Good day, ladies and gentlemen, and welcome to the Bridgeline Digital Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference Mr. Brett Maas. Sir, you may begin.

Thank you and good afternoon, everyone. I am pleased to welcome you to our second quarter earnings 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 the 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 financial results, as well as provide 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, Brett, and good afternoon, everyone. Bridgeline has made several product advances and operational improvements in recent quarters that we have enabled the company to win more customers, deliver greater value to existing customers and at the same time for the core business to run more efficiently. This took hard work and great innovations from the team, and I’m happy to see those efforts continue to drive growth. In the second quarter of 2017, we increased SaaS revenue, iAPPS recurring revenue, subscription and perpetual license revenue, hosting revenue and grew margins compared to last year. We did all of this while reducing operating expenses by 7%. Our Pro-Series is not just allowing us to win business, where we could not previously even compete; it’s also allowing us to deliver great value to existing customers who want to expand in the success Bridgeline has provided them across other subsidiaries within their organization. This is a trend that helps Bridgeline continue to produce more efficient customer acquisition cost and demonstrates the quality of our customer satisfaction. Our investments in marketing automation have allowed us to begin winning business from customers, who need Internet marketing but are not ready for a new website. This not only expands our customer base, but also enables us to grow revenue with lower customer acquisition costs, with future upsells of WCM, Web Content Management, and eCommerce and marketing customers. We’ve also helped business connect physical products to Bridgeline powered eCommerce sites with Internet of Things technology, enabling Bridgeline to demonstrate success and grow in this exciting new generation of commerce and customer service. Cloud software companies like Bridgeline often have strong valuations, because much of their revenue is high margin, recurring and sticky. At Bridgeline, our iAPPS recurring revenue is our economic engine, includes our SaaS…

Thanks, Ari. So I’ll review the results of operations for the second quarter ended March 31, 2017. Second quarter revenue was $4 million compared to $4.2 million in the second quarter of last year. This is in line with the guidance range we gave of $3.9 million to $4.1 million last quarter. 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 we mentioned in 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. This is the third quarter in a row where we have had a sequential revenue increase. So let me give some additional color around the various components of revenue. Our subscription and perpetual license revenue for the second quarter of fiscal 2017 increased to $1.6 million compared to $1.5 million in the second quarter of last year, helping to drive this increase was our increased SaaS revenue. Our SaaS revenue increased 8.1% to $1.4 million in the second quarter of fiscal 2017 compared to $1.3 million in the second quarter of last year. I’d like to note that our iAPPS SaaS revenue increased 16.5% to $1.4 million compared to $1.2 million in the second quarter of last year. At this point, all of our SaaS revenue right now is from our iAPPS product base. Our licensing revenue for the second quarter makes up 39.6% of our total revenue compared to about 36% of the total revenue in the second quarter of last year. And our license revenue and hosting revenue combined make up 46.1%…

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

Congratulations. Nice incremental improvements in the first quarter.

Thanks, Howard.

First question regards, is this the last quarter we’re going to see the restructuring charge in the income statement?

Yes. I believe so. So this charge for this quarter just was related to our India office, we when were a different company, primarily services, we get a model utilizing some headcount over there. As we transition to a SaaS company, we don’t have any headcount there. But we still got a little bit of time left on the lease that we restructured in Q2. And I think the only reason you would see a continued material restructuring charge would be - what I mentioned in terms of the corporate facility. We find some sort of sublease or someone to take it over. We would just take a charge for the difference between whatever that event was in the current rate. But for the most part, I believe we’re through with the restructuring charges.

Okay. And it was also nice to see, I guess, hosting actually sequentially from the first quarter jumped up a little bit. Is there a particular reason for that or is that a trend that could continue a little bit?

Yes. I think - I hope it is a trend. So over the last year we’ve been talking about shedding a lot of the smaller non-iAPPS customers. They are paying $200, $300, $400 bucks a months. And we’re done with that. And now we are still finding that although maybe 8 out of every 10 deals is a SaaS deal for that 9th to 10th deal that a customer that wants a perpetual license, they’re usually asking us to host as well. It’s a good price point. It’s anywhere from $15,000 to $30,000 per quarter. So just adding one customer every quarter - every other quarter, I think we can still maintain some healthy growth in the hosting line.

Okay. And with the sales force now been around a little while, what are they seeing in terms of what the customers are desiring, want in terms of its initial products and some potential upgrades? And are they seeing anything different in opportunities out there than you had, so what they would see?

I’m sorry, you’re referring to our sales force, we are seeing different opportunities?

Yes. I mean, in interacting with customers, are they seeing different things out there that are opportunities…?

Yes. We are seeing some things. There are two places that is really bringing a lot of interesting innovations. One of them is existing customers finding out what they need and going into sales engagement. So one of the things that we’ve been discovering is interest in what’s broadly classified as the Internet of Things. And we have active customers today that have physical inventory on the ground within their customers, that is now being shipped and connected directly back to the commerce sites that we build for automatic replenishments. We have companies, customers of ours that have inventory all over the world within their own customers that is automatically connecting to the commerce websites we build and allowing them to make purchases and directly monitor their sites. And that’s an area where there is a tremendous amount of growth. We are on the cutting edge of it and delivering real-world solutions today. And I would expect to continue to see opportunities in that area.

