Bridgeline Digital, Inc. (BLIN) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital, Inc. Third Quarter Earnings Conference Call. Currently 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 turn the call over to your host to Cameron Donahue. Sir, you may begin.

Thank you and good afternoon, everyone. I'm pleased to welcome you to our third quarter conference call. Before we begin, I'd like to remind listeners that during this conference call, comments 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 your 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 Cameron and good afternoon everyone. I'm happy to report that in Q3, as with Q2 and Q1, we met the guidance we provided at the beginning of the year. In Q3, we achieved more than 10% revenue growth and we won more new customers this quarter than we did in the first two quarters of 2017 combined. Thanks to our continued focus on our iAPPS platform this quarter had strong recurring revenue with ARR increasing by 9% to an all-time high of $7.1 million. ARR has increased for seven quarters in a row and we ended the quarter with a backlog of over $22 million in revenue that will be recognized over the next three years. We expect Q4 to be even better than Q3 with strong license revenue and for our bottom line to further strengthen. Enterprise and Pro sales continued to be strong and Marketing Automation software is gaining momentum with several new sales in Q3. Marketing Automation also has generated opportunities that converted directly into larger Web Content Management engagements during the sales cycle. In Q3, we added Marketing Automation customers in the advertising industry, in finance, and in transportation. Our Pro-Series product line continues to be strong with sales in pharmaceuticals, manufacturing, and national associations, and enterprise IF sold into manufacturing, environmental, and the healthcare industries. We closed new business in the United States, the UK, and in Ireland with initial engagement as large as 850K in license and services. We net [ph] only one new customers this quarter, we continued to see existing customers refer us to their subsidiaries and other departments in their business to help build new websites with additional licenses. This quarter, we received significant recognition from industry analysts including Gartner, Nucleus, and Codi, also Bridgeline added two key executives who bring impressive technical experience to the company. Ed Sullivan has joined as Bridgeline's Executive Vice President of Professional Services. Ed will focus on growing revenues in our existing customer base through delivering excellent implementations on our software. Ed brings 25 years of experience and a proven track record from PWC, Fatwire, Endeca, Oracle and SAP. Jim Voss has joined as Bridgeline's Executive Vice President of Technology and will be responsible for engineering, hosting, and customer support. Jim is a hands-on software executive with 20 years of engineering experience who has lead research and development, professional services support, hosting, and product management teams at companies including ProSeeder, FatWire, and Thrive Networks. In many way,s Q3 has been the strongest quarter yet for Bridgeline and Q4 is off to a great start. We began Q4 with a $20 billion retailer selecting Bridgeline to power four of its service franchise divisions. Bridgeline will partner with the retailer to create over 350 websites and engagement of nearly $1 million in the first year's licenses, services, hosting, and maintenance. This implementation will be built upon Bridgeline's variant technology that allows a franchisor to control branding and curate content for its franchisees while allowing franchisees to leverage their local knowledge and entrepreneurial energy to add further content to their website that drives greater revenue. Bridgeline is unique in this capability in our experience, and this industry gives us an advantage with franchises and brand networks as we offer additional subject matter expertise and out of the box technology that accelerates implementations to drive greater value. We also released Version 6.0 of our product suite which includes an updated user interface with more flexible content authoring, enhanced search, and new marketing campaigns builder. Version 6.0 is even faster than our previous versions and leverages the latest technologies including the AngularJS system for higher quality and faster user experience. We released a new analytics product as well Bridgeline Insights. Insights interacts with Google Analytics to provide [indiscernible] information about site performance to our customers. Version 6.0 and Insights are available to our Enterprise, Pro-Series and Marketing Automation customers. We've received significant interest from large companies especially in the manufacturing space for SOC-II certification. To further increase competitiveness, we have begun SOC-II certification earlier this year and are now in the final stages with completion scheduled for this October. Customer success is the key to growth and we are making investments in our team including recruiting in our professional services organization, recruiting fees will have a minor impact on our professional services margin in Q4, but the near term revenue growth will make up for these investments to maintain continued bottom line improvements. And at this time, I'd like to turn the call over to our Chief Financial Officer, Mike Prinn who will provide more details of the financial results for our third quarter. Mike?

