56%, compared to 57% in the year ago quarter. The slight decrease in our gross margin is attributable to some excess capacity on our delivery teams due to the 60% decrease in non-iAPPS legacy revenue and additionally due to some capitalized software development costs related to our release of iAPPS version 5.0 that are now being amortized. We expect that during fiscal 2014, our gross margin will continue to improve, primarily because of the forecasted increase in license revenue from the launch of additional iAPPS ds customers. Bridgeline generated $115,000 of adjusted EBITDA in Q4, compared to $583,000 in Q4 of last year. Our non-GAAP adjusted net loss was $482,000, or a loss of $0.02 per diluted share, compared to non-GAAP adjusted net income of $268,000 or $0.02 per diluted share in the fourth quarter of last year. Our GAAP net loss was $705,000 in the fourth quarter, compared to a loss of $40,000 in Q4 of last year. Turning to our balance sheet, at September 30, the company had total assets of $37 million, with cash of $2.8 million and receivables of $3.2 million. And our DSO was a very healthy 45 days. Our line of credit facility had approximately $3.8 million outstanding at September 30, 2013. Turning to our fiscal 2014 outlook. For fiscal 2014 our revenue is expected to be approximately $28 million, an increase from $24.5 million in fiscal 2013. We expect to generate positive adjusted EBITDA for the fiscal year. Included in this 2014 outlook is a projected increase in the company's core business of approximately 32% from fiscal 2013, and a reduction of non-iAPPS-related legacy revenue of approximately $2.5 million, or a decline of 46%. At this time, I would like to open up the call to Q&A.

[Operator Instructions] And at the moment I'm showing just one question coming from Howard Halpern from Taglich Brothers.

I guess 1 or 2 housekeeping questions I have to fill-in. Of the 945 cumulative iAPPS sold this current year, how many are -- have been deployed? I think it was 669 in Q3. So...

Yes. It's a little over 700. So with the 945, you have to factor in the projects that are in process, as well as we gave the comment about our retention rate. So there's a 16% VAT.

Turns.

Yes, turn through customer acquisitions and so forth. So the number is a little over 700.

Okay, okay. And going forward, how should we look at the elements acquisition in 2014, of the 3,200 franchises that are on the platform. What type of retention rate do you expect? And then on that scale of 40 to 100, what would be your estimate, or average estimate for the month? Monthly shift?

Well, we expect a 90% retention of the 3,200 of converting into iAPPS ds. The 2 largest customers that they have, have already committed to the migration plan. I think just for competitive reasons...

Okay, that's fine. I understand.

Well, I'll give you this, [indiscernible]. We said that our iAPPS ds licenses range between $40 and $100. And based on the amount of locations a customer has, we are not discounting our pricing model for these migrations.

Okay, okay. Now you've talked a little bit about in the press release, maybe you could expand on it, about what you did you to, I guess, upgrade or the co-managed Network Operation Center. And when you discussed that a little bit more, what type of -- I don't know how you want to couch it in terms of what your revenue capacity is at current level, without spending any more money or how many sites or stores that get to handled currently. But it would be, I guess, a little helpful to get some color on that.

We invested, from a CapEx perspective and related services, we invested over $1.5 million into the Network Operation Center in fiscal '13. These are all brand-new, state-of-the-art SAN storages units, brand-new network interfaces, acceleration devices, improved enhanced monitoring software, things driving us towards PCI and PAS, the compliances. And we also added additional personnel that's not part of that $1.5 million. And I think the way to look at it, Howard, is the IT team along with outside professionals, consultants, architected an ecosystem that allows us to scale as our demand scales based on how many iAPPS sites we could put into a server, whether it's dedicated or virtual, or how many iAPPS sites we can also put in the SAN storage. So it was a very important for us to -- because our iAPPS ds pipeline ranges anywhere from customers that have 300 locations to opportunities that have 10,000 locations. And it's very important for us to be able to add any customer at any point in time where we can add anywhere from another 200 to 300 or another 10,000 micro sites onto that environment. And so what happens is it's almost like Lego blocks, if you will, from an ecosystem perspective. You got this core infrastructure that we invested into and we could just add the these ecosystem Lego blocks off of that core system to where we can scale and monetize tens of thousands of sites, not like a year and a half ago, our capacity was limited to probably under 3,000 sites.