Okay. And you’re seeing now that Pro has been around a little while, and I know automations really just getting going. But are you seeing customers you have now desire or talk about upgrading more towards the enterprise area?

We see two things with regards to Pro - I guess three things. So, first of all, not surprisingly, Pro is - in terms of the volume of sales, we saw more in Pro than anything else. We have companies who have a large number of brands. Companies like, for instance, L’Oréal has a bunch of brands underneath, some other companies of ours that have multiple brands that need a separate site for each of their brands. And what they do is they come to us. And Pro is the right departmental or brand solution for them. And they continually buy more and more Pro licenses from us. We also have companies that start off with Pro, and they expand to Enterprise. And it’s a great way for us to win a customer quickly, show them great success and then growing their organization. Pro has certain limits, for example, the number of pages on a website, the amount of traffic that it can occur and so forth within that site. And companies, especially smaller companies, start off with Pro, makes sense. But after the site really kicks in and they start driving more business in it, already today even though Pro has only been out for a year we see people exceeding those limits and then coming to us to expand Enterprise. And that’s about four times increase in license revenue between Pro and Enterprise for us and it’s happening already in the short period of time.

Okay. Okay, guys, keep up the great work.

Thanks, Howard.

Thanks, Howard.

And our next question comes from George Melas from MKH Management. Your line is now open.

Hi, George. Thank you.

Hi, guys. How are you?

Good. How are you doing?

Good, very well. I’ll just follow up on a few of Howard’s questions. The marketing automation, are you seeing some traction there?

We are, we are. We’ve got a couple of good sales so far in marketing automation. We think that the best is yet to come still as the sales team is fairly young with regard to sales for that. And we’ve already seen, even within the existing customer base, companies buy marketing automation. One of the things that we’ve discovered, that we didn’t anticipate originally and it’s a good thing, is that companies that have bought marketing automation from us, sometimes own other competitive marketing automation solutions and they’re fine with that. So it becomes actually a little bit less competitive. We don’t have to knock someone else out of a business to win them. As a marketing automation solution, we’re kind of more of a point product, and still get in there and then compete head to head in the company after they own both of us. And we’ve seen that already.

Okay. Do you mean that they would own both you and your competition or is that you don’t have to knock out, they can keep their existing marketing automation and you can sort of sell around that?

We sell around it. Yeah, so for instance, a company that bought marketing automation from us last quarter owned HubSpot. They owned HubSpot and they kept it. But saw that we could do things that they couldn’t do with HubSpot. They needed an expansion in a particular part of the organization and they chose us over expanding their license in HubSpot, and now we’re in there. And, well, we’ll see how long those guys survive. But we’re doing well with the customer.

Well, that’s really interesting. Okay, great. Just going back to the past, ds, are you seeing some traction there?

We are - and I thought of ds as not necessarily a completely separate product. It’s really a use-case, an interesting use-case for our enterprise solution. We have a large number of content contributors and large number of websites that it produces. And we’ve gone from - this time last year there were around 6,680 ds sites. And today, there are 7,200 ds sites. We’ve increased the number of sites significantly. We’ve won customers. We have customers in our pipeline. We market to it differently than we expected that we would a year-and-a-half ago. We don’t necessarily market just to franchisees, our franchise meets with ds. We find that it’s useful for any company that has dealer networks or just needs a large number of sites for a variety of reasons. That makes it a broader marketplace for us.

Got it. Okay, interesting. And then, I was looking at the numbers, the cost of - the sales and marketing cost. I was surprised that it was down sequentially and year-over-year, because I understand you’re beefing up the sales force. Can you sort of explain that number?

Yes, we stated out there for a second. You said the total sales and marketing budget year-over-year?

Yes. No, for the quarter, I think the sales and marketing expense was $1.17 million.

From around $1.3 million to $1.17 million this quarter, and that really had to do with some specific marketing campaigns that we were executing last quarter that completed - be repeated this quarter. In terms of the way we budget that’s around flat. Now, when you take a look at Q4 last year, we made a specific investment in the conference and some other things that added about $100,000 that quarter relative to our Q1. And now, in terms of the way we’re budgeting, it’s probably going to stay around this level for a while, between $1.2 million and $1.3 million.

Okay. Great. And can you just update us a little bit on your sales headcount, both on the direct and on the - so that the tele-sales?

Yes, so our total headcount in our inside team is - we held that flat. That’s got three inside people underneath our manager, who also is dialing as well as managing. And on our direct team, we have four people selling direct to one person running the phone. So that’s actually a little bit lighter than we were at the beginning of last quarter. And we’d probably be bringing that up. We are finding that right now with our marketing budget, six or seven people is probably our optimum number, so little bit lighter today than where we want to be.

Okay, great. Okay. Thanks a lot. Good job, guys.

Thanks, George.

Thanks, George.

And at this time, I’m showing no further questions.

Okay, great. Well, hey, everybody, we really appreciate all of you, all of our shareholders. And our goal is to continue to build a scalable business, which in turn will help to build great shareholder value. Today, we have annual recurring revenue of $7 million. This is strong ARR, just based on three-year contractual commitments rather than the shorter-term contracts that many other SaaS businesses have. Our professional services are continuing to drive strong gross margins that are approaching 50% today and we believe these financial fundamentals plus the tactical innovations and investments that we made in sales marketing are the foundation of a strong company and an opportunity for great stock appreciation. So thank you for everything and for joining.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.