Bridgeline Digital, Inc. (BLIN) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital, Inc.'s Fourth Quarter 2018 and Year-End Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded. With us on today's call are Ms. Carole Tyner, Chief Financial Officer, and Mr. Ari Kahn, President and Chief Executive Officer. I would now like to turn the call over to Ms. Carole Tyner. Ma'am, you may begin.

Thank you, and good afternoon, everyone. I am pleased to welcome you to our fiscal 2018 fourth quarter conference call. Before we begin, I would 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 take no obligation to inform you if they do. Results that we report today should not be considered as an indication of our 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 when discussing the company's financial performance. We provide a reconciliation of these non-GAAP measures to our GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting our website. I would now like to turn the call over to Ari Kahn, our CEO and our President.

Thank you, Carole, and good afternoon, everyone. In 2018, Bridgeline acquired customers from several verticals, including healthcare, association, finance and manufacturing. Overall, we saw a trend in B2B, with the manufacturing sector showing significant interest. We also saw international requirements and partnered with some of our customers to expand our product line to meet the needs of this trend. Our partnership with international manufacturing customers resulted in the upcoming launch of version 7 of our platform, which includes a new feature set called Unbound Commerce variants that includes unique localization capabilities for currencies, taxation, inventory, logistics and compliance, it may vary from country to country. As part of these same trends, we're also launching the Unbound Translate product, which will enable direct integration with translation systems to expedite for publication of content to international sites. Bridgeline has partnered with Lingotek on this new product to leverage their network of translation specialists and workflow software to give our customers seamless and cost-effective translation of content on their websites and online product catalogs. Commerce variants and translation goes hand-in-hand with Bridgeline's GDPR-hosting capabilities to help our customers with European side to expand to new customers in Europe where recent regulatory changes are causing many companies to redesign their web presence. In addition to variants and translation, these further help Bridgeline differentiate the platform and multinational companies in addition to our unique B2B capabilities. A recent customer win is a manufacturer of office workspace accessories who is using Bridgeline to evaluate strategies for increasing B2B online revenues and improve branding through its website. Bridgeline's unique capabilities in the B2B space helped create this relationship and our continued innovation will provide additional value through the company's valuation process. In general, B2B companies make larger investments in their websites than their B2C counterparts. Bridgeline was selected by the AARP and the UnitedHealthcare to launch a new website for their AARP longevity network. This site will assist investors and entrepreneurs in health care who want to break into the age 50 plus market with a platform for gathering ideas and accessing shared resources online. In health care, Bridgeline was selected by an organization that operates several hospitals in the Northeast to create patient engagement. They intend to create a multi-language site with content for self-health and self-education as wells as events, blogs and physician directories. Bridgeline's recent advances in version 7 for variants and its translation partnership with Lingotek create opportunities to add additional value to this healthcare organization’s initiative. In our last earnings call, we mentioned that one customer of ours, who has several contracts with Bridgeline, canceled one of its agreements, effective September 30. While this customer may have canceled due to strategic redirection of that organization, this only impacts one of its contracts and the others are still active with Bridgeline, continuing to have a strong relationship with the customer. However, the contract that was canceled is significant and impacts revenues by approximately $375,000 per quarter. On our last call, we discussed our strategy for 2019, which is to prioritize inorganic growth. To this end, Bridgeline provides deep strategic value to its customers when trusted with multiyear initial commitments. And our challenge is that new customer acquisition takes a long time with high marketing cost due to the depth and strategic value our customers must place in our platform. Our customers look to us for new features and products to add to their digital marketing suite, which are typically technical point solutions that sit on top of our side of our platform. Indeed, marketing technology sector has thousands of small companies with excellent point solutions that have rapid sales cycles, but as technical products, they are not best positioned to be the sole product in a standalone company. Bridgeline often integrates with these solutions and has been approached by some of them seeking combination. These solutions have large customer bases and short sale cycles, which is a great complement to our more in-depth product that has longer sales cycles. We believe Bridgeline can reduce customer acquisition costs for its core platform and more rapidly grow by combining with some of these companies, cross selling their products into our customer base and cross selling our platform into their customer base while providing a more strategic and longer term relation to their customers. To this end, Bridgeline conducted a secondary public offering for $5 million and has begun actively speaking with candidate companies. We've made progress with one company regarding the combination and are hopeful to not only close that acquisition in the upcoming quarter but to find at least one more in 2019 that can bring our revenues towards the $20 million level, tripling our customer base where a significant portion of our pipeline for platform sales would come from up-sells to existing customers and our addition of technical products to our suite for a more rapid new customer acquisition would occur. This would reduce customer acquisition cost and accelerate the growth of our customer base. At this time, I'd like to turn the call over to our Chief Financial Officer, Carole Tyner, who'll provide more details on the financial results for our fourth quarter. Carole?

