Bridgeline Digital, Inc. (BLIN) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Bridgeline Digital Chief Financial Officer, Michael Prinn. Please proceed.

Thank you, Charlotte. Thank you, and good afternoon, everyone. I'm pleased to welcome you to our first 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 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.

Thank you, Mike, and good afternoon, everyone. We really apologize for having our Q1 financial results conference call on a Friday heading into a holiday weekend. We thought we were going to be able to be in a position to announce another very significant, multiyear, multimillion dollar iAPPSds engagement by today. However, we now plan to announce the details of this engagement in the coming weeks. As you could see from our Q1 results, Bridgeline continues to execute against its long-term strategic plan to strengthen and grow a high traction, scalable iAPPS business model. While our legacy revenue declined 51% in our first quarter of fiscal 2014, year-over-year, from our core business, it grew 33% to $5.6 million compared to $4.2 million in the first quarter of 2013. Subscription and perpetual license revenue increased 100% to $1.6 million in the first quarter of 2014 compared to $800,000, and recurring revenue increased 42% to $1.7 million compared to $1.2 million a year ago. The growth areas of our business is what is going to maximize shareholder value and over the next year, as we significantly increase the sales of iAPPS recurring SaaS licenses, our margin and profitability will improve. From 2010 to 2012, our historical average initial iAPPS enterprise engagement was approximately $120,000, and as we said before in fiscal 2013, this increased to $300,000. As we just now completed our first quarter of 2014, I'm pleased to report that this positive trend continues. Our qualified pipeline of iAPPS opportunity has soared to almost $50 million. This is up from $25 million just 1 year ago. iAPPSds was specifically developed and marketed to the franchise and large dealer network markets who need to provide superior website engagement tools to their numerous franchises or dealers, while maintaining content and brand control. iAPPSds enables corporate franchises to provide a centralized digital marketing structure for the franchises and their dealers. It's a cloud-based, multi-tenant SaaS solution that's highly scalable. The iAPPSds qualified pipeline of opportunities has soared in the past year from $500,000 in Q1 of 2013 to almost $27 million at the end of Q1 2014. I want to point out, of the $27 million of qualified iAPPSds pipeline, 90% of this is high-margin recurring SaaS software. While our iAPPS enterprise sales cycle has traditionally been 9 months, our iAPPSds sales cycle is every bit of 12 to 15 months. Each iAPPSds deployment can take 4 months to 12 months depending on the complexity and the scope of the engagement. We believe that there's no other web platform solution in the franchise marketplace that truly competes with the quality, the value proposition and scale of iAPPSds. An iAPPSds customer that deploys 2,000 locations will add approximately $1.2 million a year in high-margin SaaS recurring revenues to Bridgeline, and an iAPPSds customer that deploys 400 locations could add approximately $350,000 a year of high-margin SaaS recurring revenues. Let me take a few minutes to describe at a high level the general makeup and value of our iAPPSds qualified pipeline. Customer opportunity A is a health care communications technology company that is in need of 4,000 quality microsites. Customer opportunity B is a well-established staffing franchise and is in need of 6,000 -- excuse me, 600 quality microsites. Customer opportunity C is a Fortune 500 company that improves cost-effectiveness of health care organizations, and they are in need of over 1,000 quality microsites. Customer opportunity D is a leading financial services firm, and they are in need of approximately 9,000 quality microsites for their independent certified financial advisers. And customer opportunity E is an existing customer that we obtained from our recent acquisition of ElementsLocal. They are a leading haircut salon with over 1,200 locations that are planning to upgrade to iAPPSds. Because of the value, which is far more significant than the ElementsLocal platform, the price of the iAPPSds is twice of that of the ElementsLocal platform. So once migrated onto iAPPSds, this will incrementally add hundreds of thousands of dollars of annual recurring SaaS revenues to Bridgeline. We have far more than just 5 opportunities that I just mentioned, but hopefully, the descriptions of these 5 qualified opportunities give you a clear understanding of the significant impact iAPPSds will have to our business model. As our iAPPSds pipeline matures, solutions become specified and then proposals are issued. Our iAPPSds pipeline maturity is at the 1-year mark, and we are looking forward to closing many of these opportunities over the next months and beyond. At this time, I want to turn the call back over to Mike, who is going to provide more detail on our first quarter financial results. Michael?

