Good day, ladies and gentlemen and welcome to Bridgeline Digital Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Michael Prinn, Chief Financial Officer. Sir, you may begin.

Thank you. Good afternoon everyone. I am pleased to welcome you to our third quarter conference call. Before we begin, I would 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 a copy of our earnings release by visiting our website. I'll now turn the call over to Ari.

Thank you, Mike, and good afternoon everyone. Bridgeline continued to make progress in our strategic initiative to transition to a SaaS based company where valuations over the past decade averaged four to eight times revenue. In fact, in the past two months we’ve seen several acquisitions of SaaS companies more than 8 to 12 times revenues. To this end, I’m happy to announce that for first time third fiscal quarter of the year 2016 Bridgeline's license plus hosting accounts for 50% of overall revenue compared to 39% in the same quarter last year. Furthering our transition to a SaaS based company and unlocking the higher valuation requires that we continue to increase licensing and hosting revenue relative to services and also that we focus on reducing our customer acquisition cost compared to the life time value of our customers. Here's how we are doing this; The life time value of the customer for Bridgeline is driven by two key components. The license that powers our customers' web and marketing solution and the services we provide to personalize the license for a customer's business. Our license business is where we can earn 75% or higher margins compared with services margins which are generally 40% to 50% in our industry. License revenue is recurring both from monthly SaaS subscription license fees and for maintenance fees and our perpetual licenses. Our license revenue is sticky because its disrupted for a customer to switch to a competitors license once we're installed. SaaS licenses contribute to our long term revenue backlog as recognized over the life time of our customers' usage but do not generate large short term revenue. Services on the other hand does produce short term revenue over the first three to six months after a sale but these revenues are not recurring…

Thanks Ari. So, I will review the results of operations for the third quarter ended June 30. Third quarter revenue was $3.7 million compared to $4.9 million in the third quarter of last year. As Ari mentioned, we’re making steady and accelerated progress in our efforts to transform Bridgeline into a SaaS focused company as evidenced by a greater mix of license revenue. As you mentioned our previous calls, and as Ari talked about earlier, we've been focused on rebuilding our sales team and focused on our new product offering iAPPS Pro which will generate more license revenue at higher gross margin levels compared to our previous offerings. So let me give some additional color around the various components of revenue. Our subscription and perpetual license revenue for the third quarter of fiscal 2016 increased 2% to $1.5 million compared to the third quarter of fiscal 2015. Our licensing revenue for the third quarter makes up 41.3% of our total revenue compared to about 30.9% of the total revenue in the third quarter of last year. Also as Ari mentioned our license revenue and our hosting revenue combined our 60% of our total revenue. That's up from 40% in the third quarter of last year and this is the first quarter in Bridgeline’s history that we've reached 50%. So you can see even though our revenues decreased we're driving a higher percentage of license revenue to total revenue and expect to continue to do that in the future quarters. This will help transform Bridgeline to an improved SaaS business model in the future. Our SaaS revenue increased 9.2% for the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015. Our recurring revenue, which consist of SasS licenses annual maintenance on perpetual licenses and hosting revenue remains…

[Operator Instructions] And our first question comes from Howard Halpren from Taglich Brothers. Your line is open.

Good afternoon guys. If I heard correctly, I guess the investments you're making now positive EBITDA should resume sometime in the March or June quarter of next year?

Yes, I think that's a fair statement and we haven't released any guidance, but we're - I think we're positioned to make an improvement from Q3 to Q4 and certainly talk about the March or June quarter one or two quarters ahead of that, I think that's a good estimate.

Okay. Now, I've seen this quarter you've reported that you had a 9.2% increase in SaaS revenue. How do you envision that building so you can get over the 10% of mark and then close up to the 20% mark? How do you see that evolving as time goes on?

Well we've made significant investment in our sales team. As you know now we've nine direct sales people plus an inside sales team with three more people. And the growth on the SaaS revenue will largely be from new customer acquisition. Our existing customers will continue to renew their SaaS licenses, but the growth is really going to happen through new customer acquisition. Over the next year as we’re requiring customers with both Marketier, which will be driven by our inside sales team in the Pro series, which can be sold by inside and direct sales people, both of those opportunities have upgrade past. So, someone made by Marketier who is not using Bridgeline content management software at all that’s an important part of the value prop for that and then later in the right time in their sales cycle, we'll already have a relationship and be able to upgrade them to either Pro or enterprise. Similarly our Pro customers have an upgrade path to our enterprise products. So for the next year, new customer acquisition is going to be the key, actually that will always be the key for growth of their license revenue and now unlike in the past we also have up-sell opportunities within our install base as well.