Thanks, Ari. Today, I will review the financial results for the fourth quarter of fiscal 2018, as well as the results for the fiscal year ended September 30, 2018. First, I'll touch on revenue. Total revenue for the fourth quarter of fiscal 2018 was $2.8 million, compared to $4.2 million in the fourth quarter of last year. The following are some details of the various components of revenue. First, I'd like to talk about our license revenue. Total license revenue comprises our subscription-based licenses, or what we call SaaS licenses, and our perpetual licenses decreased to $1.2 million for the fourth quarter of fiscal 2018 compared to $1.8 million in the fourth quarter of fiscal 2017. We had approximately $269,000 in perpetual license sales in the fourth quarter of 2018 - of last year - excuse me, 2017 last year compared to only $8,000 in the fourth quarter of this year. As it is for most software companies, perpetual license can be inconsistent from quarter-to-quarter, but we do strive to offer our customer the choice of the type of license based on their organization and structure. Our SaaS revenue was $1.1 million for the fourth quarter of 2018 compared to $1.4 million in the fourth quarter of fiscal 2017. The primary reason for the decline is due to the loss of a larger customer who was acquired and therefore compelled to not renew their contract. Also contributing to the decline was the price negotiation of another large customer's contract to a lower rate. Our hosting revenue decreased slightly from $263,000 in the fourth quarter of 2017 to $206,000 in the fourth quarter of this year. The decrease in revenue was due to attrition related to customers that were obtained from prior acquisitions that we no longer wanted to support. Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, decreased to $1.4 million in the fourth quarter of fiscal 2018 compared to $1.8 million in the fourth quarter of last year. Again, this decrease is driven by the drop in SaaS revenues as previously mentioned. Our annualized recurring revenue, or ARR, at the end of the fourth quarter, was approximately $5.9 million. Our new engagements are typically 3-year contracts with 1-year auto renewal. Our services revenue was $1.4 million in the fourth quarter of fiscal 2018 compared to $2.2 million in the fourth quarter of last year. As longer term projects started to wind down, the decrease in new engagements impacted overall services revenues. However, we will be focusing on increasing our pipeline by selling new engagements and providing add-on services to our existing customer base, in addition to what Ari mentioned about driving some cross-sells with potential partnerships. Moving on to gross margin. Our gross margin for the fourth quarter was 51.3% compared to 54.8% in the fourth quarter of last year. The decline in the margin is primarily due to the decline in license revenue. Cost to hold the subscription customers with our partner Amazon Web Services are relatively fixed cost and therefore can impact our margins. We will continue to review our hosting infrastructure, which is highly scalable. We have invested in baseline improvements so they can deliver better margins as the customer base grows. Our new products are hosted for our existing customer. We reduced our operating expenses by 20.8% to $2 million for the fourth quarter of fiscal 2018 compared to $2.6 million for the fourth quarter of fiscal 2017. Please note that this excludes a non-cash goodwill impairment charge of $243,000. Over the past few years, we have committed to a restructuring plan and have significantly reduced our facilities costs and overall general spending. As I just mentioned, we had a goodwill impairment in the fourth quarter of $243,000. In the quarter ended June fiscal 2018, we adopted a new accounting standard that simplifies the impairment tests or goodwill. The carrying value of the company as compared to the fair value and if there is an impairment then that is recorded as a charge in that period. The impairment testing in the fourth quarter of 2018 resulted in this non-cash goodwill impairment charge of $243,000. Moving to the bottom line, our net loss of $947,000 compared to $332,000 in the fourth quarter of fiscal 2017. The $947,000 losses included the impairment charge of $243,000. However, excluding the goodwill impairment charge, the net loss would be $703,000 for 2018. Our non-GAAP adjusted net loss of $555,000 or a loss of $0.13 per diluted share in the fourth quarter compared to non-GAAP adjusted net loss of $98,000 or a loss of $0.02 per diluted share in the fourth quarter of last year. Our adjusted EBITDA for the fourth quarter of 2018 was a loss of $414,000 compared to a gain of $41,000 or income in the fourth quarter of fiscal 2017. And I would like to turn your attention to talk about the full year of 2018 as compared to 2017. Our revenue for fiscal 2018 decreased 16.7% to $13.6 million compared to $16.3 million for the same period last year. This was primarily due to the decrease in new license deals and the resulting in services engagements. Our subscription and license revenue decreased to $5.6 million from $6.8 million in the previous year. Perpetual license sales in fiscal 2017 were $721,000 compared to $80,000 in fiscal '18. Again, perpetual license can cause inconsistency and some lumpiness in our financials. The decline in SaaS licenses is primarily due to the reasons I mentioned previously regarding the acquisition of a customer. Our services revenue decreased 18% to $16.9 million compared to $8.5 million in the previous year. Gross margins also decreased from 56.1% for fiscal 2017 to 50.3% in fiscal 2018. The primary contributor to the decline was a decrease in license revenue, particularly the lumpiness from the perpetual license. Our operating costs for fiscal 2018 were reduced by 14.9% to $9 million compared to $10.5 million at fiscal 2017, which is actually an improvement of $1.6 million. This excludes the non-cash goodwill impairment charge of $4.9 million. Also excluding the $4.9 million goodwill impairment charge, we had a net loss of $2.4 million in fiscal 2018 compared to a net loss of $1.6 million in 2017. Adjusted EBITDA was a loss of $1 million in fiscal 2018 compared to income of $122,000 in fiscal 2017. However, as I mentioned, we did make significant reductions to our facilities and reduced our overall operating expenses year-over-year. Turning now to our balance sheet. At September 30, 2018, the company had cash and accounts receivables of $2.4 million. Our total assets were $11 million and our total liabilities were $6.6 million. Total debt at September 30 was $3.6 million, which is comprised of $2.1 million from our line of credit and the remaining amount related to a term loan and promissory note. Just to note that the promissory notes were paid off in October when we raised a net $3.4 million in our public offering. I would like to thank you all for listening. At this time, we would like to open up the call to questions and answers.

[Operator Instructions] And I'm showing no questions on the phone lines at this time. I'd now like to turn the call back to Mr. Ari Kahn for closing remarks.

Thank you. Thank you all for listening and taking the time to join us for today's update. We appreciate the support and patience of all of our shareholders, and it's our goal to continue building a scalable business which in turn will build shareholder value. We are very excited about our strategy for 2019. Thank you for joining us today. We look forward to speaking to you again in our Q1 2019 conference call. Have a great weekend, everybody, and happy holidays.

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