Bridgeline Digital, Inc. (BLIN) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Bridgeline Digital Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host to today's program, Brett Maas from Hayden IR. Please go ahead.

Thank you and good afternoon, everyone. I am pleased to welcome you to our fourth quarter earnings conference call. Before we begin, I like to remind listeners that during this conference call, comments that we make regarding Bridgeline Digital are not historical facts or forward-looking statements and are subject to risks and uncertainties that could cause actual results 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 today’s call, we will discuss some non-GAAP financial measures in talking about the company's financial performance. We report our GAAP financial 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, bridgeline.com. I'll now turn the call over to Ari. Ari, the floor is yours.

Thank you, Brett, and good afternoon everyone. In 2016, Bridgeline focused on growing its iAPPS SaaS business to build high margin, recurring revenue and long-term customer engagement. This focus helped us increase our iAPPS recurring revenue by 27% fiscal 2016 compared to 2015. Full year SaaS license revenue increased by 11.4% and gross margins increased to 54.2% in 2016 from 42.6% the previous year. Infact, gross margins increased each quarter this year reaching 59.3% in Q4. Gross margin is expected to further increase with our SaaS to services revenue mix growth and our newer product lines. Bridgeline has made several strategic investments in 2016 to pave the way to even greater success in 2017. We launched our iAPPS Pro series in markets here, these products have a higher staff to professional services ratio than the iAPPS enterprise product lines. They also have larger addressable market space and faster sales cycles. We also invested in sales and marketing this year, with several additions to our direct sales team and the launch of an inside sales team. We begin 2017 with twice the sales people, a sales process that is twice as fast, more of customer acquisition cost and a sales pipeline that is significantly larger than we had at the start of 2016. With these strategic investments in place and proven with our 2016 results, our goal is to reach positive cash flow in 2017, and ultimately drive our customer companies enterprise value to the higher multiple revenue seen by many SaaS company. SaaS based company valuations over the past decade averaged four to eight times revenues and 2016 saw valuation of the more than eight times revenue for many businesses. In earlier years, Bridgeline primarily sold lower margin professional services and professional services companies often have a low enterprise value. In 2016, we demonstrate that the growth and commitment of our iAPPS SaaS products line and other companies – success Bridgeline has significant future revenues contracted [last time] and yet to be recognized over the future years. Our new engagement typically includes a three-year SaaS license to auto renewal annually for the third year. Although we only recognize revenue on a monthly basis during the three-year subscription the revenue was contractually committed from our customers. We are beginning 2017 with 6.8 million in ARR. Bridgeline’s revenue for a new SaaS engagement is spread over multiple years and therefore as with other SaaS companies it will be important to continue to watch our ARR in addition to topline revenue growth as new SaaS sales will generally produce revenue spread over 36 months. As the redesign of the website is often disruptive, we often see customers take advantage of the auto renewal feature of our SaaS subscription and become even longer-term customers. Although we focused on driving SaaS revenue, professional services will always be an important part of our business. Our gross margin on professional services was 40% in fiscal 2016 and many of our customers have retainers or recurring professional services engagement. In addition to the revenue and profit associated with these engagements, our services create a stronger relationship with our customers, which increases revenue rates and also leads to innovation as new product features are often born from service engagement. This year our rents includes iAPPS, Enterprise, GS [ph] Pro and Marketier sales. Not only are we winning new business, I am happy to report that expansion in our existing customer base has occurred as well. In Q4, we have three customers who purchased SaaS licenses for their subsidiary source or internal websites, which demonstrates the quality of service that they receive. These customers with Q4 purchases include a $4 billion water treatment in Analysis Company with more than 30 brands of which three now own SaaS software from Bridgeline. A $3 billion industrial services company with two of its brands on our SaaS software and a $50 billion logistics company using Bridgeline for one of its internets. In just the last month, we’ve won a $1.5 million engagement with a $6 billion subsidiary of a leading manufacturing company. This project spans several continents, languages and currencies and this $1.5 million phase covers only one content and one continent and one language with additional license sales opportunities as new phases and geographies commence. We saw success with our Pro series including a cosmetics company and Orthodontic care company, an on time, online retailer. Most of our enterprise customers and all of our Pro customers had purchased Marketier. We made sales to several multi franchise companies including a home remodeling business. We enter 2017 in a much stronger position than 2016 with growing SaaS licensed revenue, $6.8 million in ARR, a gross margin approaching 60%, new products and a larger winning sales team. Given our success in 2016, I am excited for Bridgeline’s continued growth and its other SaaS business and what that can mean for our shareholders. At this time, I’d like to turn over the call to our Chief Financial Officer, Mike Prinn who will provide more details of the financial results for our fourth quarter and for 2016.

