Bridgeline Digital, Inc. (BLIN) Q1 2017 Earnings Report, Transcript and Summary

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 Services, to deliver even higher performance sites and email for our customer. This partnership is strategic and will free up existence staff to focus on growth for our company rather than network maintenance. Each new engagement includes professional services to implement our software for customers. In 2016, we’re trying to launch the partner network to help deliver consisting growth margins through a more elastic team that can quickly scale for new projects, while maintaining a smaller bench. Bridgeline's professional services as a result of this effort increased gross margin to 44.3% this quarter versus 38.7% in Q1 2016. Bridgeline sales team grew significantly over the past several quarters and currently has nine enterprise sales people, plus five inside reps compared with the total of only four enterprises and no inside reps in Q1 2016. Enterprise sale people have quoted as $2 million and the inside sales quota as 1 million per rep. This in combination with renewals gives us a new booking capacity of $20 million to $25 million depending on individual rep productivity. This quarter we added a dedicated sales director to lead our inside sales team, which will increase productivity further. Our teams are building a pipeline of new customer opportunities that currently includes more than twice the new engagement opportunities that ahead in Q1 2016. We're also finding opportunities in certain verticals including manufacturing and B2B2C, where our capabilities with dealer networks and sales attribution provide a competitive advantage. Our unique email marketing and deep marketing automation and web-type content management integration especially for franchises creates strategic differentiators that further increase our competitiveness. Our new engagements not only include acquisition to new customers but also expansion into new business units in our current customer base. Last quarter, we announced that a $4 billion water technology company, that customer of ours added another of its subsidiaries to our customer base. This company has more than 30 brands underneath it and this quarter it added yet another worth it subsidiaries to launch its website after Bridgeline. We expect to continue to grow with this customer and with other customers that are some as well. We've also made new license sales in manufacturing, finance, health and association category. New engagement bookings increased by over 8% over last quarter and a more than double year-over-year. In fact, new bookings this quarter were stronger than they were any quarter in 2016. 50% of all new engagements purchased are Pro series, 33% purchased enterprise license and the remaining 17% of new engagements purchased pure marketing automation. Also, I would like to note that for our Pro and Enterprise new customers, a 100% of those purchased our marketing automation as well. This quarter, we had notable perpetual license sales that contributed to our license revenue and also included a hosting and maintenance renewal that’s expected to contribute over $300,000 to our high margin iAPPS recurring revenue over the next 36 months. Bridgeline generated positive adjusted EBITDA in Q1. We ended the quarter with over 1.4 million in cash, further demonstrating our focus on fiscal strength. And at this point, I would like to turn the call over to our Chief Financial Officer, Michael Prinn, who will provide more details of the financial results for our first quarter.

