Bridgeline Digital, Inc. (BLIN) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Bridgeline Digital Incorporated First Quarter 2019 Earnings 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 call is being recorded. I would now like to introduce your host for today's presentation, Ms. Carole Tyner. Ma'am, please begin.

Thank you, Howard, and good afternoon, everyone. My name is Carole Tyner, I'm the Chief Financial Officer for Bridgeline Digital. I am pleased to welcome you to our first fiscal 2019 first 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 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 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'd now like to turn the call over to Ari Kahn, our CEO and President.

Thank you, Carole, and good afternoon, everyone. [Audio Gap] 2019 strategy to reduce customer acquisition costs and improve our bottom-line by taking advantage of the crowded marketing technology space in which we operate. There are over 5,000 martech companies, many of which are too small or needs to operate independently, but have excellent customer bases and technologies. Combining with the right business can enable cross-sale opportunities, synergies and delivery expenses for stronger gross profit, faster sales cycles and differentiation in the breadth of our product suite. We've reviewed dozens of businesses, and I'm excited to announce that this week, Bridgeline entered into an asset purchase agreement with SeeVolution, Inc. that includes a Celebros search products line and more than 80 ecommerce customers across the Americas and Europe. Celebros is an ecommerce search platform with artificial intelligence, natural language processing and machine learning that helps companies increase revenues by allowing products to be better found on their websites by improving search engine results and by enabling marketers to more easily promote key products. Celebros’ revenue, its high margin SaaS and the technology is based on the same Microsoft platform [Audio Gap] which creates synergies in the delivery of our combined product suite and opportunities for greater gross margins. The sales cycle for Celebros is much shorter than Bridgeline’s. And in fact Celebros signed multiple new customers in January this year alone. Each Celebros customer is a candidate for Bridgeline software, and most of the Bridgeline customers are candidates to buy Celebros. Celebros sales are often generated from its partnered network, which can greatly reduce our customer acquisition costs in addition to the improvements we expect from cross-sale between the combined customer bases. This quarter's revenues include the impact of the license nonrenewal we discussed in December of approximately $375,000 a quarter. The revenues from Celebros offset this impact and do so with a diverse customer base that has upsell potential. Future quarters will see the revenue improvement from the Celebros license agreements. Bridgeline has worked closely with Celebros throughout this process. And integration of the two companies is already well underway. To facilitate integration, Bridgeline has promoted Tom McGourty, our previous EVP of sales to the position of EVP of partnerships and strategic alliances. And he'll act as an executive sponsor for the combined customer base to drive strategic alignment and better serve our customers with this broader, enhanced product offering. We've added industry veteran, Brian Baloga, as our new EVP of Sales. Brian will work closely with Tom to create great momentum for the combine Bridgeline and Celebros products and customers. We still operate in a crowded market and there are other opportunities to grow our customer base and expand our product line. During our search that found Celebros, we've seen many exciting opportunities [Audio Gap] right first step and additional strategic opportunities may emerge in the future. In recent quarters, Bridgeline has acquired customers in several verticals including healthcare, finance, associations and manufacturing. Overall, we saw a trend in B2B ecommerce and internationalization that has led to this month's release of version 7 of our platform that includes a new feature set called unbound multi-store management. Multi-store management delivers easy-to-deploy localization for currency, taxation, inventory, compliance, and logistics. So, version 7 release along with the addition of the Celebros search product line gives Bridgeline great differentiating features for multinational companies including ecommerce especially in the B2B space. Our long-term partnership with a Fortune 50 company has yielded yet another win with a cold chain logistics B2B ecommerce site with a self service web-based platform for its healthcare customer base. Ease-of-use was the forefront of the deployment, allowing customers to connect to using their current credentials to order temperature sensitive packaging to promote unique client shipments of medical supplies, technical hardware, laboratory sensitive material and more. Our 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 here in North America and globally. Bridgeline's unique capabilities in the B2B space, including language and currency variants helped create this relationship, and our continued innovation will provide another value through the company's evaluation process. Bridgeline was selected by AARP and the UnitedHealthcare to launch a new site for the AARP longevity network. This site provides ready access to resources targeted to assist investors and entrepreneurs as they create breakthrough products for health technologies benefiting the 50-plus-year old audience. A U.S. retail business with over 40 stores in seven states and hundreds of brands has signed with Bridgeline to power its extensive online ecommerce catalog of apparel, footwear and accessories. Another new ecommerce customer has selected Bridgeline for its online fabric site that sells clothing materials with a product catalog that includes thousands of materials and requires multi-faceted search capabilities. And in, healthcare, Bridgeline was selected by an organization that operates several hospitals in the Northeast to help increase patient engagement. They intend to create a multisite, multi-language experience with content for self-help and self-education as well as blogs and position physician directory. Bridgeline's recent advances in our newly launched Unbound version 7 platform, including site variance and translation create opportunities to add additional value to this healthcare organizations initiative. In addition, in relying on our strong partnerships, we've worked together to launch a separate wellness focus site within extremely short timeframe to meet the regulatory requirements. And at this time, I'd like to turn the call over to our Chief Financial Officer for Carole Tyner, who will provide more details of the financial status of our first quarter.