So, I guess as an example, if we take the, I guess the customer that you should be deploying in 2014, that one with 400 sites, if in advance, they come to you and say, okay, we want all 400 sites done ASAP. What is the deployment time? Would it take a week? A day? A month?

We have, right now -- well, every customer is different. That's the beautiful thing about iAPPS. Every customer has their own unique initiatives that they're trying to drive and iAPPS is flexible in architecture and capabilities to be able to meet those unique requirements. So -- from a revenue scale perspective, we have the ability, let's say, like today, if we have, say, 3,000 sites in our ecosystem, plus you have another 3,000, 3,200 sites from the acquisition, we have the capacity of migrating all of those current ElementsLocal sites into our current environment, and we have the capacity of adding another several thousand sites into what we have today. So we -- we are very comfortable and we're very focused on, obviously, not just driving $7 million quarters, but then how do we get to a point where we're driving $8 million quarters, and we have the infrastructure in place today to drive those $8 million quarters from a [indiscernible] perspective.

All right. This one, I guess, maybe it's for Mike, in terms of the expenses in the fourth quarter, is that a good metric to use as the run rate going forward, in terms of sales and marketing and SG&A and R&D?

Yes. Absolutely. I think one thing to remember for selling and marketing is it has 2 months of the ElementsLocal acquisition in there, because they were August 1. So you have a little bit of incremental expense. But I think it's a good run rate. Same thing with G&A. R&D team might be slightly higher, closer to 500 and then the depreciation is a pretty good run rate. So other than the adjustment for a full quarter of the acquisition, it's -- it should be pretty stable.

Okay. And another on -- I guess, on the balance sheet, on the deferred revenue side. I know it was up nicely year-over-year. But sequentially from third to fourth quarter, it dips some. Was that just an anomaly?

Yes. And it's going to go back up. It's just -- the big spike was UPS Store, our first customer. A lot of people jumped on in the first quarter of last year towards the end of the quarter. And so we're going to go through a real big renewal cycle and you'll see that number go back up. But so, really what happened in the fourth quarter was it just dipped down a bit as that revenue moved to the income statement. But you'll see it bump jump back up.

And one last one. I know you announced, I guess, fairly recently, I guess to intercept there, like Channel Partners, I guess, overseas. Is that factored into your forecast, some overseas engagements and revenue from that?

It is not in our forecast that we gave today. It is -- those Channel Partners in the Far East are all on the enterprise side of our business. And they have -- they're going to have traditional sales cycles of 6 to 7 months themselves by the time they start contributing to our P&L.

Okay. So it's really a 2015 story -- a fiscal 2015 story for those guys.

Yes. At the earliest, Q4 '14.

[Operator Instructions] So our next question comes from Neil Cataldi from Blueprint Capital.

Revenue in the years leading up to 2013 was fairly consistent and growing. Last year it was a bit choppy. That being said, my first question, as it relates to your new guidance for next year, should we expect a return to sequential growth or will there be some continued lumpiness like there was last year?

We anticipate each quarter in fiscal 2014, from Q1 to Q4, to have sequential growth.

Okay, great. Fantastic. And then separately, can you provide a little bit more color on the pipeline, maybe the type of traction you're getting right now on the ds side. And if possible, any color on what the timing might be with some of these new relationships?

The total pipeline is over $40 million. It's $42 million in total. $20 million of that is enterprise sales or enterprise pipeline. That is a combination of iAPPS software and services, planned services, to launch either the mission-critical website or web store around iAPPS. Typical sales cycle in the enterprise side for Bridgeline is 6 to 9 months. $22 million of our pipeline -- and the gross margin, the gross profit margin on the enterprise side is approximately -- the blended margin is approximately 58%. And on the iAPPS ds side, that qualified pipeline is now $22 million, with the average engagement being north of $600,000. And the average gross margin contribution of the iAPPS ds is 75% to 80%. It's primarily all licenses, very little services. The lead time -- the sales cycle for ds, as I said earlier, is every bit of 1 year. And the pipeline was about $3 million in size. The iAPPS ds pipeline was approximately $3 million in size this time last year. It's now grown to $22 million. So from a pipeline maturity perspective, we're at the point where we will see us winning, consistently, new business every quarter going forward.

