Bridgeline Digital, Inc. (BLIN) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital fourth quarter earnings call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Michael Prinn, CFO. Sir, please begin.

Thanks, Vince. So thank you. 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. In a minute, I'll turn it over to Ari Kahn, Bridgeline Digital's Chief Operating Officer. But before we do, let me give you -- let me give him a proper introduction. Ari is one of the founders of the digital engagement industry and built one of the first companies in digital engagement, FatWire. He founded FatWire in 1996 and grew it into a profitable company with 13 office -- with offices in 13 countries. FatWire was eventually acquired by Oracle. In addition to being a successful entrepreneur, Ari has a Ph.D. in computer science with a deep technical expertise in digital engagement. Ari's also made a personal direct investment in Bridgeline at above-market value. So Ari will spend some time talking about Bridgeline, why he's here, our strategy and our focus for fiscal 2016 as well as some recent accomplishments. Then when Ari's done, I'll come back and I'll go through a financial summary of our fourth quarter. Ari?

Thank you, Mike, and good afternoon, everyone. I'm going to spend some time talking about why I joined Bridgeline, the market and our strategy to increase profitability with Express solutions that capitalize on inbound market demand that we see. Although I've been in the web content management market since its inception, I hadn't looked closely at Bridgeline until just this year. When I did, I was immediately impressed by Bridgeline's product suite, iAPPS. iAPPS has the broadest feature set that I've seen in the digital engagement space. As I looked at Bridgeline's customers and at their websites, as a computer scientist, I appreciated the fact that Bridgeline has powered mission-critical applications like e-commerce at the enterprise level. The security and performance necessary to deliver these websites requires a level of technical maturity that does not come easy. I saw Bridgeline's challenges, too. I had the same challenges at FatWire, and I knew they could be overcome. When I created FatWire, I led the acquisition and turnaround of a company named Open Market. Open Market was a web content management company approximately the same size as Bridgeline and was losing money. Within a short period of time, we focused on operational excellence, drove the company to profitability and created a valuation of over $160 million, which was 4x its revenue. I decided to not only make a direct investment into Bridgeline but to join Bridgeline, so I could participate hands-on in its success. I'm excited to be here and confident that we can create great shareholder value. So let's start off and take a moment to talk about our market. The digital engagement market has matured significantly in recent years, and at the same time, is evolving rapidly. Just think about how social and mobile have changed in 2015 alone. Websites are central to most companies' brand and are often a key driver of revenue. In addition to commerce, websites are a conduit for lead generation. Microsite's landing pages are now best practices to promote individual products and services. Integration with social media's comments and mobile is a must. On top of all this, our analytics engines that monitor websites to enable continual improvement. Today, many companies are on their third or fourth generation of their website. Their website is performing good enough, even if it is missing some of the latest features. Many companies had a painful experience building their website and are reluctant to change it for that reason. Some companies with well performing websites are not sure why their websites perform so well and are afraid to make changes to them. As a result, regardless of the latest innovations available on a platform like Bridgeline, companies only launch a new website on average every 4 years. And when they do, it's a major decision requiring signoff from several stakeholders and an evaluation time frame of 6 months or more. During the life of a website, companies see new technologies and come to Bridgeline to learn about our capabilities. Bridgeline has not sold stand-alone features previously, because we assumed those features would justify the sale of a new website. This assumption was valid just a few years ago, but not for today's fourth generation websites. Bridgeline, like its competitors, rarely convert these inquiries into new customers. This presents a significant challenge for both Bridgeline and for its competition. The cost of customer acquisition is high because companies are reluctant to replace their existing website. In fact, the cost of customer acquisition is perhaps our greatest challenge. If our product suite could help customers who need incremental improvements to an existing website, then Bridgeline's cost of customer acquisition would dramatically improve. The breadth of Bridgeline's iAPPS product suite is outstanding. Every major feature required for an enterprise is available, including web content management, commerce, marketing automation, social, mobile, analytics and even franchise. Our breadth is one of the reasons that our standard marketing initiatives generate requests even from companies who are not ready to