Bridgeline Digital, Inc. (BLIN) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Bridgeline Digital to report Financial Results for the Fourth Quarter and Fiscal Year Ended September 30, 2014 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I’d now like to turn the conference over to Mr. Michael Prinn, Chief Financial Officer. Sir, you may begin.

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 based 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 the copy of our earnings release by visiting our Web site. 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, everybody. Bridgeline continues to execute against its long-term strategic plan to strengthen and grow a high-traction, scalable iAPPS business model, while our legacy business declined 40% in fiscal 2014, year-over-year revenue from our core business loose 6% to $20.3 million. Our subscription and perpetual license revenue increased 43% to $5.7 million and our recurring revenue increased 33% to $6.9 million. In fiscal 2014, we achieved record new bookings of $32 million, of which 53% or over $17 million of the new bookings is high margin recurring future revenues. Once all of the multiyear engagements that were booked in fiscal 2014 are fully deployed, it will add approximately $2.6 million per year in annual recurring revenues, of which the vast majority will evolve in operating income. Once our backlog is fully deployed, these lines will have close to 10,000 businesses relying on iAPPS and Bridgeline for the digital engagements needs. In fiscal 2014, our blue-chip customer base added new customers such as TeleVox, Sport Clips, Allscripts, Broadridge, Cardtronics, [indiscernible], Unidine and companies like Twitter. With a customer retention rate of approximately 90%, Bridgeline is developing a recurring revenue business. Bridgeline service delivery teams have created and deployed amazing award winning iAPPS driven Web sites, Web stores and microsites. These sites are rich in front-end utilization combined with powerful back-end functionality. Since Bridgeline’s inception, we received close to 200 industry related awards, of which over 27 of these awards were received in fiscal 2014. This is a record year for Bridgeline. In fiscal 2014, ongoing investments were made into the iAPPS co-managed network operations center, driving 99.9% uptime for our valued customers. In addition, in fiscal 2014, our iAPPS environment achieved PCI compliance, a necessary requirement as our iAPPS commerce business continues to grow. Bridgeline’s R&D team added impressive enhancements and functionality to iAPPS in fiscal 2014, notably to iAPPSds and iAPPS Marketier. iAPPS Marketier is a platform that has native female marketing, which among it is a solution that is -- that we’ve added is the new command communication dashboard with intuitive features that empower corporate marketing teams to develop manage and execute effective email campaigns, now iAPPS customers can build campaigns with custom email design or use new email template available to them right out of the box. Additionally, new dynamic list segmentation capabilities allow our customers to easily nurture specific audiences with targeted communication. To enhance our fiscal 2015 operating performance in the second quarter of this year, we will be implementing initiatives that are expected to improve our gross profit margins by approximately $300,000 per quarter or $1.2 million on an annual basis. Additionally, we will reduce our operating expenses by approximately $500,000 per quarter or $2 million on an annual basis. Combined these planned expense reductions will improve Bridgeline’s operating performance by $3 million on an annualized basis. We are committed to driving an operating model that delivers positive EBITDA. Bridgeline Digital currently has $7 million in annual recurring revenues that is growing at a rate of over 30% a year. In addition, once our large backlog is deployed, our annualized recurring revenues will be fast approaching $10 million. And this doesn’t include any new business that will be booked and delivered throughout fiscal 2015. As you know market valuation comps provide valuations of four times to as high as eight times annualized recurring revenues. Like you, we’re disappointed with Bridgeline’s current market cap of just only $11 million and we’re of the opinion that Bridgeline’s two market valuation is greater than $50 million. In fiscal 2015, we will work to deploy our backlog to schedule, drive future iAPPS related business, improve our gross profits, reduce our operating expenses, and return to positive EBITDA. iAPPS is an outstanding digital engagement platform that provides superior functionality, market differentiation and value with a large backlog in place, a strong sales pipeline and operating adjustments being made, we’re very excited about fiscal 2015 and beyond. 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 2014 financial results. Michael?