Thanks, Ari and good afternoon everyone. So, I will review the results of operations for the fourth quarter and the full year fiscal 2016. Our fourth quarter revenue was $3.7 million compared to $4.5 million in the fourth 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. And as we’ve mentioned in our previous calls, and as Ari talked about earlier, we've really 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 fourth quarter of fiscal 2016 remained constant at $1.5 million compared to the fourth quarter of fiscal 2015. While the total licensed amount was flat, I think it’s important to point out that we had approximately $100,000 more in perpetual license revenue in the fourth quarter of last year because the perpetual can be a little lumpy and as part of our transitional full SaaS model, our perpetual licensing will decrease, but offer that licensing model if require or requested by our customers. Our SaaS revenue increased 8.5% to $1.3 million in the fourth quarter of fiscal 2016 compared to $1.2 million in the fourth quarter of fiscal 2015. Our licensing revenue for the fourth quarter makes up 40.5% of our total revenue compared to about 33.6% of the total revenue in the fourth quarter of last year. In our license revenue and our hosting revenue combined our 48.7% of our total revenue, so that’s up from 41.2% in the fourth quarter of last year. 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 really help transform Bridgeline to an improved SaaS business model in the future. Our recurring revenue, which consist of multiple components so SaaS licenses, annual maintenance on perpetual licenses and hosting increased 2.3% to $1.8 million in the fourth quarter of fiscal 2016 compared to $1.7 million in the fourth quarter of fiscal 2015, so while that only seems like 2.3% I just want to break apart that recurring revenue and note that the iAPPS piece of the recurring revenue increased 19.3% to $1.7 million in the fourth quarter of fiscal 2016 compared to $1.4 million in the fourth quarter of last year, so we are very pleased with that progress and we will continue to report that in upcoming quarters. Our services revenue decreased by $767,000 from the fourth quarter of last year. As we've discussed previously, we've made some changes in the last few quarters and all through of 2016 really to align our delivery team with our revenue projections. We will 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 at our Pro series products, we can continue to drive service revenue back towards $2.5 million per quarter. We’ve made further progress in the fourth quarter in terms of expanding the sales team and increasing our spending on lead generation. We expect to see the results of these investments pay off in the upcoming quarters. I also think it’s very important to point out that although our service revenue decreased by $760,000, our cost of providing that service revenue decreased by over $500,000 in the current quarter demonstrating our commitment to streamlining cost in line with our revenue, and that's evident in our gross margin improvement, which I'll turn to now. So we significantly improved our gross margin in the fourth quarter demonstrating the benefits of our ongoing transition to a SaaS based model. Gross margin for the fourth quarter was 59.3% compared to 50.3% in the fourth quarter of last year. We continue to see the benefit of all the infrastructure improvements that we've made throughout the last three to four quarters. This is the sixth sequential quarter in a row that we’ve seen gross margin improvement. We’re seeing a delivery team that has a much higher billable utilization and ultimately as we continue to sell more license engagements, we believe we can drive a higher gross margin in future quarters. Also contributing to the gross margin and increase, our improvements in aiding [ph] facilities and overhead reductions. These changes also impacted our license and hosting margin, which improved to 73.4% in the fourth quarter of this year compared to 62% in the fourth quarter of last year. Our operating expenses were $3 million for the fourth quarter of fiscal 2016 compared to $3.3 million for the fourth quarter of last year, excluding our goodwill impairment charge of $10.5 million in the fourth quarter of last year. We’ve made every effort to reduce our operating expenses to be in line with our current revenue and we have initiatives that we’ll continue to focus on. We’ve continued to make changes in our office footprint and these changes alone account for significant savings compared to prior years. We will continue to look for opportunities to reduce our operating expenses, while not impacting the planned growth of our sales team and our marketing spend. So one thing I just want to mention again, on our last quarterly call I walked through an unusual item on our P&L for us and I just want to review that again as it was a non-cash charge that we took partially in Q3 and in the remainder in Q4. The settlement date of the debt instrument as we discussed on our prior calls, and mentioned in our recent press releases, we successfully completed the conversion of $6 million of convertible notes and term notes into common stock. This process began in the second quarter was completely recently in the fourth quarter, so from accounting perspective some of the notes that converted had an initial conversion price from over three years ago that was much higher than the $0.75 conversion price that was approved by the shareholders at our annual meeting. So we will require to take the fair value of the difference between the number of shares that would have been issued according to the original notes and the number of shares that