Bridgeline Digital, Inc. (BLIN) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Bridgeline Digital Second Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference to our host, Mr. Michael Prinn, Chief Financial Officer. Sir, you may begin.

Thank you, and good afternoon, everyone. Welcome to our Second Quarter Conference Call. Before we begin, I'd like to remind listeners that, during this conference call, comments that we make regarding Bridgeline Digital that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time, and we undertake no obligation to inform you if they do. Results that we report today should not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause Bridgeline's actual 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, everybody. While we are very disappointed with our short-term financial results, Bridgeline continues to execute against its long-term strategic plan to strengthen and grow a high-traction, scalable iAPPS business model. Although our legacy business, the non-core business, revenue declined 40% in our second quarter of fiscal 2014, our year-over-year subscription and perpetual license revenue increased 30% and our recurring revenue increased 23%. In addition, we are pleased to report a record bookings quarter of $12.2 million in the second quarter of 2014. Late in Q2, we entered into a multiyear iAPPSds agreement with a leading health care communications technology company. The total value of this agreement is over $7 million to Bridgeline Digital, and 94% of the revenue related to this significant engagement will be recognized as SaaS license revenue beginning in 2015. As you know, SaaS license revenue received a multiple, from a valuation perspective, of anywhere from 5x to as much as 9x. For example, at a 6x revenue multiple, the enterprise value of this one engagement is well over $13 million. This one engagement will have 3,700 health care locations using an iAPPSds microsite with state-of-the-art functionality integrating content management, eMarketing and analytics. This particular Bridgeline customer has over 20,000 active customers of their own. And once we begin deployments in fiscal 2015, the customer plans to market their iAPPSds microsite solution to their entire active customer base, and they have plans to double the amount of the customers that they have using microsites today. Bridgeline's backlog is now over $20 million, and our qualified pipeline remains strong. We fully anticipate closing another multiyear multimillion-dollar iAPPSds engagement this quarter, with a rapidly growing franchise. Once again, 94% of that particular engagement will also be recognized as SaaS revenue once fully deployed in fiscal 2015. Bridgeline plans to have booked approximately 10,000 iAPPSds subscription locations by the end of the calendar year. This would be up from 2,300 location licenses just 3 months ago. In addition, we are executing a well-thought-out plan that will potentially capture over 40,000 various iAPP location licenses in the coming years. The average iAPPS enterprise engagement is now well over $400,000, with 25% of that being iAPPS SaaS licenses or iAPPS perpetual licenses. Mission-critical websites, intranets or Web stores are being developed around iAPPS, creating a high-retention customer base. Some of the best brand name companies in the world have selected iAPPS for their digital needs, companies such as L'Oreal, Triumph Motorcycles, GE, Teradyne, Parametric Technologies, the UPS Store, Qualcomm, LeSportsac and AARP. Bridgeline's services and delivery teams do outstanding work implementing iAPPS-driven websites, intranets, microsites and Web stores. These sites helps drive our customers to improve their businesses. We help our customers to maximize their search engine optimization capabilities, the awareness, conversions, their revenue and internal efficiencies. iAPPS-driven sites won 26 different industry-related awards last year, and we have already won 17 industry-related awards this year, a testament to the quality solutions delivered. The growth areas of our iAPPS business model is what's going to maximize shareholder value. And over the next year, as we significantly increase the deployed revenue of iAPPS recurring SaaS licenses, our margin's profitability will significantly improve. We believe that our patient and long-term shareholders will be rewarded. At this time, I'm going to turn the call back over to our Chief Financial Officer, Michael Prinn.