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 and that's up from 44.1% in the first quarter of last year. So, you can see our total revenue is decreased slightly. We're driving a higher percentage of licensed revenue to total revenue and expect to continue to do that in the future quarters. This will help transform Bridgeline when improved SaaS business model. Our recurring revenue which consists of SaaS licenses, annual maintenance on our perpetual licenses and hosting moving cost in at 1.7 million in the first quarter of fiscal 2017, compared to the first quarter of last year. I'd like to point out that while the recurring revenue remained constant year-over-year included in this number is a decrease of approximately a 145,000 that we have completed the transition of shedding some of our smaller non-iAPPs customers from another software platform from a prior acquisition in 2013. I also want to break down our recurring revenue and note that our IS recurring revenue increased 13.9% to 1.7 million in the first quarter of fiscal 2017, compared to 1.5 million in the first quarter of fiscal 2016. So we're very pleased with that progress. We ended the quarter with a total monthly recurring revenue or MRR of about 563,000 and this will put our annual recurring revenue right now at a little less than 6.8 million. Our services revenue decreased by 347,000 from the first quarter of last year, so as we discussed previously we made some changes in the last few quarters to align our delivery team with our revenue projection will continue to focus on available utilization and our resource planning to make sure we drive the forecasted revenue. This is the third sequential quarter that we had reported an increase in our service revenue. We've made further progress in the first quarter in terms of expanding a sales team and increasing our spending on lead generation and we expect to see these investments translate to revenue growth in 2017. I also think it's important to point out that although our service revenue decreased by 347,000 year-over-year, our cost providing that service revenue decreased by 326,000 in the current quarter, demonstrating our commitment to streamline our cost in line with our revenues and as evident in our gross margin improvement which I'll speak to you now. We significantly improved our gross margin in the first quarter demonstrating the benefits of our ongoing transition to a SaaS based model as well as our successful transition of selling the services piece of our engagement as time and materials rather than a fixed price project. So our gross margin for the first quarter was 57.5% compared to 50.8% in the first quarter of last year. We continue to see the benefit of all the infrastructure improvements that we've made throughout the last four to five quarters. We're seeing a delivery team that has a much higher global utilization and ultimately as we continue to see more license engagements we believe we can drive a higher gross margin in future quarters. Also contributing to gross margin increase and the improvements we made in facilities and overhead reductions. These changes also impacted our license and hosting margin, which improved to 71.1% in the first quarter of this year and that’s compared to 66% in the first quarter of last year. Also I want to mention that in Q1 and Q2 of this year fiscal 2017, we're upgrading and transitioning our hosting facility and capabilities from our networking operating center to Amazon Web Services. So during Q1 and Q2 we'll be running to some extend both environments and parallel while we complete this migration and transition and so during Q1, we encored roughly $100,000 in additional cost related to this migration. So, excluding this cost our gross margin, which we reported at 57.5% would have been 60% and our licensing and hosting gross margin would have been about 5 points higher than what we reported at approximately 76%. We have some more incremental cost in our second quarter, while we fully complete this transition and then expect to have a more scalable, reliable environment going forward. Our operating expenses were reduced 17.2% to 2.7 million for the first quarter of 2017 compared to 3.2 million for the first quarter of fiscal 2016. Excluding the restructuring charge of approximately 586,000 in Q1 of last year, our operating expenses were relatively flat. We saw some decreases in G&A and other areas, which was offset by an increase of 226,000 or 21% in our sales and marketing expense. So as we discussed, we've been investing in growing our direct sales team as well as creating and building an inside sales team. We made every effort to reduce our operating expense to be in line with our current revenue and we have initiatives that we will continue to focus on. We will also continue to look for opportunities to reduce our operating expenses, while not impacting the planned growth of our sales team and our marketing spend. Our GAAP net loss was 476,000 in the first quarter of fiscal 2017 compared to a GAAP net loss of 1.4 million in the first quarter of last year. Our non-GAAP adjusted net loss was 161,000 or $0.00 per diluted share in the first quarter compared to non-GAAP adjusted net loss of 583,000 or a loss of $0.11 per diluted share in the first quarter of last year. Adjusted EBITDA for the first quarter of 2017 was $10,000 compared to adjusted EBITDA of 65,000 in the first quarter of fiscal 2016. We're excited to be able to report positive adjusted EBITDA for the quarter as a last two quarter's we've generated negative adjusted EBITDA assume to that process of investing and rebuilding our sales team. Our go going forward in 2017 to generate positive adjusted EBITDA for the full fiscal year. So, trying to review the balance sheet at December 31, the Company had cash and accounts receivable of 4.1 million and our DSO was 50 days, total assets of 18.4 million and total liabilities of 6.3 and our line of credit balance with our bank at December 31 was 2.4 million. I want to wrap up with some financial outlook for the second quarter. We expect our second quarter revenue to be in a range of 3.9 million to 4.1 million. We made significant improvements to our adjusted EBITDA from Q3 and Q4 of 2016 to Q1 of 2017, and we expect to see continued improvement throughout fiscal 2017 and again expect to generate positive adjusted EBITDA for fiscal 2017. We also believe we've significantly reduced our cash burn and our goal is to get to a point probably in the fourth quarter, where we're generating operating cash on quarter basis. Lastly, I just want to get some color around our NASDAQ listing, in August of 2016, we did receive the initial notification order that we fail to maintain our minimum closing bid of $1 for 30 consecutive days, so the 180-day grace period to cure that and regain compliance, that 180 day period ends later this week and we will not regain compliance, however, we able to receive an additional 180 extension if we maintain all of our other listing requirement except the minimum bid requirement. We expect to be able to receive this extension, which will go until August of 2017 and managements committed to maintaining its NASDAQ listing and regaining full compliance. So, thank you. At this time, I would like to turn open up the call to Q&A.

[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.