were actually issued and a fair value of those shares is what we are calling a loss on inducement of convertible notes. The total non-cash charge recorded in the fiscal year is $3.4 million and it’s a same number we talked about before and it’s a onetime charge but we have to record the charge based on the dates that the note holder elected to convert and these happened in June, July and August for the charges recorded over two quarters. In the third quarter we saw a charge for 726,000 and the remaining 2.7 million which we talked about on our last call is recorded as an inducement charge in the fourth quarter of fiscal 2016. Again, this is the accounting required to convert this debt into equity and was non-cash. This makes our balance sheet much healthier and in future quarters, reduces our interest expense by over 150,000 per quarter or 600,000 annually. Our GAAP net loss was $3.5 million in the fourth quarter of fiscal 2016 compared to a net loss of $11.5 million in the fourth quarter of last year. The significant improvement in our GAAP net loss is primarily attributable to the goodwill impairment charge we had in the fourth quarter of last year, offset by the loss in inducement charge in the fourth quarter of this year. Our non-GAAP adjusted net loss was $429,000 or a loss of $0.02 per diluted share in the fourth quarter compared to non-GAAP adjusted net loss of $361,000 or a loss of $0.08 per diluted share in the fourth quarter of last year. Adjusted EBITDA for the fourth quarter of 2016 was a loss of $300,000 compared to positive adjusted EBITDA of $21,000 in the fourth quarter of last year. So last quarter you know we made a decision when we continue to rebuild the sales team, make additional efforts around inside sales team, as well as increased marketing spending for lead generation. So these costs are in our income statement this quarter, but we are still a quarter to wait and see significant improvement in the top line. So our goal is to enter fiscal 2017 is to get back to the generating positive adjusted EBITDA and drives towards the quarterly operating profit in fiscal 2017. So that wraps up the quarter, although a little bit brief on year to-date, but just turning to results for the full year 2016 compared to full year 2015, our revenue for fiscal 2016 was $15.9 million, compared to $19.2 million for the same period of last year. Our subscription and license revenue increased 5.1% and our SaaS revenue increased 11.4%, increase in our iAPPS only recurring revenue is 27.1% as that increase to $6.4 million in fiscal 2016 and $5.1 million in 2015. We expect our iAPPS recurring revenue to continue to grow at the end of fiscal 2017. Well our service revenue did decreased by $3.4 million, our related cost of service revenue decreased by $3.6 million as a result of our focus on streamlining, our delivery teams billable utilization, as well as facility and overhead costs. So we drove the much better gross margin of the lower revenue amount for the full year. Our gross profit for fiscal 2016 was $8.6 million compared to $8.2 million for fiscal 2015. So again it’s very important to point out the progress we made in our transition as we generated approximately $400,000 more in gross profit on $3.3 million less the total revenue. This resulted in an increase in gross margin from 42.6% from fiscal 2015 to 54.2% from fiscal 2016. We’re pleased with the significant gross margin improvement we made throughout the year and really think we can see continue improvement in fiscal 2017 as our new business has a higher concentration of license to service revenue. Our operating costs for fiscal 2016 were $12.2 million, compared to $13.8 million in fiscal 2015, again excluding our goodwill impairment charge. And so that was an improvement of over $1.6 million, or 12%. Inclusive of the $3.4 million non-cash charge related to the inducement of a convertible debt and the goodwill impairment charge in fiscal 2015, net loss improved to $7.9 million for fiscal 2016 from a net loss of $17 million [ph] for fiscal 2015. And our adjusted EBITDA improved by over $1.8 million, so from a loss of $2.6 million last year compared to a loss of $800,000 for this year, through the combination of the improvements we made in our gross margin and the reduction in our operating expenses. So turning quickly to the balance sheet, at September 30, 2017 the company had cash accounts receivable of $3.2 million and our DSO was a healthy 48 days. Our total assets were $17.7 million and our total liability decreased from $13.5 million at the end of fiscal 2015 to $6.2 million at the end of fiscal 2016, so again this significant decrease in liabilities was debt converting in equity and that process was completed in Q4 by September 30. So now that the convertible notes and the term notes that all been converted, our only significant piece of debt that remains is our line of credit that we have based on our accounts receivable and that balance right now as far as September 30 is $2.1 million. So, in terms of financial outlook, I just want to wrap up with some outlook for our first quarter. We expect our first quarter revenue in the range of $3.8 million to $4 million and we expect to generate sequential revenue growth for each quarter throughout fiscal 2017. With that improvements in our adjusted EBITDA from Q3 to Q4 and expect to see continued improvement and we’d like to get back to generating positive adjusted EBITDA in fiscal 2017. We also believe that we significantly reduced our cash burn and our goal is to get to a point most likely in the fourth quarter we were generating operating cash on a quarterly basis. Thank you. And at this time we’d like to open up the call to Q&A.