Thanks Ari. So I'll review the results of operations for the third quarter ended June 30, 2017. So our third quarter revenue was $4.1 million compared to $3.7 million in the third quarter of last year, an increase of 10.2%. This is in the upper range of the guidance we gave of $3.9 million to $4.1 million, and this is the fourth quarter in a row we've had sequential revenue increase. We're excited that some of the recent changes that we made in fiscal 2016 and early 2017 are translating into top line growth. Let me give some additional color around the various components of revenue, so our license revenue for the third quarter of fiscal 2017 increased 11.8% to $1.7 million compared to $1.5 million in the third quarter of fiscal 2016 . Helping to drive this increase was an increase in our SaaS revenue, in addition to an increase in perpetual license. We ended the quarter with a total monthly recurring revenue or MRR of $589,000, and this will put our ARR or annual recurring revenue right now at about $7.1 million. At this point, all of our SaaS revenues from our iAPPS product, our SaaS revenue increased $1.4 million in the third quarter of fiscal 2017 compared to $1.3 million in the third quarter of last year. We continue to see steady growth in our SaaS business. Our recurring revenue, which consist of the SaaS licenses, the annual maintenance on our perpetual licenses, and hosting remained constant at $1.8 million in the third quarter fiscal 2017 compared to the third quarter of last year. However, I'd like to point out that while the total recurring revenue remained constant year-over-year included in the 2016 number is non-iAPPS recurring revenue that we've strategically shared and are done with now. Our iAPPS recurring revenue increased 7.9% to $1.8 million in the third quarter of fiscal 2017 compared to $1.6 million in the third quarter of last year. So we're very pleased with this progress. And our services revenue increased 14.6% to $2.1 million from $1.8 million in the third quarter of last year. This is the result of us driving a higher utilization from our team, we're excited that this is the second quarter in a row with a service revenue that has been above $2.1 million. We've been winning new business at a higher rate in fiscal 2017 compared to last year and this has helped build our services revenue backlog. Our gross margin improved in the third quarter demonstrating the benefits of our SaaS based model as well as increased efficiencies in our delivery process that will continue to help us deliver at a higher gross margins. Gross margin for the third quarter was 55% compared to 54.3% in the third quarter of last year. We've completed the transition from our own network operations center to AWS in Q3 and expect to continue to see an increase in gross margin in the coming quarters. An additional benefit of migration AWS is that a capital expenditures are expected to decrease going forward as we no longer have to make significant purchases and investments into our own network operations center. Our operating expenses were reduced by 15.1% to $2.6 million for the third quarter of fiscal 2017 compared to $3.0 million for the third quarter of last year. While sales and marketing expenses remained relatively flat we had significant reductions in G&A into our depreciation and amortization expense in Q3. We recorded $126,000 for depreciation and amortization of third quarter of this year compared to $328,000 in the third quarter of last year or a reduction of over 60%, this is due to the end of life of our network operations center equipment that we've talked about in the disposal of older fully depreciated equipment as we finalize our transition to AWS. Like to make one additional important note around operating expenses and adjusted EBITDA, as you know we've made significant amount of progress with our facilities and infrastructure in the last couple of years. Although I do want to point out that we have a low occupancy rate at our corporate facility outside of Boston. We have approximately $60,000 of quarterly operating costs related to unused space. We're actively pursuing sublease options and have approximately 15 months left on our lease, but that it's worth pointing out when you look at our reported adjusted EBITDA numbers that I'll get to that upon fixing our occupancy here we could potentially report a higher number by about $60,000 per quarter. So moving the bottom line, we had an improvement of $1.7 million in the third quarter compared to last year. Our net loss was $332,000 in the third quarter of fiscal 2017 compared to a net loss of $2 million in the third quarter of last year. This is a significant improvement year-over-year and a result of a much better operating performance in the quarter combined with two significant items from last year. So in a third quarter of last year interest expense was much more significant due to the convertible debt that we had on our balance sheet almost 300,000 compared to only $9000 in the third quarter of this year. We also recorded a non-cash charge in Q3 last year of $726,000 related to the inducement of convertible debt. Now that we have those lines behind us, we're pleased to report that in terms of bottom line this is the best quarter that we've had in almost five years. Our non-GAAP adjusted net loss was $51,000 or $0.01 per diluted share in the third quarter compared to non-GAAP adjusted net loss of $1.8 million or a loss of $0.91 per diluted share in the third quarter of last year. We're excited to be able to report positive adjusted EBITDA for the third consecutive quarter really all of fiscal 2017. Adjusted EBITDA for the third quarter of 2017 was $49,000 compared to a loss of $575,000 in the third quarter of last year. At the beginning of the year gave guidance that we expect to drive positive adjusted EBITDA for the full fiscal year of 2017 and we believe we'll generate positive adjusted EBITDA for the fourth quarter of 2017 and of course the full year of 2017. Turning to balance sheet at June 30, company had cash and accounts receivable of $3.8 million and our DSO was 56 days. Total assets of $17.8 million and total liabilities of $6.4 million and a line of credit balance with the bank at June 30 was $2.3 million. Bridgeline expect to generate cash at around $150,000 per quarter of adjusted EBITDA. We ended Q3 with $50,000 of adjusted EBITDA, which is normally about $100,000 per quarter from generating cash and we ended the quarter with over 750K of cash. We invest in R&D and marketing to few growth and of balancing these investments with our cash management. If we choose to raise working capital, we look at both debt and equity both of which are available to us, and at this point we're very sensitive towards additional dilution on our common stock price would probably look towards a debt option if you wanted to add any additional working capital. We recently filed an S3 self-registration to enable a faster execution if a strategic opportunity such as an acquisition were to arise. There is no strategic opportunity identified at this time and we're not investing significant resources towards a search as our focus is on continuing to improve our financials, grow our customer base, but if one opportunistically arises we have a shelf in place to move forward quickly. Want to wrap up with some financial outlook for our fourth quarter. We expect our fourth quarter revenue in the range of $4.1 million to $4.3 million. We've had four straight quarters of sequential revenue growth and expect that trend to continue in the final quarter of 2017. That's consistent with the guidance that we gave at the beginning of the year. We made significant improvement to our adjusted EBITDA from Q3 of 2016 and Q3 of 2017. We expect to see continued improvement in Q4. We've generated positive adjusted EBITDA in the first three quarters of fiscal 2017 and we expect to generate positive adjusted EBITDA in the fourth quarter and of course mean that our full year adjusted EBITDA will be positive. This would be an improvement of close to $1million from our fiscal 2017 and an improvement of over $2.7 million from our fiscal 2015. We also believe that we significantly reduced our cash burn and our goal is to get to a point probably in the next couple quarters where we're generating operating cash in a quarterly basis. Lastly like to give some color around our NASDAQ listing we cured our listing deficiency earlier this week and are in compliance with all NASDAQ listing requirements. Thanks. And at this time I'd like to open the call up to Q&A.