Thank you, Thomas. And good afternoon, everyone. I'm going to review the results of operations for the second quarter ended March 31, 2014. Our second quarter revenue was $5.3 million compared to $6 million in Q2 of last year. That's a decrease of 12% and is obviously disappointing to us. I'd like to take a moment now to give some color around the revenue decrease. The decrease came entirely from our service revenue. We experienced lower-than-expected service revenue from our delivery team primarily due to the timing of our second quarter bookings. While we did book a record $12.2 million in new business in the second quarter, a majority of those bookings were later in the quarter. This impacts our ability to book and deliver within the quarter. As we have discussed on prior calls, our engagement size continues to grow. In the second quarter, our average engagement size was over 500,000. Experience of -- experiencing a 30- to 60-day delay in closing just one engagement of this size can impact revenue from a timing perspective by as much as 150,000. We obviously had this happen to a number of engagements in the second quarter. Customer delays are also part of our business, but the number and the amount of delays in the second quarter was unusually high. This led to a decrease in our billable utilization for the second quarter and the overall decrease in our revenue for the quarter. I'll comment now on what we have done and what we are doing to address this, and then move on to the rest of the P&L. So within our sales process, we've made changes around the criteria and time line for what is actually committed to our sales forecasts. In our revenue planning, we have adjusted our methodology around the amount of revenue that we can rely on to be booked and delivered within a quarter. And finally, in our delivery side, we've been increasing our variable labor pool that we can draw on to help support fluctuations in the level of demand on our delivery teams. This will also help us from a utilization perspective as that we have the ability to staff up or pull back from this variable labor pool. We fully expect that these adjustments we've made will enable us to better execute our strategic objectives and focus on a more efficient sales and delivery cycle. We had a strong bookings month for April and are confident that we will not see some of the unusual fluctuations we saw that impacted revenue in the second quarter. Moving on to the other pieces of revenue. Our subscription and perpetual license revenue increased 30% compared to the second quarter of last year. This significant increase was a 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 decreased slightly to $4.5 million in the second quarter from $4.7 million in the second quarter of last year. This decrease is due to the decrease in our service revenue, which I previously discussed. And our core business revenue increased to 84% of the total revenue compared to 78% of the total revenue from the second quarter of last year. Moving on to recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, increased 23% in the second quarter of 2014 to $1.6 million as we continued 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 additional iAPPSds customers as well as the incremental revenue from our ElementsLocal acquisition as we migrate their customers to the iAPPSds platform. Revenue from our non-iAPPS or legacy business decreased by approximately 40% when compared to the second quarter of last year. We're now at a point where our quarterly revenue of legacy business is consistently less than $1 million per quarter. Our gross margin for the second quarter was 40% compared to 53% in the second quarter of last year. This decrease is obviously a result of our lower-than-expected service revenue, and I fully expect the gross margin to be back to 50% or greater in the third quarter. Adjusted EBITDA in the second quarter was minus $1.3 million compared to $17,000 in the second quarter of last year. Again, this is primarily a result of our lower-than-expected revenue number and we do expect a much better adjusted EBITDA number in the third quarter. Our non-GAAP adjusted net loss was $1.9 million or a loss of $0.11 per diluted share compared to non-GAAP adjusted net loss of $417,000 or $0.03 per diluted share in the second quarter of last year. Our GAAP net loss was $2.3 million in the second quarter compared to a loss of $687,000 in the second quarter of last year. Turning to the balance sheet. At March 31, we had total assets of $37 million, with cash and accounts receivable of just under $7 million. And our DSO is 52 days. We will continue to remain fiscally responsible and manage our expenses as we grow our business. In terms of the potential for additional financing, I'll message what we've consistently said in the past that management will constantly review our needs for working capital requirements on an ongoing basis and determine if our needs require additional capital. Turning to our guidance. Halfway through fiscal 2014, we have generated close to $12 million of revenue, and I would expect the next 2 quarters to be between $6 million and $6.5 million. So for fiscal 2014, our total revenue is expected to be approximately $24 million to $24.5 million. One comment to try and connect guidance just to the large iAPPSds agreement we announced and Thomas talked about: While this contract is approximately $7 million in revenue, with $6.6 million of it in license revenue, our implementation teams still need our deployment time and then a fair amount of ramp-up time to migrate over all 3,700 locations. Once this is completed in fiscal 2015, this customer alone will generate over $550,000 in quarterly licensees for many years to come. As Thomas mentioned earlier, we also look forward to announcing more iAPPSds engagements in fiscal 2014. Thank you. And Eric, at this time, we'd like to open the call up to Q&A.