[Operator Instructions] And our first question comes from the line of Howard Halpren from Taglich Brothers. Your question please.

Congratulations guys, you’re really starting to see the progress in the numbers, so it’s nice to see.

Thank you.

How many new customers did you get with progressing the Pro and the Marketier in the quarter?

Well, for Pro and Marketier, I think about six new customers, approximately 20 new customers for the quarter, yeah, five or six.

Okay. And I guess on the long term plan, so you have those five or six customers, what is your anticipation that, you’ll take those five or six customers, they’ll be satisfied with the product. And then when did you start potentially the upsell process?

Right, right. Okay, great. That’s really the heart of our strategy going forward is that we’ve traditionally been selling our enterprise software which is higher ticket product, we split that up into smaller components including Marketier. We’ve created templates around it to reduce our customer acquisition cost. And now we can sell Marketier directly for example, upgrade that to Pro and upgrade that ultimately to Enterprise to have high life time value of customers who have still the lower customer acquisition cost. In terms of the timeline to answer your question, first of all, we’ve seen a lot of customers upgrade right in the sales cycle, so we wouldn’t even speaking to some of these customers had we not had Pro and Marketier to start the conversation and when they saw the value of upgrading. So we will see that. And I would have anticipate that many of our customers we need to build the track record here that we’re going to see about a 12 months increase, and the key driver on that is really going to be how quickly we can educate them and value of, for instant Pro if they’re moving from Marketier to Pro, and also what their own business cycle is. One of the challenges that we had in the past was that we’re only able to sell really the entire suite. In 2015, if you weren’t a customer that was ready to rebuild your whole -- infrastructure we couldn’t sell to you. Now we can sell you a part of the time but still to make the full upgrade to a new website, there is external politics that are involved because you are changing the look and feel on presentation for your company. So we’re always little bit subject to that. 12 months though is what my initial expectation is though for many of the upgrades.

Okay. And in terms of your pipeline of business, could you possibly break it down in two, because I know you’re selling I guess into two different tiers of potential revenue companies and in the 150 million plus and 25 million to 150 million could you break it down maybe in percentage terms where your backlog fits?

Yes. So our pipeline right now has a little bit more than half of the customers and the less than $500 million range, many of those are 250. Now, some of those that I’d say are less than $500 million are actually not businesses but they are departmental business unit. We got some great wins in just the last quarter of selling to business units in subsidiary areas of companies and we see that and that’s a really good place for our Pro series. But more than half of them in general are good customer prospects for Pro are either standalone smaller companies of business units.

And I know, I guess the life board is really the sales team, and so how many sales people do you have now and as business develops, how – what I guess is the criteria that you’ll use to know when to start adding to the sales team without you know look at deferring I guess the lack of a better term getting towards that cash flow breakeven or positive number?

Right, right. So we kicked off the year with four sales people and we finished the year with nine sales people. And that’s the direct sales team and then in addition to that we have four inside sales people. We started 2016 with two, so we’ve essentially doubled it. We’ve also more than doubled our pipeline and our sales cycle went from a nine months sales cycle down to a 3.8 month sales cycle. So we’re much more efficient and we’re bigger. Now, the market in general is very large relative to our size, so we don’t have any concerns with building a team so big that it loses efficiency due to tapping out the market. But, as a SaaS company, one of the key things that we have to be careful about and one of the reasons why so many SaaS companies are losing money when you just look at their P&L and don’t look at it a little bit deeper, is that the customer acquisition costs is often not returned until the end of the first year of the subscription. We are signing a three year subscriptions for our software and the customer acquisition costs being the total sales and marketing dollars including personnel, including commission, including allocations for office space and so forth is typically not returned for the first 12 months. So we are doing a little bit of a balancing act where the product is great. We are running very efficiently and if we had a ton of cash in the bank we could hire a large number of sales people and do a large customer acquisition graph right now knowing that two or three years down the road we would have our life time value of our customers who would pay for that. We don’t have a huge cash position right now. So we’d probably in this year can still accomplish our financial goals and maybe get upto 12 direct sales people and have an inside team of six to eight people and have that cash flowing well and have a good profitable company. And as we get towards that route and our topline revenue is growing and we’re still managing the bottom line really carefully we’ll be able to adjust the longer way to really you know maximize how much customers we can acquire given the cash that we have.

Okay, well congratulations Ari, keep up the good work.

Thanks, thanks. It’s been an exciting year, appreciate that Hart.

Thank you. [Operator Instructions] And this does conclude the question and answer session of today’s program. I’d like to hand the program back to management for any further remarks.

Well thank you. We appreciate the support and patience of 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. And we look forward to speaking again in February at our Q1, 2017 conference call. Have a great evening.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.