Thanks, Ari. Today, I will review the financial results, as Ari said, for the first quarter of fiscal 2019 for the period ended December 31, 2018. Total revenue for the first quarter of fiscal 2019 was $2.4 million, compared to $4 million in the first quarter of the last year. The Company adopted the new revenue recognition standard in the first quarter of 2019. However, the adoption had an immaterial impact on the revenue recorded for the quarter. The following are some details of various components of revenue that I'd like to discuss with you today. Total license revenue [Audio Gap] based licenses or SaaS licenses and perpetual licenses decreased to $1 million for the first quarter of fiscal 2019, compared to $1.6 million in the first quarter of fiscal 2018. The decrease in revenue was primarily from a large decrease in our delivered subscription SaaS product offset by an increase for a perpetual license sales on this quarter. SaaS revenue was $764,000, in the first quarter of fiscal 2019, compared to $1.5 million in the first quarter of fiscal 2018. The primary reason for the decline are due to the loss of a few large customers for various reasons. In one case, a large customer chose not to renew their subscription. In another case, our customer was acquired and therefore it was not able to renew contract. Also contributing to the decline was the price reduction for another large customer contract due to a change in their business model. Our hosting revenue decreased from $303,000 in the first quarter of 2018 to $257,000 in the first quarter of this year. The decrease in revenue was primarily due to the larger customer who's not renewed their contract. Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses, and hosting, decreased to $1.1 million in the first quarter of fiscal 2019, compared to $1.9 million in the first quarter of last year. Again, this decrease is driven by the decline in SaaS revenue as previously mentioned. Our annualized recurring revenue or ARR at the end of the first quarter was approximately $4.6 million. Our new engagements are typically three-year contracts with one year auto renews. Our services revenue was $1.1 million in the first quarter of fiscal 2019, compared to $2.1 million in the first 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 they saw new engagements and providing add-on services t our existing customer base. Gross margin for the first quarter was 4.35%, compared to 50.7% in the first quarter of the last year. The decline in the margin is due to the decline in license revenue, as well as the drop in services margin. Cost to host our subscription customers with our partner, Amazon Web Services, are relatively fixed costs and therefore can impact our margins. We will continue to review our hosting infrastructure, which is highly scalable. We have invested in baseline improvement and can deliver better margins as the customer base grows new products are hosted for existing customers. We reduced our operating expenses by 13.5% to $2.0 million for the first quarter fiscal 2019, compared to $2.4 million for the first 2018. Please note that this excludes a noncash goodwill impairment charge of $3.7 million. Over the past two years we've committed to a restructuring plan and have significantly reduced our facilities costs and our overall general spending. In fiscal 2018 we adopted a new accounting standard that simplifies the impairment testing for goodwill. The carrying value of our Company is compared to the fair value, and if there's an impairment, then that is recorded as a charge in that period. We did an impairment test in the first quarter of 2019, and this resulted in noncash goodwill impairment charge of $3.7 million, and this is due mainly to the decline in our stock price. Moving to the bottom line, our net loss of $5 million compared to $30,000 in the first quarter of fiscal 2018. As mentioned, the $5 million loss this quarter included impairment charge of $3.7 million. So, excluding the goodwill impairment charge, the net loss was only $1.2 million. Our non-GAAP adjusted net loss was $1.1 million or a loss of $0.10 per diluted share in the first quarter compared to non-GAAP adjusted net loss of $$233,000 or a loss of $0.06 per diluted share in the first quarter of last year. Our adjusted EBITDA for the first quarter of 2019 was the loss of $866,000 compared to a loss of $94,00 first quarter of 2018. I'd now like to turn our review to the balance sheet. As of December 31, 2018, the Company had cash and accounts receivable of $4.4 million. Our total assets was $9.3 million and our liabilities were $5.4 million. Total debt at December 31, was $2.5 million, comprised of $1.9 million outstanding on our line of credit and the remaining amount related to the term loan. I’d like to thank you all for listening. At this time, we'd like to open up the call to Q&A.