Thank you, sir. [Operator Instructions] Our first question comes from Howard Halpern of Taglich Brothers. Your question please.

Congratulations guys, great to see year-over-year growth.

Thank you.

Thanks Howard.

In terms of the new customers, how many new customer wins were there and what is the value that it added to your backlog?

Well, we had about 10 new customer wins, and overall value to the backlog, I'm not sure of the top my head, it's going to be significant, it's going to be probably…

It's probably about $4 million Ari, just thinking of one larger deal and then the other 10 or so are just various shapes and sizes. But it's probably you know that $3 million to $4 million range.

Okay. And now in terms of that you've been selling the products now for a while and new products, where do you estimate your sales force is right now in terms of their overall potential capacity?

Our sales force is probably close to its capacity, maybe a little bit of additional marketing effort can leak out little more and then we'll start adding more people to the sales team. The one thing that we discovered in the last year was that the marketing component generating leads is incredibly important for us. We win deals when we're in them. We compete really well, but we're not in enough deals in the first place, unlocking that marketing is really probably the one area that's going to make a big impact for us in the next few quarters.

Okay. And was the hiring of the new, at least one of the two new executives going to help in that direction?

Well, it is, so Ed Sullivan who runs our Professional Services Group, he's actually forming a new team within services called customer success, and customer success will focus on better understanding our existing customers and expanding rapidly within that customer base. So now in addition to going out and finding new customers, we actually have a focus quoted revenue team that is going to expand within existing customers. And even without that team, we have seen a tremendous amount of growth within that customer base, companies with subsidiaries or divisions that need new websites, companies that are identifying needs for their existing website like ADA Compliance, American Disabilities Act Compliance is one that we keep on seeing where we need to do a lot of work, and that's unsolicited, now if we have a team that helps understand their bigger objectives and growing to them, we expect that to increase a lot of increased revenue and that's exactly what Ed's primary focus will be.

Okay. And with the addition of those two executives, is that going to move the needle at all on the G&A line?

On the expense side, it is not going to make a huge impact, we shuffled some people around, and there are additional expenses for those two people, but its minor compared to the overall budget.

Okay. And one final one, I know year-over-year gross margins improved, but it was a little softer than you know the first two quarters, is there something there or will it start bouncing back and trending towards that 60% area?