launch a new website. Companies see the value in our features and want to see if they can incrementally add them to their existing non-iAPPS website. Because we are technically structured as a suite of products, a small engineering investment can create stand-alone products around some of the feature sets that do not require customers to replatform their entire website to iAPPS. Competitors who have a single product and are not designed as a suite would find this more difficult to accomplish. This is a great advantage. We have a unique opportunity to respond to the growing market of companies with third or fourth generation websites that are good enough, but can benefit from incremental improvement. Fulfilling that demand would not only create sales for inquiries that we previously could not service, but also forges relationships with companies who eventually will be ready to replatform their full website to Bridgeline iAPPS. And this leads to a pivot in our traditional strategy. We have tremendous opportunity with our iAPPS platform and will continue to invest in direct iAPPS sales for launching new websites. Our broad feature set is a strong differentiator. In fact, we intend to increase investments in marketing iAPPS as the platform for new websites. But as we make these marketing investments, we expect to generate demand for incremental updates to non-iAPPS websites as a side effect, and we intend to capitalize on that demand as well. Bridgeline will offer stand-alone features called Express solutions. The engineering investment to implement Express solutions is modest as they only require resegmenting features in the iAPPS platform. The marketing investment is also small because we're responding to an existing demand. Since customers are not replacing their entire website, we expect the sales cycle to be measured in weeks rather than months. In the long term, our cost of customer acquisition for iAPPS platform customers is expected to decrease when we upsell the Express solutions customer base. Express solutions have another advantage in that they have a higher ratio of license-to-services revenue. Launching a new website involves a significant graphical design investment, but by their very nature, Express solutions leverage existing website design and are more out-of-the-box. We'll have quick start service packages for Express solutions but expect the length of the entire engagement to be very short. Bridgeline's strategy is driven by current market demand. It's accretive to our current core business model and augments momentum. It does not require significant engineering and marketing investment and can be executed quickly. Bridgeline's unique relative to our competition because of our broad feature set that is designed as a suite rather than as a single product. This design enables us to quickly create new Express solutions with minimal engineering expense. In 2016, execution will be key. Bridgeline has tight financial position and should be careful about raising capital under its current stock price. Driving positive adjusted EBITDA is a core company goal for Bridgeline, and our investments need to be consistent with that goal. We made great strides in trimming costs and continued diligence will be central in 2016. We'll make strategic investments in business development and intend to increase the size of our sales team significantly. We'll also invest in lead generation to ensure that our expanded sales team has sufficient new sales opportunities to pursue. We plan to release 4 Express solutions in 2016, and we'll continue to monitor inbound market demand to find other opportunities for Express solutions. The Express solutions will include marketing campaign builder, a multisite launcher, an accelerated web store solution and an accelerated small franchise website. Because our Express solution strategy is responding to existing market demand, we already have 2 Express solutions sales and a growing pipeline of opportunities today. To sum up our plan for 2016, we intend to focus on driving positive adjusted EBITDA, invest in sales and marketing for new iAPPS-powered websites and to capitalize on existing demand for incremental site updates with Express solutions. At this time, I'll highlight a couple of items for our 2015 fourth quarter, and then Mike Prinn will review our quarter's financials. In August, Forrester Research released a report evaluating Through-Channel Marketing Automation Platforms for franchise systems and multiunit dealers. Bridgeline's industry strategy received the highest rank possible in that report. Bridgeline was one of the 4 strongest performers out of the 14 listed, and Bridgeline had one of the largest market presence. As our iAPPS market presence grows, we anticipate to see iAPPS and other industry-leading analyst reports as category leader. Financially, we're happy to announce that Bridgeline had a positive adjusted EBITDA in the fourth quarter. This was helped in part by a 13% year-over-year increase in license revenue and a 2% increase in gross margin. We'll continue to focus on driving positive adjusted EBITDA in each quarter and ultimately to a point where we're generating cash and operating profit. At this time, I'd like to turn the call over to our Chief Financial Officer, Mike Prinn, who will provide details of the financial results for our fourth quarter 2015. Mike?