Okay, great. That's very helpful. I guess, and then just lastly, in past conference calls, you've spoken about the engagement sizes increasing. And I think in the past, you said that you wanted a little bit more data before you call it a firm trend. So now that it's in, I think, about a year since the engagement side is really starting to spike higher, are you confident in calling it a trend? Or how do you kind of paint that now?

A really good question. We are now comfortable with it being an absolute figure that we use in our modeling, cause we've had over 4 quarters consistently now of that engagement size and the enterprise side being, on average, about $300,000.

And when you look at our pipeline to the engagements in there...

Yes, say that.

They validate that.

Yes, they validate that. Good point..

And our next question comes from Brian Swift from Security Research.

Could you give a little color on the acquisition that was made in August? Sorry, it just disappeared from my screen here.

For ElementsLocal?

Yes. On how that's going to be integrated in. I got on a little late, so maybe some of the stuff was covered but -- and also you can comment on how things are going with UPS.

So ElementsLocal, Brian, the acquisition is completed in August. We did it strategically to help accelerate on our entry into the franchise marketplace. We're gaining a lot of traction in the enterprise website and commerce marketplace through iAPPS because we've been at it for 5 years. But with regard -- on the franchise side, we're new to that space. So we created this acquisition. ElementsLocal is approximately $2 million a year in revenue. They were break even at the time of the acquisition. High retention of their customer base. 3,200 franchises on their platform and their platform is very inferior to the iAPPS ds platform, both from a benefits features, value proposition and scale capability, which is I think one of the reasons why the principals of ElementsLocal were excited to merge in the Bridgeline and continue to help us grow in the franchise large dealer network space. So our plan is to migrate those 3,200 franchises, Sport Clips, Pearle Vision center, Maaco, Glass Doctor, and we're going to begin all that process in 2014 of migrating all of those franchises onto ds and off of the EL platform. We anticipate no dip in revenue. The acquisition was a combination of, primarily, almost all, some cash and earn out, where there's only $400,000 of cash that was utilized in completing the acquisition and the balance of the acquisition is paid off in earn out over a 3-year period based on performance of that particular business. So we're really excited about it. Great people, great thought leadership, great reputation, great customer base with high retention and it's accretive to our earnings. Right away, it's accretive in our first quarter here. So we're excited about the integration of that over the next year to 18 months. And regarding UPS Logistics, as I mentioned earlier in the call, that relationship's going very, very well. It was huge a validation to the iAPPS Commerce platform. And in fiscal '13, that relationship has brought B2C and B2B commerce solutions to us, from companies like GE Healthcare, Triumph Motorcycles, Qualcomm, WebMD, Lighting Science and we're excited with that traction.

[Operator Instructions] So I'm showing another question coming from Walter Ramsley from Walrus Partners.

A quick question for Mike, trying to put together the total share count so the company had 18,300 -- 18,300,000 actual shares out at the end of the year. Can you just go through what the options, warrants and the shares behind the convertibles add up to?

Yes. I think the easiest way to think about it, Walter, is all-in, fully diluted. It's a little under 20 million.

Okay. And as far as the UPS collaboration goes, does that business actually have a brand? I mean, how do -- when you go in and sell the combination, does it have its own identifier? Or how do you sell that thing?

It's being marketed as eCommerce for field, because it's an end-to-end solution including their logistics management, pick, pack and ship capabilities, which everybody knows is world-class. So it's marketed as called eCommerce for field. If you ever go to iappscommerce.com and you'll see a dedicated micro-site that markets that solution. And basically the relationship with the UPS sales force, not your traditional small package sales force but they're more of the enterprise sales force on the logistic supply chain management side, when customers that they have, or even some that they don't have that we had helped them win as well, need to have a commerce channel, whether it's B2B or B2C and they also want to have all the logistics managed by a third-party partner like UPS, that's -- then we bring it to the customer together. It's 2 different agreements. It's a Bridgeline agreement and it's a UPS Logistics agreement that the end customer ends up signing. So we're not entangled with who covers indemnification and things of that nature, right. So 2 separate agreements but we're marketed as a team. We go in as a team. We pitch it as a team. We propose it as a team. Price it out as a team from end to end with that potential customer.