Yeah, you're right. Thanks for pointing it out. We expected to take up, so it did take down a couple points from last quarter. We had the transition from our network operations center to AWS, and as we completed that migration, we're still trying to get a handle around you know all the costs, and we're looking at ways that we can already make some improvements going forward, that was one piece. And the other piece was in order to generate more service revenue probably in the last month of the quarter than we initially planned, we sort of pulled the lever and used some more contractors at a higher rate. So it was better year-over-year, it did dip a couple of point sequentially, but we'd expected it to continue to trend up in Q4 and beyond.

Okay. Guys keep up the great work.

Thanks Howard.

Thanks Howard.

Thank you. [Operator Instructions] The next question comes from George Melas of MKH Management. Question please.

Yes. Hi guys, good afternoon. Nice quarter.

Good afternoon George.

Thank you.

So, I have a general question about how do you track customer satisfaction, and based on those kind of metrics, what do you see in terms of customer satisfaction?

Okay, great. We track it in a few different ways and actually one of the new guys that we brought in, Jim Voss, this is part of his focus. So we have satisfaction from a support perspective in terms of surveys that we do with the customers after each support ticket that is formed, but But the real way to track it where the rubber hits the road is to look at our churn rate, how often does a customer not renew the contract with us. And our revenue churn is at less than 1% last quarter – about 3% on an annualized basis, so we're pretty happy with that and that is you know straight recognition that our customers are continuing to spend money, now that churn rate also as we have newer customers, because now we're winning new customers at a higher rate than we had previously will probably decrease even further just because we’ve got new customers and the lifetime of customers is generally several years.

Okay, okay great. And can you sort of - I got follow up to one of Howard's question, can you sort of try to calculate your sales capacity, how would you measure that?

Well we would measure the capacity and which is $2 million times direct sales person so you need six there. And so it's $12 million of bookings and $1 million for inside sales people, so there'd be another three, so that gets you to $15 million in bookings capacity, and now we've just added our two customer success managers, and they will have 750 each, so now you're up to about 16 sites, so you're in that range for our current sales capacity.

Okay, so if you did three to four this quarter, you were roughly - you were sort of within the range of what your capacity is?

Yeah, right now this customer success guys weren't producing in the third quarter, they just are starting now at the beginning of the fourth quarter, so I take that 1.5 out of that analysis for third quarter.

Okay, okay. So when if we look at what's going to make the company grow at the slightly faster pay? So it's a matter of new revenue minus churn, the churn seems to be in a very good place which is a great foundation. So maybe add more new revenue I guess?

That's right, it's really on the new revenues side and the marketing part of that equation is the area where I see the most immediate opportunity, and we're experimenting, but we need to be in more deals. So this involves shifting some budgets from for instance direct sales to lead generation marketing, and we do a very good job of measuring our leads, understanding what the conversion rates are of leads from different sources, so that gives us the foundation to experiment to find additional one. Big part of that is an effort that we're making with Gartner and Forrester to become part of their magic quadrants and wave reports, now there's revenue limitations and we're right on the cost of being able to exceed those numbers. But we're not there yet, so we're not eligible for those reports this year. But that is one thing that next year we're hopeful be in those reports and I first see that they generate a lot of leads directly. So we're going to be focusing on lead generation including what we call account based lead gen where we take specific industries like manufacturing that we are particularly successful and host local events and try to expand within that industry ourselves, so that's the first efforts that we'll be making.

Okay, great. And then quick question on the marketing automation on the intersection between Marketing Automation and sort of sale in CRM sales, I understand some companies are sort of expanding the Marketing Automation to include some kind of tools for sales people, not so much staff for managers to manage the pipeline from a top protective, but more sort of tool for sales people. Do you see someone need for that?

Well we do see some of that, in fact, even our own team internally uses some systems like that. So Marketing Automation traditionally has been the marketing team tool. And individual sales reps today do want to have limited ability to do email blast for instance and some of their own marketing and I think that's helpful. We have some of those tools inside of our product, but we also have integration with other dedicated software tools that companies were often buy our Marketing Automation and some of these other tools together to use them in conjunction and we even do that ourselves.

Okay, great. Okay, thank you very much.

Thank you very much.

Thank you. [Operator Instructions] I show no further questions on the queue at this time. I like to turn the call over back to Ari Kahn for closing remarks

Thank you. Thank you everybody, 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. Today we have annual recurring revenue of $7 million this is strong ARR that is based on three year contractual commitment rather than shorter term contracts or some other SaaS businesses. Our professional services are constantly driving strong gross margins and approaching 50%. I look forward to delivering continued financial growth and helping to translate that growth into shareholder value. Thank you for joining us today, and we look forward to speaking again in August on our Q3 2017 conference call.

Thank you, ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.