Thanks, Ari. So I'll go through our fourth quarter ended September 30. Fourth quarter revenue was $4.6 million compared to $5.8 million in the fourth quarter of last year, a decrease of 21%. Although this revenue number is lower than last year, as we mentioned in our previous calls, we're focused on aligning our cost structure to our revenue forecast. And you'll see we had a significant improvement to our bottom line, which I'll talk about in more detail in a bit. So let me give some color around the various pieces and components of revenue. Our subscription and perpetual license revenue for the fourth quarter of fiscal 2015 increased 13% to $1.5 million compared to the fourth quarter of fiscal 2014. Our licensing and our hosting revenue combined for the fourth quarter make up more than 40% of our total revenue compared to about 31% of the total revenue in the fourth quarter of last year. This continued increase in our license and hosting revenue, aligned with our improved cost structure, has enabled us to significantly improve our bottom line, which I mentioned I'll talk about in a bit. And the Express solutions that Ari spent some time talking about before will help drive a higher proportion of license revenue to service revenue. Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual license and hosting was $1.7 million in the fourth quarter, and this is consistent with the fourth quarter of last year. Our service revenue decreased by approximately $1.3 million or 33% from the fourth quarter of last year. And as we discussed in our prior calls, we've made some changes in the last couple of quarters to align our delivery teams with our revenue projections. We'll continue to focus on our billable utilization and our resource planning to make sure we have the right team to continue to drive the forecasted service revenue. We believe that with our focus on increasing the sales team and our focus on Express solutions, we can drive the service revenue number to increase every quarter throughout 2016. As we mentioned in our last couple of calls, we initiated expense reductions that started in the second quarter of fiscal '15 and continued throughout the year. Our goal is to align our cost structure with our revenue forecast and to be in a position to drive positive adjusted EBITDA. We're pleased that we have done that in the fourth quarter. We have taken initiatives to reduce headcount to the appropriate size and scale as well as facilities and other operational expenses. The combined impact of our expense reductions is approximately $1.5 million per quarter or over $6 million annually. Our gross margin for the fourth quarter was 50% compared to 48% in the fourth quarter of last year. Our gross margin on services for the fourth quarter was 42%, and sequentially, that's an increase from 28% in the third quarter of 2015, as we balanced out our headcount and made some changes, but you can see the results of those changes in the fourth quarter. We expect to continue to see an increase in our gross margins and specifically our service margin in the coming quarter, as we see the full impact of the expense reductions we discussed, and we see a delivery team with a much higher billable utilization. Our operating expenses, excluding goodwill impairment and restructuring, which I'll talk about in a minute, were $2.8 million for the fourth quarter of 2015, and that's down from $4.2 million in the fourth quarter of last year. We made really every effort to reduce our operating expenses to be in line with our current revenue, and we also have initiatives that we will continue to focus on in 2016. I'll cover briefly 2 unusual items that we usually don't see in our income statement, the goodwill impairment and a restructuring charge. In our fourth quarter, we recorded a goodwill impairment charge of $10.5 million. We test our goodwill asset for impairment annually and have not had any impairment issues in recent years. We reviewed both qualitative and quantitative factors and followed generally accepted accounting principles. Our review and analysis concluded that the carrying value of our goodwill was higher than the equity value by approximately $10.5 million, and so we recorded a onetime noncash charge in the fourth quarter of 2015. The other fourth quarter item I wanted to cover was our restructuring charge. So in the last couple of calls, we've talked about how we've committed to aligning our cost structure with our revenue. We've talked about headcount reductions and other expense reductions. In the fourth quarter, we initiated further reductions that included both headcount as well as facility costs. And as a result of this initiative, we recorded a restructuring charge in the fourth quarter of 2015 of approximately $440,000. This is a onetime charge, and a portion of the charge was paid in the fourth quarter and then about $300,000 was accrued at September 30, and that will be paid out over the next couple of years, and that's primarily related to the facility piece of the restructuring that we did. In prior quarters, all of the changes we made were within the quarter and did not typically result in accrual and did not require a restructuring charge. In terms of adjusted EBITDA and some other financial metrics. So as we talked about before, we're very pleased to report positive adjusted EBITDA for the fourth quarter of 2015. We took significant action in the earlier part of fiscal '15 to align our cost structure to drive and improve bottom line. And in the fourth quarter, we generated $21,000 in adjusted EBITDA. In the fourth quarter of last year, we reported a loss or a negative $602,000 of adjusted EBITDA. This is also an improvement sequentially of approximately $200,000 from the third quarter of 2015. Our fiscal 2016 operating plan is focused on generating positive adjusted EBITDA throughout the year and getting to the point towards the end of the year, where we're generating cash and reporting operating income. Our non-GAAP adjusted net loss was $361,000 or a loss of $0.08 per diluted share in the fourth quarter compared to non-GAAP adjusted net loss of $1.5 million or a loss of $0.34 per diluted share in the fourth quarter of last year. Our GAAP net loss was $11.5 million in the fourth quarter of fiscal 2015 compared to a loss of $1.8 million in the fourth quarter of last year. The $11.5 million GAAP net loss in Q4 of this year, of course, included the $11 million of total goodwill impairment and restructuring charge. Turning to the balance sheet. At September 30, the company had cash and accounts receivable of $3.5 million and our DSO was 54 days. We will continue to manage our cash and operating expenses, remain fiscally responsible as we continue to generate positive adjusted EBITDA and execute our operating plan for fiscal 2016. Also just wanted to mention that in some of our prior calls and filings, all of our debt had maturity dates approaching in fiscal 2016, which would have resulted in this being classified as current or short-term debt at September 30. I'm pleased to announce that we amended the maturity dates with almost all of our debt holders to fiscal 2017. So all the debt will be presented as long term, and all these details will be available in our Form 10-K filing, which we expect to file subsequent to this call. So before we move to Q&A, I just want to say that both Ari and I believe the company is positioned to execute in fiscal 2016. We're both pleased with the recent changes that have been made to align our cost structure to a more appropriate level and are excited about our Express solutions, which has the ability to really drive a true SaaS model and accelerate our time line's profitability. Thank you. And at this time, we'll open up the call to Q&A.

