Good day, ladies and gentlemen and thank you for standing by. Welcome to Bridgeline Digital Inc., First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will host a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to hand the conference over to Cameron Donahue with Hayden IR. Sir, please proceed.

Thank you and good afternoon, everyone. I am pleased to welcome you to our first quarter conference call. Before we begin, I 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 with the Securities and Exchange Commission at time to time by Bridgeline Digital. 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 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 under our website for the earnings release that was issued today. I'll now turn the call over to Ari.

Thank you, Cameron, and good afternoon everyone. I'm very proud of Bridgeline's progress in 2016 and this quarter shows some of the returns from last year's investment. 2016 was a pivotal year for Bridgeline where we focused the Company on its SaaS business to build high margin recurring revenue and long-term customer engagement. We invested in our marketing automation platform and released the Pro series to expand our addressable market, reduce customer acquisition cost and increase gross margins. As a result, Bridgeline increased iAPPS recurring revenue by 27% in fiscal 2016 compared to 2015, and our momentum continues into Q1 with iAPPS recurring revenue increasing by 13.9% year over year. In fact, our iAPPS recurring revenue increased every quarter in 2016 increased in Q1 2017, and we expect continue to grow iAPPS recurring revenue in future quarters. iAPPS recurring revenue is our economic engine as it is high margin and renews. We typically see a 36-month contract with 12-month auto renewals for new engagements. iAPPS recurring revenue includes our SaaS licenses, enhance hosting for commerce or perpetual license customers and software maintenance agreements. When Bridgeline wins new customers, iAPPS recurring revenue is recognized over several months, so we do not see immediate bump in our P&L, but instead we see high margin recurring growth that last for years. This revenue is what drives higher enterprise value for our SaaS companies with public company valuations over the past decade, generally four to eight times revenue. Our focus on SaaS business grew our higher margin iAPPS recurring revenue to 41.3% of overall revenue this quarter compared to only 35.6% in Q1 2016. This helped increase gross margins to 57.5% from 50.8% in Q1 2016. We grew margins while simultaneously making long-term strategic investments to our hosting infrastructure and partnership with Amazon Web…

Thanks, Ari. So, I'll go through the results of operations for the first quarter ended December 31, 2016. First quarter revenue was 4.0 million compared to 4.2 million in the first quarter of last year; however, this is the third quarter in a row where we've had sequential revenue increase. As Ari mentioned, we're making steady and accelerated progress in our effort to transform Bridgeline into a SaaS focus company as evidenced by a greater mix of license revenue. As we mentioned in our previous call, 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 and higher gross margin levels compared to our previous offerings. Let me give some additional color around the various components of revenue, so our subscription and perpetual license revenue for the first quarter of fiscal 2017 increased to 1.7 million compared to 1.5 million in the first quarter of fiscal 2016. Helping to drive this increase was a large perpetual license that we sold this part of when we had with the Global Engines Manufacturer in Q1. Our SaaS revenue increased 11.3% to 1.4 million in the first quarter of fiscal 2017 compared to 1.2 million in the first quarter of fiscal 2016. I'd also like to note that our IS SaaS revenue increased 24.9% to 1.4 million compared to 1.1 million in the first quarter of last year. At this point, all of our SaaS revenue is from our iAPPS product. Our licensing revenue for the first quarter makes up 43.2% of our total revenue compared to about 35.9% of the total revenue in the first quarter of last year and our license revenue and hosting revenue combined, comprised 49.2% of our total revenue…

[Operator Instructions] And our first question comes from the line of Howard Halpern with Taglich Brothers. Please proceed.

First question regarding sales team. And how close are they to getting to the capacity or the minimums that you want them to achieve in their sales?

So, we've got on our direct sales team, half of the team members are hitting their quarter right now. That's pretty good for a first year team; and the other half, we've got probably half of the other half are well on their way and the other 25% needs some work. So, that's gone pretty well, on the inside sales team one of the important things that we did because we were not getting the productivity that we were shooting for in the last couple of quarters was that in November we brought in a director of inside sales a woman in Chicago who has great experience and tremendous energy and she's added, well she made some changes to that team. It's currently four people and this quarter's the first quarter that they'll start moving towards their quota but they're not there yet.