Thanks, Thomas. I'm going to review the results of operations for the fourth quarter and year ended September 30, 2014. So fourth quarter revenue was $5.8 million compared to $6.7 million in Q4 of last year, a decrease of 13%. There is a number of pieces that make up this decrease of $900,000, so let me provide some color for this shortfall. So revenue from our non-iAPPS or our legacy business decreased by approximately 31% when compared to the fourth quarter of last year. We are now at a point where our quarterly revenue of legacy business is consistently less than a $1 million per quarter. And in the fourth quarter our non-iAPPS or legacy business was approximately $600,000. Our subscription and perpetual license revenue increased 8% compared to the fourth quarter of last year. This increase was a result of an increase in revenue from our iAPPSds sales, an increased demand in our iAPPS platform and the incremental revenue from our acquisition of ElementsLocal in the fourth quarter of last year. Our recurring revenue, which again consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, increased 20% in the fourth quarter of 2014 to $1.8 million. Our iAPPS services revenue decreased by approximately $800,000 in the fourth quarter compared to the fourth quarter of last year. This was a result of a couple of large existing engagements that were delayed combined with new engagements that were expected to sign being pushed into fiscal ’15. All these factors resulted in the lower than expected utilization of our delivery teams in the fourth quarter. As Thomas mentioned before, we’re making some adjustments in the second quarter to help us drive an appropriate billable utilization and cost structure for the remainder of fiscal ’15. On an annual basis, our revenue for fiscal ’14 was $23.8 million compared to $24.5 million for fiscal 2013. This decline is due to our non-iAPPS revenue decreasing by 40% or $2.1 million in fiscal 2014 compared to fiscal 2013, offset by an increase in our core business. The $23.8 million in fiscal 2014 included an increase in our core business, which is the iAPPS and the ElementsLocal platform of 7% compared to fiscal 2013. Additionally, on an annual basis, our subscription and perpetual license revenue increased 43% to $5.7 million in fiscal 2014 compared to $4 million in fiscal 2013. And our recurring revenue increased 33% in fiscal 2014 to $6.9 million compared to $5.2 million in fiscal 2013. Our gross margin for the fourth quarter was 48%, compared to 56% in the fourth quarter of last year. This decrease is primarily the result of a lower than expected service revenues in the fourth quarter, which impacted our service margin. Our license and hosting margin in the fourth quarter was relatively consistent with the fourth quarter of last year. Turning to adjusted EBITDA. Our adjusted EBITDA in the fourth quarter was a loss of $602,000 compared to positive adjusted EBITDA of $115,000 in the fourth quarter of last year. As we discussed previously, we’re making changes in the upcoming months to help reduce our operating costs with a goal of driving positive adjusted EBITDA in the upcoming quarters. Our non-GAAP adjusted net loss was $1.5 million or a loss of $0.06 per diluted share, compared to non-GAAP adjusted net loss of $0.5 million, or a loss of $0.02 per diluted share in the fourth quarter of last year. Our GAAP net loss was $1.8 million in the fourth quarter compared to a loss of $800,000 in the fourth quarter of last year. Turning to Bridgeline’s balance sheet. At September 30, 2014, the Company had total assets of $34 million with cash and accounts receivable of $4.6 million, and our DSO was 55 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 said consistently in the past; management will continually review our needs for working capital on an ongoing basis and determine if our needs require any additional capital. Thank you. And at this time, we'd like to open-up the call to Q&A.

Thank you, sir. [Operator Instructions] The first question comes from Howard Halpern from Taglich Brothers. Your line is open. Please go ahead.

Good afternoon, guys.

Yes.

In terms of, I guess, the restructuring that, well rationalization of expense that is kind of go on, are we going to see any charges in the first quarter of this year?

No, we won’t see anything in the first quarter. Our first quarter was -- ended December, so we’re getting our arms around where we’re going to reduce expenses and its something that we’re going to do in -- we said in the script in the second quarter.

Okay. So no one-time charges at all, one-off expenses even in the second quarter or we might see something there?

We are not sure. I don’t think we’re prepared to give those details. We are going to get our arms around it and figure out the appropriate places to reduce cost and what that entails.