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

First question to you, Mike. Is there going to be any additional kind of restructuring charge that we might see in the first quarter of this year?

Yes. We will have one in the first quarter of '16, just in regards to some of the management changes that we talked about in the last month or so.

Okay. Now -- well, congratulations on your position here, Ari. And...

Thank you.

I guess I have a couple questions, I guess, about the Express solutions. What -- are all 4 of those solutions been launched yet? Or is it just 1 or 2? Or are they going to be launched?

Sure. These are all going to be launched. Now we had 2 prelaunch sales this quarter of our web store solution of -- and of our accelerated franchise system. So most of those will be -- have formal launches in next quarter. And then the marketing automation website will be launched in the quarter following that.

Okay. And are these going to be just a onetime license or an annual or a SaaS model? And what would you expect the ratio of license revenue to service revenue be for a customer?

Right, right. Yes, these are all SaaS solutions, software-as-a-service solutions. And they're going to have much higher ratio of license to services. In general, they're going to be anywhere from 2/3 to 3/4 license-driven products.

So Howard, if you think about what engagements have looked like in the past, some of our enterprise engagements were $200,000 to $250,000 in services and maybe $100,000 in software and that software was a 3-year, 36-month SaaS subscription. We really feel like we're well positioned, where some of these Express solutions, for example, an Express website might be $50,000 in services but the monthly SaaS subscription is not going to change that much. It might be a little lower in price. But for discussion purposes, it stays around that same $100,000. You're talking about $150,000 engagement with $50,000 in services. That $50,000 instead of a 4- to 6-month deployment or implementation phase, you're talking about 2 to 3 months with less risk because it's a smaller engagement.

And that's a great point because the services around Express solutions, we anticipate those to have higher margin than the services around a traditional iAPPS solution. So both the services will be more profitable, and we're going to have higher ratio of license to services.

Okay. And I guess if you could talk a little bit about how you will, I guess, manage or maybe have tweaked the sales force? How are they going to engage with customers and follow customers and maintain and grow customers? If you could discuss that a little bit?

Well, an important thing that we've done is we've increased the size of our sales force. We've added 4 more people to our direct sales team already this quarter, and we're going to continue to evaluate and expand, both our direct sales team and our inside sales team as well. One thing that will change is that the Express solutions do not require really a direct sales effort where a higher-level salesperson is flying out to meet a customer and having executive meetings and so forth. Our goal with the Express solutions is for them to, in large part, to be an easy decision for a customer that does not require a full executive review and to be sold with -- over the phone in a lot of cases with a few phone calls and a webinar, for instance. So we'll be expanding our inside sales team as well and training our current team, which is primarily focused on evaluating leads and disqualifying leads if they're not ready to buy a full iAPPS platform to be able to take those leads that were previously disqualified and convert them into Express customers.

Okay. So...

So Howard, the -- from -- like an enterprise perspective, we're going to continue to sell the larger engagements. And that sales force, the headcount decreased throughout '15, and so Ari has done a great job since he's been on board at increasing that headcount. And then for the Express solutions, like Ari mentioned, that's more of a junior salesperson that might not need to have as long an interaction, a shorter sales cycle primarily by phone and webinar.

Okay. And I mean, your ultimate goal with this Express solutions is to spread it out to customers as far and wide as you can. And then over time, develop them into potentially larger customers?

Yes. That's really an important part of this strategy. So first of all, we've got existing demand coming in today, saying, "You know what, I've got a website that is good enough. I'm not looking for a big disruptive event of changing out the whole website, but I just want some incremental advances." Express solutions will do that. Now we've got a relationship with a customer. And long term, they'll buy other Express solutions for us. And then eventually, when it's the right time in their business model, when that 1-in-4-years event happens, where it's time for them to redo the whole website, we'll be there with a relationship as a trusted partner to become the platform for their new site.

Okay. One last one is, can you talk a little bit about the iAPPS, the ds, and how that is and where it fits into the long-term strategy?

Well, ds continues to be part of our strategy and we're very unique in this space in that we've got ds, which has franchised multiunit website capabilities. This is a vertical submarket of the general website market that we can address, and we'll continue to. We, in fact, even have an Express solution for ds and we launched a public ds website just recently for a company called Camp Bow Wow, and that was a very successful implementation, campbowwow.com. This is just one vertical of the many that we see demand for. And we'll go after that one as well, but that is not the central focus of the company. It's a focus of the company.

At this time, I'm not showing any other questions in the queue. I'd like to turn it back to management for any closing remarks.

Great. Thank you, Vince. Well, everyone, we appreciate the support and patience of our shareholders, and it's our goal to continue to build a scalable business model, which in turn will build shareholder value. Thank you for joining us today, and we'll talk again on our Q1 earnings call in February.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.