Okay. And what is the -- I mean, can you describe a little bit I guess the primary focus of the inside sales team? Or what you hope --

Sure. Okay, great. Yes. So, the enterprise teams are generally traveling and $2 million quota selling our Enterprise licenses and sometimes Pro licenses $250,000 to $500,000 initial engagements. The inside sales team is not travelling, but generally selling market here or iAPPS Pro licenses with initial engagements ranging between $50,000 and a $150,000 and they a $1 million quota each.

Okay. And since the launch of the Pro and now the recent market automation, how many new -- how many brand new customer have you gotten? And how many you have existing customers or have maybe joined on board for some of those products?

So, last quarter half of our new customers were Pro customers, a 100% of our new customers bought marketing automation but between 10 and 20% of them were marketing automation only customers, so in general what we're seeing is that marketing automation leads to a Pro sale. But we've not seen and I don’t expect to see this right away is a lot of Pro sales leading to enterprise sales. So that'll generally you're buying a Pro license you've got a 36 month window with that and you'd outgrow the Pro towards the end of that window, so that'll be a longer up sell process than the marketing automation side.

Okay. Do you have a rough figure for your 36 month of backlog?

Mike, what is our backlog yet?

Yes, sure Howard, it's probably around 22 million to 23 million.

Okay. And in terms of I guess the gross margin, I guess, I'll ask it two ways since you had a little extra expense. What type of -- when you have a percentage shift towards a higher margin you know licensing products, what type of bump should we expect in the gross margin I guess say in the second half if that, if the total improves towards that 50% mark what type of bump do we see in gross margin?

Yes, so there's a still a pretty decent component that services revenue. So, I think it makes sense that I think for us as we end the year we'd like to be at maybe like a 61% or a 62% overall gross margin. I think on the license and the hosting side it's really going to be about volume, so we've got the you know certain amount of set fixed cost and the more new customers we add the better you'll see that, the faster you'll see the licensing and hosting gross margin you know increase and that we hope to get up to you know like I said without the onetime cost this quarter we were at 76%. I'd like to get that close to 80. And then in the services piece you know we've been very successful that was a major you know achievement in 2016 to transition to selling our services on a T&M basis instead of a fixed price basis, and that's where we got in trouble in past with troubled projects in '16 and '15 and beyond. So, I think the services margin can be 44% this quarter. I mean you'd like to see that up into the high 40s approaching 50, and I think when you want this together probably between 60% to 62%, is probably good place in the next couple of quarters.

One of those things that will contribute to our margin for our SaaS like this is the investments that we made with Amazon Web Services. So, we had -- previously had a dedicated network operations center that we're managing, as hosting has become more of the utility so to speak driven by larger companies like Amazon and Microsoft and IBM, we've thought made a migration over the past couple of quarter into the Amazon cloud, which will increase quality, increase our performance, provide what I like to call elasticity essentially network cycle is un-tap, as we grow we can just incrementally increase the amount of the cloud we're using. And overall, it actually reduced our operating expenses for as we just don’t need as many people to maintain to add on a day to day basis. We'll also increase our gross margins as well. And primary reason why we made this shift was to increase performance but it has that nice benefit once we make the initial investment of thing so far financially as well.

Okay. One last one for me. You talked about getting into new verticals and, are you trying to target company such as the water company where they are large company with many subsidiaries so you can just keep mining them for future, for future growth? Is that sort of the thing that you're eyeing down the road?

Well, what we're finding is that, by focusing our marketing efforts towards specific verticals and we’re able to reduce our customer acquisition cost. When we get a larger company that has the number of brands underneath them, that’s a huge bonus for us and it’s a great testimony to the quality of our delivery that we get those kind of internal references and we have a number of those, that’s not so much a marketing and sale direct, it's direct benefit that we get. B2B manufacturing for example, the huge industry that has generally been a laagered in the e-commerce space, and they're starting to make movements that, and we're seeing a lot of activity. And because of our experience with some of our customers in that space, we have a great competitive advantage and it also allows us to focus the team and learn that vocabulary and build the name in that kind of narrow industry.

Thank you. [Operator Instructions] I'm showing no additional follow-up question. So, at this time, I would like to hand the call back over to Roger, Ari Kahn, President and Chief Executive Officer for closing comments and remarks. Sir?

Great, 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. We look forward to speaking again in May at our Q2, 2017 Conference Call. Thanks everybody.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody have a wonderful day.