Okay. Could you talk a little bit about market automation market that for the enterprise that you're going after and how was -- what is the market size and how is it evolving?

Sure, marketing automation is the ability for us to help customers acquire leads for perspective customers, create nurturing campaigns to maintain contact with those leads and to notify their sales force within their perspective customers are looking at their material or need to be contacted. That market is right now approximately little bit over a $1 billion, expected to go to $3 billion by 2020. In the last few years, it's actually had a 40% year-over-year growth rate and in the SMB and the upper mid marketplace, is the penetration for marketing automation is still less than 20%. So you got high year-over-year growth rate and low penetration. So the end is nowhere in sight. Now you do have a number of companies that are in those spaces from a competitive perspective and the two big guys are Marketo and HubSpot. Marketo actually was just taken private by the equities at 8.5 times revenue. Those two companies, it is strong year-over-year growth. Neither of them have posted profits in the last three years and that's because their cost of customer acquisition relative to lifetime value of the customer is low. So they're better off investing in additional customers and reaping the long-term rewards. Because there is low market penetration, high growth in that space, we're really focused on this as being a core part of our growth and for us, unlike Marketo and HubSpot I mentioned earlier, we have a strategic opportunity, where once we acquire a marketing automation customer, we have a suite of software in web content management, commerce, social analytics that we can use to upgrade them and those markets are actually even larger in the $5 billion range although they have higher penetration than marketing automation which is little bit newer on the scene.

Okay. And one final one on the three customer wins I guess you had recently, when do you think we are going to start to see some of that revenue from like the life insurance company and the franchise that selected you guys?

Yes so our customers, our new wins the revenues generally has two components, you've got the license revenue and the services revenue and our long-term strategic value is based on our license revenue, license revenue being recurring, being sticky, being higher margins. For our new customer wins, what you see is in the first three to six months a spike in revenue on the services side where we personalize our software for that customer. So there we'll have our services team members billing anywhere from $150 to $250 an hour providing professional services work. That work is often called won and done work, although we always have ongoing retainer relationship essentially during customization ones and that said non-recurring. So you'll see a slice in services revenue from these new customer wins immediately. So that will start coming in this quarter. The real core strategic revenue however, happens over a longer period of time and that's the SaaS revenue. So that is the recurring revenue from the license, very high in margin, 75% plus and when we do a booking, I’d say that we win a new customer and you've got $150,000 in booked SaaS license fee plus $150,000 in services, that $150,000 services you get that in three to six months. The $150,000 SaaS fee that comes over a three-year period, so you don't see the spike, but you do see higher quality of revenue. When I talk about higher quality of revenue, I'm talking about smooth predictable revenue that's high margin, that's recurring. And one of the great things about our software is that I use the term sticky earlier. So I would say that we've signed initial engagement with a three-year SaaS license. We’re typically going to see our renewals after the end of that three-year period because the lifetime of a website for instance is often five years and it's very disruptive within a company to change from one web platform to another. So even when we do an initial booking of say $150,000 and license, there's often another $100,000 in additional renewals that happen afterwards.

Okay.

Hi, Howard, one thing that's probably worth mentioning is I know you're close to, how we're going to market our sales cycle? In the past, we’ve talked about our SaaS revenue starting with website launches. We've actually successfully been able to transition that and we now for the most part for our new deals for SaaS license billing starts also in the contract sign. So we’re billing, collecting and recognizing license revenue as we're building the website.

Okay. That's good to know. Well, I like the progress. Keep it going and look forward to 2017.

And our next question comes from George Mills from MKS Management. Your line is open.

So I'm trying to look at the revenue that you need to generate in order to I'm just focused on reaching it be the breakeven. And you have roughly $1.8 million recurring revenue and of course you need to sell on top of that. And you have right now sales -- you have roughly nine direct sales people and you’re adding your inside sales team. So I’m just trying to get a sense, what is your sales capacity right now with your current sales force and what would be your sales capacity when you think that they've fully ramped up?