[Operator Instructions] Our first question or comment comes from the line of Howard Halpern from Taglich Brothers. Your line is open.

What type of gross margin are we looking at for the revenue from the acquisition?

Sure. Yes. So, the company that we bought is named SeeVolution and they -- their product line is Celebros. And, this is SaaS software, very little professional services associated with it, that is in the high 70% gross margin range. And one of the great things -- that's good margin in the space is that their technology is based on the same stack that ours is. So, we're available to merge infrastructures, and that's going to allow us to have economies of scale and improve both there's and our gross margin even further.

Okay. And this is just really a product and customer acquisition, so operating expenses except for maybe one-time to hit acquire the assets. Is that all we're looking at?

That's what we did is we did an asset purchase. And so, we’ve purchased contracts for over 80 customers, all of the intellectual property, and we’ll continue to service those. The employees of Celebros are now employees of Bridgeline. There's no other significant...

How many new employees will you have?

Only 10.

Okay. And I don't know if you had mentioned this, of the 80 customers, what type of industries are there? And what kind of opportunities does that give you in the cross-sell?

Okay. So, the customers for Celebros are all ecommerce sites. So, they're all transactional. And about half of them are in the United States and half of them are in Europe, a couple of in Australia as well. But that's for the bookmark as U.S. The companies tend to be smaller than the Bridgeline company. So, Bridgeline’s customers generally are falling in the $200 million to $2 billion range, more or less. And here, I would say, the fees [ph] are broadly in the $50 million to $200 million range with some outliers there. And, we expect that we'll be able to have faster sales cycles with the Celebros products. So, this is a software that sells much quicker than the full deeper platform. We expect that all of the Celebros customers and the new customers will come on-board with Celebros, will look at the Bridgeline suite when it's the right time in their own business cycles to replatform their website. And that will allow us to -- in addition to our current marketing efforts, have .faster and lower customer acquisition costs on the cross-sales. In addition to all of that, Celebros has a great partner network that brings -- leads, and this is something that we have as a strategic initiative for 2019 to create partner network. So, this bootstraps that initiative and allows us to come out of the gate with momentum.

And one last one, you talked about you've got some Celebros contracts already in January. Do you have visibility as to a monthly uptake or quarterly uptake of new customers that might be in the pipeline?

We do have good visibility of the pipeline, and we're expecting that we're going to continue to see multiple new customers coming in every quarter, if not every month. We don't have any specific details on that pipeline to share on this call. But, it operates at a -- there is smaller deals, but they are still much faster and there’s going to be a much larger volume of them.

Okay. I’ll look forward to seeing how it incorporates in the future. Thanks.

Great. Thank you, Howard.

[Operator Instructions] I'm showing no additional audio questions in the queue at this time, sir.

Great. Okay. Well, thank you. We appreciate the support, 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’ll look forward to speaking again on our second quarter 2019 conference call. Have a great day everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.