Okay. In terms of, I guess, entering fiscal ’15, how many active DS sites were paying you the monthly subscription fee?

In fiscal ’14 you mean?

In ’15. When you entered ’15 on October 1st.

All in all, it’s probably about a little more than 4,000.

Okay. And we anticipate that we should see a material jump once all that TeleVox deployments are active and that should be in the second half of the year?

Correct. We will see an increase of about 6,035 -- I’m sorry, 5,500 to 6,000 sites by the end of the year.

Okay. Okay. And if you give a little bit of an update on the Element 21 and the conversions that you’re seeing so far and what your plan is that you see for fiscal ’15?

With the [indiscernible] of the acquisition of ElementsLocal?

Yes, and the conversion of their stores too the DS platform, that’s progressing.

We are currently implementing the largest customer they had on to iAPPSds and that is scheduled to begin deployment in April of this year. So the entire solution being developed and deployed as we speak, but the actual deployment of the DS licenses will be in April -- well, that’s when it will start.

Okay.

And that’s about 1,200 to 1,300 units alone. The balance of the ElementsLocal customers are much smaller, offset 300 or 200 units and we’re currently getting them under contract rate now to switch from EL to our iAPPS which would be a lower end version for them.

And what kind of -- if you could describe, what kind of stages you’re on with potentially new DS customers? Are you just in the proposal stage -- stages or are you further on some potential new customers for 2015?

We are very excited. The opportunities for DS range from anywhere from 150 units location to as many as 8,000 locations and so we’ve a very broad spectrum. We -- this month closed a smaller one that had approximately 250 units, which is about a $900,000 contract that we will provide a quarter million dollars of annuity a year for a three-year period. We are very excited about that and that will be deployed over the next four to five months and then we will start generating those annuity revenues. We have other ones that -- larger ones that are at a proposal stage that are over 1,000 units and could be significant annuity revenue to Bridgeline. We have multiple opportunities that are at that stage, so we’re very excited about that. And lastly, as I mentioned earlier, we will be announcing in the near future a -- another version of DS that will be very attractive for the sold [ph] 500 unit market that allows that market to get up and running in 90 days and will reduce our selling cycles significantly as well. We find as we continue to execute this market, there are two big categories. We got the folks that have greater than 500 units typically require a lot of customization, a lot of complexity with back-end integration and then you have the sub 500 unit market, the smaller enterprises that want all the power that DS can provide for their local franchises or dealers, but cannot justify the ROI of up front customized costs. So as I said, we’re very excited about developing a solution for that that will really improve our time to market.

Okay. And one last one, can you talk, I guess, a little bit about the enterprise business and what you’re seeing in terms of maybe change selling approach or what customer feedback it is on potential new customers there, if you could just go over the landscape generally?

Over the last 18 months, we’ve seen a dramatic shift in our enterprise business. As we reported all along in the quarters that we were averaging couple $100,000, $250,000 type engagements and that number is doubled and we’re seeing much larger engagements on the enterprise side with a lot more complexity which takes anywhere is from eight months to a year to deploy. Two years ago, we maybe sign an engagement for $1 million on the enterprise side, that’s now happening almost every quarter. And like I said, in almost -- on average, let Mike [indiscernible] with our average engagement side is close to $500,000 now?

Yes, absolutely.

So the good news is, we have phenomenal brand names that are coming to us with complex mission critical Web properties that they’re replacing on iAPPS, but it does increase the complexity for delivery as well as the time to deploy which then has an impact on revenue recognition. So that’s probably the biggest shift that I see on very seldom do we ever have anything that is now closing, that’s $200,000.

Okay. Well, I look forward to 2015.

Thank you, Howard.

Thanks, Howard.

Thank you. I'm showing no further questions at this time. Gentlemen, I’d like to hand the conference back over for closing remarks.

We appreciate the support and patience of our shareholders. It’s our goal to continue to build a scalable business model, which is going to in turn build shareholder value. Thank you for joining us today. We wish you and your family a very happy, healthy New Year. Thank you.

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