George, let me may be try and answer the first part of the question, in order to really get back to generating positive adjusted EBITDA, it’s probably around say $4.2 million in revenue and we know that in a modeling perspective, roughly $5 million gets us to net income and profitability. So those are the two sort of key metrics that are out there for us and we have been guided as to when that will happen, but $4.2 million is probably positive adjusted EBITDA and $5 million is profitability. And I think in terms of the current existing sales team, Ari can comment, but I think those folks, the team as it stands fully ramped up can get us at least to that first metric if not…

Sure, for our direct sales team we should expect once they're all ramped up, which takes up nine months from initial hire to be able to produce $2 million a year in annual revenue and the mix of that revenue would be little better than one third service -- little better than two thirds license and then one third services. And the license side your gross margin is going to be in the high 70's and the services side, your gross margins going to be in the mid-to-high 40's. So I’ll give you a sense of what each one is going to produce at the end of the day in terms of driving the bottom line. We also are investing in an inside sales team. The inside sales team you have a lower cost salesperson in terms of what their salary is and their fully loaded cost, because they don't need to travel as much in the shorter sales cycle. That sales team is going to be focused first and foremost on our marketing automation and then also on our Pro series as well, although Pro sometimes will require a direct sales person because those implementations can be a little bit more complicated than what you'd be able to do just over the phone. Hence we just launched our insight team. Right now we don't have a sense of what the annual revenues are going to be there and we are watching them carefully to be able to click there. But on the direct team itself it's a rule of thumb use $2 million after they've been on the team for nine months.

But you have nine direct sales guys right.

That's right.

So, you’re talking about $2 million sales capacity for all nine of them?

No, no, for each. So, that would be $18 million in sales capacity cumulative.

And I think just though the one disconnect - I mean I was talking about bookings and so that's the total value of the contracts which are - most of them are three years and then that will, obviously translate into revenue.

That's a great point, so one of the key things that we focus on growing is our - is our backlog. So right now we’ve got about $23 million backlog for a three year backlog, 36 month backlog and that bookings Mike just mentioned so we book $18 million, that's going to be $18 million over is - the least services component over a three year. So, let’s say that's $12 million in the - the license component over three years, you get $12 million in license recognized over a three years, that’s about $4 million a year and additional license revenue and then $6 million in service which are generally be recognized over three to six months.

Got it. Okay, great. And when do you think the team - the direct team is fully ramped up. You have probably couple of people who are fully may be of the nine, how many are actually producing right now.

Right. So we’ve got generally about nine months expectations for a new team member to ramp up and we brought in just as last quarter four new sales people, so they are going to be fully producing in our second fiscal quarter which is the quarter beginning January. Although we’ve been happy to see that lately, we’ve been able to get people productive a little bit quicker, so a lot of our sales people are producing their first sale in the second quarter that they are on board. So right now out of the nine, we've got, I'd say one, two, three - three that are fully productive, one that's pretty close, they could see the four, another one that’s pretty close and the balance of them are still ramping.

Great. Okay, that's really helpful. And Ari in response to Howard's question, you talked about HubSpot and Marketo. Can you sort of help us understand how you are positioning yourself in relation to these two companies in a way, what kind of functionalities they have and you don’t have and maybe what functionalities you have and they don't have?

Right. So the way that we’re positioning ourselves really against both of these guys is that they have evolved and sprout to a certain extent over the past five or six years because they initially had to try out certain functionality that just turned out not to be necessary or if combined a couple of things could maybe our integrating as well, as time savings. And what we have is a subset of their functionality that results in nearly all of functionality that a customer needs especially in the SMB space and a much cleaner and easy to use interface. We are more cost competitive. We start it for instance $900,000 a month, probably start to 1200 but you really can't do much with it for less than $1800 or $2400 a month. So the core value prop that we have is a clean interface with everything that you need unless you're a very specialized company at a better value. And one of the strategies for acquiring customers that will have is not only our inside sales team, but we're also partnering with digital agency and expect to be able to show our product to companies that currently have no marketing automation whatsoever so that it can easily fit within their budget, deliver clear value, and is very easy for the end users to use as opposed to a more complicated system from published broader market that also costs.

Okay, great. Good luck. Thank you very much.

[Operator Instructions] And at this time I'm showing no further questions. I'd like to turn the call back to Ari Kahn for closing remarks.

We appreciate the support and patience of all our shareholders and it's our goal to continue building a scalable business model which in turn will build shareholder value. Thank you for joining us today. Have a great week.

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.