Thanks, Thomas. I'm going to review the results of operations for the first quarter ended December 31. First quarter revenue was $6.5 million compared to $6.2 million in Q1 of last year, an increase of 5%. Let me give some color around the various pieces. So our subscription and perpetual license revenue increased 100% compared to the first quarter of last year. This significant increase was the result of revenue from our iAPPSds customer, an increase demand in our iAPPS platform and the incremental revenue from our acquisition of ElementsLocal. Revenue from our core business increased 31% to $5.6 million in the first quarter from $4.2 million in the first 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 first quarter, our core business revenue made up approximately 85% of our quarterly revenue. This is compared to about 69% of our quarterly revenue in the first quarter of last year. We expect that this percentage will continue to increase throughout fiscal 2014. Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, increased 42% in the first quarter of 2014 to $1.7 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 the future quarters as we integrate our second iAPPSds 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 51% when compared to the first quarter of last year. We are now at a point where our quarterly revenue of legacy business is less than $1 million per quarter. We will see decline in our legacy business but at this point, we have 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 legacy customers will eventually become iAPPS customers. Turning to gross margin. Our gross margin for the first quarter was 54% compared to 52% in the first quarter of last year. The increase in our gross margin is attributable to our 100% increase in license revenue in the first quarter. We expect that our gross margin will continue to improve primarily because of the forecasted increase in license revenue from the launch of the additional iAPPSds customers. Bridgeline generated $20,000 of adjusted EBITDA in the first quarter compared to $50,000 in the first quarter of last year. Our non-GAAP adjusted net loss was $610,000 or a loss of $0.03 per diluted share compared to non-GAAP adjusted net loss of $359,000 or $0.02 per diluted share in the first quarter of last year. Our GAAP net loss was $777,000 in the first quarter compared to a loss of $642,000 in the first quarter of last year. Turning to the balance sheet. At December 31, the company had total assets of $35 million, with cash and accounts receivable of $4.7 million, and our DSO was 55 days. In December of 2013, we reduced our short-term debt and accounts payable by approximately $1.4 million. This created a decline between our cash and accounts receivable of approximately $1.3 million from September 30. We'll continue to remain fiscally responsible and manage our expenses as we grow our business. In terms of additional financing, I'll message what we've consistently said in the past that management will constantly review our needs for working capital, as well as opportunities for strategic acquisitions and determine if our needs require additional capital. In terms of our fiscal 2014 outlook, so turning to our guidance 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. At this time, we'd like to open up the call for Q&A.

[Operator Instructions] Our first question comes from the line of Howard Halpern from Taglich Brothers.

Sort of the standard question, I guess, I have. How many iAPPS enterprise was deployed, and how many ds were deployed during the quarter?

So ds was about 65 and from -- we had 76 enterprise licenses sold, and the number deployed was probably a little bit less than that, I think about 45.

Okay. Okay. I guess the next question is regarding -- because, I know you gave some indication now that it takes at least 4 months for deployment at ds to occur, or it could take a minimum of 4 months. Where does the 400 that you've talked about last time in the last call stand at this point?

That was SidCorp [ph], and they are just -- their actual engagement is getting deployed by the end of March. And so their licenses of the 400 will not -- will be additive post-March.

Okay. And I guess based on the cycle that we're looking at, you talk about you're going to give details on the new -- the record contract that should be coming. You would anticipate then, based on the size of it, that it really wouldn't impact fiscal '14 that much. It would be more of an impact in fiscal '15?

At this time, Howard, we're going to wait until we make the announcement. The announcement will have a lot of detail in it, so everybody understands how the -- what the financial impact would be to the company in fiscal '14, '15 and '16.

Okay. And just based on, I guess, the guidance that you provided, you're really looking at, I'm assuming, a much better second half than first half, almost $15 million in the second half to get to that $28 million. Is that a fair assessment?

That is correct.

Our next question comes from the line of Mark Stafford from Stafford Capital.

Given your cash position, what do you think you're going to need to get through the rest of this year?

Mark, I'll reiterate what I said on the call. We're going to evaluate on a periodic basis. So I know that the cash position at December is lower than December. But I did point out that from a debt perspective, we were about $1.4 million lower, and that is the facility with our bank that we can draw down on -- based on our accounts receivable and stuff. So that...

And that line is, what is it, $5 million?

A $5 million line, and at December, we had about $2.5 million outstanding underneath that line. So we use that line for our working capital, and we borrow and pay back against that throughout the year. And then on top of that, we'll continue to evaluate what sort of needs we have for, if anything, working capital or strategic acquisitions.

[Operator Instructions] Our next question comes from the line of Jason Revland from Blueprint Capital.

I think we can forgive you for doing a Friday call. I think that's pretty good reason, you guys tried to squeeze that PR in. I think that would've made sense. Looking forward to hearing more details about that. Can you give us anything more as far as like what industry that was, or how many seats that might be, or will that just be letting the cat out of the bag too early?

I think we wanted to share with our shareholders that we have a very sizable engagement that's on the goal line. And we really were hoping to have it wrapped up today so we could talk in detail about it on this call. So I apologize that we can't. We will share all of that detail, the amount of units, how it's going to be -- how it actually flows into the P&L. So we put a lot of thought into how we're going to describe it in the press release, but unfortunately, Jason, you have to wait until that comes out.

Sounds like it's in legal hands, if my experience serves correct, on why things like this get delayed. But...

Well, it's that and it's, you know what else, as you know, it's also your -- when you deal with really large companies, there tends to be sometimes more involvement on their end from various people in that legal process. So we're very close. So we'll announce it, hopefully, in the next coming weeks.

Yes, I don't think you'd tip your hat if you weren't on the 1-inch line. So look forward to seeing the details there. I'll ask a different question about engagement sizes. I know that's been trending higher over time. Maybe I missed that. Have you -- did you disclose the average engagement sizes for iAPPS licenses?

It's now approaching $400,000 per enterprise engagement. That's just the enterprise side. I think the ds side, our average engagement on ds will be north of $1 million average.

Got it. Any thoughts on the acquisition landscape? Or are there deals out there that you might be looking at in the periscope a little closer than, say, 3 or 6 months ago?

We're always evaluating opportunities. We do have ongoing discussions with some companies that are of interest. However, right now our current guidance is all organic growth.

[Operator Instructions] And at this time, I'm not showing any more questions.

Okay. Thanks, Charlotte. Once again, we appreciate everybody's patience and your support. We're going to continue to build a very scalable business model. I'm excited to see our recurring revenues continue to grow quarter after quarter, and this is what's going to maximize the shareholder value. Thank you, and everybody, have a great long weekend.

Thank you, ladies and gentlemen, for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.