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

Following on, I guess, to what Mike said at the end. That $6.6 million will be recognized as you get each of those 3,700 in place during fiscal '15. Is that correct?

Yes. I mean it is -- throughout fiscal '15, it's going to be a ramp-up process at x number of units per month. And then once it fully ramps up, that's when you get to probably about -- it's about $550,000 per quarter. So it's not all going to happen at once. It's going to ramp up month by month.

Okay. And of the 10,000 ds-es that you project to have by the end of 2014, how many -- or if you could give a rough estimate, what will be the revenue-generating potential of what is implemented at that point? Basically, how many will be generating revenue for you in '15?

Yes, so of those 10,000, I think...

That's by the end of -- it's...

Of the 10,000 that Thomas said we expect to have sold, we would probably have about 6,000 deployed and generating revenue. And those 6,000, just at an average of $50 a month on an annual basis, it's about $3.6 million.

But then, by the end of '15 -- you said it all depends on the timing of closing, right? These engagements can take anywhere from 4 months to a year to deploy. So by the end of calendar '15, you could have all 10,000 deployed, which would be generating $1,250,000 of margin per quarter.

Okay. And in the first quarter, what percentage of the revenue was actually ds?

First quarter, or second quarter, the one we just reported?

The one you just reported.

Yes, I mean it's typically, right now, about, say, $400,000 to $500,000.

No, just ds. So if -- it's the 20.

Yes, not of total revenue. Of the iAPPS revenue, what was the ds component?

[indiscernible]

Yes, it's about $450,000 to $500,000 total ds revenue in the revenue number we just reported for the quarter.

Okay. And looking 2 to 3 years out, of iAPPS revenue, what percentage do you hope to be ds?

We have a business model that shows -- on Bridgeline scaling to a $100 million business model, we show iAPPSds-related revenue being close to half of that.

Okay. And just one last one. The service revenue that was delayed, is that going to be made up for in the third quarter? Or does that just sort of get absorbed throughout the second half of the year?

It gets absorbed because you have -- it's not any revenue that's lost. It gets absorbed because it's all contingent upon services staff delivering it. So you're -- you had -- you have a capacity issue with man-hours, right? So while Mike said, we -- obviously, because of the poor and disappointing performance in this second quarter, April started off very strong. And so we plan to have our revenue and our P&L rebound in Q3, which is our current quarter, and then progressively get better for Q4.

[Operator Instructions] And our next question comes from Mark Stafford of MOGN.

This was very disappointing, to say the least, but your comment about your raising of funds, it would -- if you have to raise another $3 million in the next 5 to 6 months, at this level, that's going to put you somewhere around 25 million shares outstanding. Would that be correct?

Yes.

And how confident are you in the second half of this fiscal year in your numbers? Because so far, it hasn't worked out.

Yes, and Mark, like I mentioned, we have implemented and are continuing to implement a number of changes. And I think those are all reflected in a more conservative revenue guidance number of between $6 million to $6.5 million for the last 2 quarters of the year. So I certainly feel comfortable with that.

That's combined with the strength of our backlog.

And are you working on your accounts receivables?

Yes, absolutely. I mean our DSO for the quarter was 52 days. That -- we're -- a good chunk of our revenue is service related. I think, in that industry, it's -- that's a good number and...

Well, I think it's a great reflection of the strength of our business model that we're trying to develop here, Mark, that -- Mike's team has always done a great job with DSOs, keeping them between 50 and 55 days, which is about 15 days greater than other companies in our space. But we have a combination of -- you have the majority of your customers in your SaaS environment, and it gives you tremendous leverage with your AR [ph] . And so we have very, very little bad debt. And our customers do pay timely, for the most part.

There are no further questions. I'd like to turn it back to Mr. Thomas Massie for closing remarks.

We appreciate the support and patience our -- of our valued shareholders. And it really is our goal to continue to build a scalable business model, which, in turn, is going to build and maximize shareholder value. Thank you for joining us today.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.