So just generally speaking, do you think that'll be about the same level of business this year? Or what's the outlook?

Well, because we've been at it now for a year, a little more than a year, we anticipate it to bring more engagements in fiscal '14 than it did in '13.

Okay. And switching to the franchising business, I mean there's a pretty long sales and implementation cycle there. Do these customers already have existing websites that you have to kind of rebuild and replace or are they brand-new? Or what are you dealing with there, usually?

And it is -- so the sales cycle is basically double what it is on the enterprise side. On the enterprise side, as you know, we build a mission-critical website or WebStore around the iAPPS platform for a particular site. With the franchise side, we're building a mothership website and hundreds or if not thousands of micro-sites as well that are deployed. However, the micro sites are, for the most part, identical and highly-scalable, with very little customization. So the time to deploy a franchise customer is the same amount of time as it is on the enterprise side. It takes anywhere from 4 to 6 months to deploy. So we don't see a slowdown in deployment. And, you know, some cases could be hairier than others. The competition out there, it's amazing to us. It's $1 billion market. It's very fragmented, a lot of small players. There's not one individual large player that is in this $1 billion space. And it is a $1 billion market, Walter. There's over 750,000 active franchises in North America alone and we estimate there's probably another 500,000, what we call large dealer networks as well that are out there in North America, if not more. So it's a very large market opportunity that's extremely fragmented without a market leader. And our competition will either be a smaller player or it is an internal, home-grown baked system that a lot of the larger opportunities have created, that are running into a whole host of issues, where iAPPS ds is extremely attractive to them because we solve those issues.

Yes, I know. It sounds great. And just one last thing, the legacy business that's kind of falling off. Generally speaking, I mean is that the customer's decision to quit? Or do you sort of push them out of the fold?

It's a couple of things. A little bit is -- it's being low margin in work that we're not focused on. And then secondly, a portion of our converting from non-iAPPS customers to iAPPS customers. So right now, it's probably a little less than $1 million per quarter. And we see that continuing to decrease throughout the year. It's not going to be at -- as an accelerated rate, the number is smaller, but there are still a handful of customers that our intention is to convert them from non-iAPPS customers to iAPPS customers.

But I'll give you a few examples. Last year, we had 2 $1 million customers that went away, that were not iAPPS customers. There was never going to be an opportunity for them to be iAPPS customers. And they just wanted -- every time they come back to us, month after month, quarter after quarter, it's more of give me your hourly rate or reduce your hourly rate by x dollars, and so the gross margin opportunity at one point, which is already low, would be in the low 40s, then it would erode down into the upper -- into the low 30s, if not high 20s. And you get to a point where you say, this is not good business for Bridgeline and we refuse to reduce our rates. And so we end up that business goes away. The other part of the business that we also forced to make a decision to leave is, there's a lot of little -- we have done some acquisitions, historically. And you know what? In these acquisitions, the margin has contributed to help us reinvest back in iAPPS. In the margin of those acquisitions, we've had plenty of customers that came from those acquisitions, eventually become iAPPS customers. But a lot of these acquisitions -- some of these acquisitions had a lot of small hosting customers and these are small little $50 per month type hosting customers that are paying hosting fees and that's not our core business. And we actually made the decision last year to notify all those customers, we basically doubled their price, although 75% of them is still staying with us, but we did lose some, because we end up doubling their price just to host them. So right now, we're down to -- like Mike said, our business plan in fiscal '14, the guidance of $28 million has, how much of it was legacy? 2 what?

2.5.

And that's down, how much, 45%?

That is down 44% for the year.

44% year-over-year. So we expect to -- legacy customers will range anywhere from $500,000 to $700,000 to possibly even $900,000 a quarter in fiscal '14.

And at the moment I'm showing no further questions. I'd like to turn the conference back to you for any concluding remarks.

We appreciate the support, the patience of all of our valued shareholders. We're going to continue to build a scalable business model, which in turn is going to drive, we believe, significant shareholder value. Thank you very much for joining us today. Happy holidays to all of you and your loved ones. Thank you.

Thank you, ladies and gentlemen, and thank you for your participation on today's conference. This does conclude your conference. You may now disconnect.