Bridgeline Digital, Inc. (BLIN) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Bridgeline Digital Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. Now it is my pleasure to turn the call to Mark Downey, Chief Financial Officer for Bridgeline.

Thank you and good afternoon, everyone. My name is Mark Downey, and I am the Chief Financial Officer for Bridgeline Digital. I am pleased to welcome you to our fiscal 2019 third 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 financials 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 President and Chief Executive Officer.

Thank you, Mark and good afternoon everyone. In our second quarter this year Bridgeline acquired two companies, Stantive and SeeVolution, which transformed our company's market position and financial status. These acquisitions brought us the Celebros and OrchestraCMS products and more than doubled our customer base and doubled our backlog and annual recurrent revenue. They brought artificial intelligence technologies into our products suite and helped establish a partnership with salesforce.com that has made a substantial impact on our company's sales pipeline and ability to win competitive sales opportunities. With OrchestraCMS and Celebros Bridgeline now has over 200 customers and a projected backlog of $27 million in recurring revenue over the next three years using historical renewal rates for the new products. As discussed on our previous conference call, most revenue associated with Stantive contracts cannot be recognized until the first anniversary of that acquisition. So our recognized revenue on those licenses will grow each quarter until February 2020 which should result in the company's and sequentially increasing fast revenue quarter-over-quarter and drive a stronger bottom line. By combining these three companies, we have not only improved our competitive position in the market and lock-in stronger recurring revenue going forward, we have also found substantial operational synergies. We created $4 million in annual operating improvements with all restructuring charges being reflected within our third quarter results. No restructuring costs going forward. Integration is now complete and we expect no future restructuring initiatives. Furthermore, we found combined technical synergies that are expected to improve our gross margins and our gross margins on our new OrchestraCMS licensing platform are over 85%. With these operational improvements Bridgeline has paved the way to become a profitable software company in 2020 after we can recognize all deferred OrchestraCMS license revenue. This is a uniquely strong financial position for marketing technology SaaS business of our size and we intend to leverage this strength to become a market leader in the broader marking technology space. Integration of the three businesses were completed very quickly due to the natural synergies between the company's technology and customer bases. In this short timeframe Bridgeline launched 15 customer websites, seven of which were on our newly acquired product lines. Our new customers are renewing their licenses and are growing the multiyear renewals which has brought our contractual backlog from $6.6 million to approximately $10 million and when renewals are projected the three-year backlog grew from $13.4 million to $27.4 million of which $14 million is from new customers acquired. Renewals include one of the five largest chains of pharmacies in the United States with over 10,000 store locations and a global biopharma company with over $20 billion in revenue and 20,000 employees. Until these acquisitions, Bridgeline had only a small part of the program with most sales being sourced from direct marketing efforts. Today we have partnerships with salesforce, shopify, Magento, Microsoft, and UPS, all of them adding to our pipeline. In the first quarter post acquisition of the combined companies, our sales pipeline has expanded significantly and we closed six Celebros sales alone which are nearly pure license sales and add to our staff backlog. We also won a new manufacturing customer who is making the transformation from a pure B2B company into a B2B and B2C business with over $0.5 million initial investment in Bridgeline Technologies to achieve this goal. Bridgeline has helped many companies make this transformation over the years especially in the manufacturing sector and our new software establishes an even stronger position for this market. Bridgeline now has several healthcare customers who total $650,000 in annually recurring SaaS revenue including three top-tier pharma customers and five major hospitals. Franchises, brand networks and chains have long been a differentiating strength for Bridgeline and we are now even stronger in that segment. We now have over $1 million in annual recurring revenue in brand networks alone. We have over $1.5 million in recurring revenue in the finance sector and most of the revenue is contractually committed through 2021. The company now has a great path towards been a profitable business in 2020 and our ability to recognize all revenue from the acquired customers has achieved within a strong presence in key markets and great differentiating technologies and partners for top line growth. We are very excited about our future. At this point, I would like to turn the call over to our Chief Financial Officer, Mark Downey who will provide more detail on the financial results for our third quarter.

Thanks Ari. Today I will review our financial results for the quarter ended June 30, 2019. Total revenue for the quarter ended June 30, 2019 was $2.7 million compared to $3.1 million for the same period last year. The following are the various components of revenue. Recurring revenue which consists of SaaS licenses, annual maintenance on professional licenses and hosting increased 5% to $1.6 million for the quarter ended June 30, 2019 from $1.5 million for the same period in 2018. Accounting rules dictate that the full contract is not recognized upon acquisition and therefore only a portion of the revenue associated with the OrchestraCMS will be recognized. Upon the first annual license payment of these acquired contracts we will be able to recognize the full value of the contracts over the term of the license. SaaS revenue which represents 78% of the June 30, 2019 quarterly recurring revenue increased 8% to $1.2 million from $1.1 million or 76% of the June 30, 2018 quarterly recurring revenue. Hosting revenue increased 4% to $300,000 or 9% of total revenue for the quarter ended June 30, 2019 from $200,000 or 8% of total revenue for the same quarter last year. Services revenue was $1.1 million or 42% of total revenue for the quarter ended June 30, 2019 compared to $1.6 million or 51% of total revenue for the same period last year. Bridgeline's focus is on increasing license revenue in some of its newer products such as the Celebros product line require little or no services to implement. This focus alone accompanies new partnerships in customers' ability for self service are expected to further increase our license to service ratio over time. Our annualized recurring revenue or ARR for the quarter ended June 30, 2019 is approximately $8.5 million. New engagements are typically three-year contracts with one year order renewals. However, some of our OrchestraCMS customers have elected multiyear renewals. Our contractual backlog is approximately $10 million and is projected to be $27.4 million based on historical renewal rates. Total revenues from our two acquired businesses comprise approximately 36% of the total revenues for the quarter ended June 30, 2019. It is important to know that this does not represent a full normalized quarter because as mentioned above, to purchase accounting principles acquired deferred revenue contracts are not realized at their full value upon acquisition date. Now I'll talk about operating expenses. Operating expenses for the quarter ended June 30, 2019 decreased 40% to $4 million from $6.7 million for the same period last year. Included within these amounts are restructuring and acquisition related costs of $900,000 for the period ended 2019. Note that a goodwill impairment charge of $4.6 million occurred last year for the same period ended 2018. Naturally the added headcount from the two acquisitions increased costs and it also increased our sales infrastructure. The restructuring charges applicable to these changes have been executed in this quarter and we will see a reduction in overall operating expenses that will more closely align with our revenues in future periods. Interest and other expenses. As mentioned on our previous earnings call in May, which included the sale of 10,227.5 units of Series C preferred stock and associated warrants for gross proceeds of $10.2 million. The net proceeds for that transaction were allocated to each of the freestanding financial instruments based on their fair values, which were comprised of the preferred stock and the warrants. Due to fair value derivative accounting rules, the original fair market valuation of the preferred stock and warrants at March 31, 2019 was $21.5 million less the proceeds received of $10.2 million resulting in a non-cash charge other expense of $11.3 million in March. On June 30, the derivative warrants were independently revalued resulting in a $10.1 million non-cash gain to other income. The net result of these two non-cash transactions resulted in an overall net charged income of $100,000 for the nine months ended June 30, 2019. Adjusted EBITDA, non-GAAP adjusted net income and GAAP income. Net income for the quarter ended June 30, 2019 is $7.3 million inclusive of a non-cash gain to other income attributable to the change in fair value of certain derivative warrant liabilities of $10.1 million and restructuring and acquisition related costs of $900,000 compared to a net loss of $5.2 million for the quarter ended June 30, 2018. Adjusted EBITDA loss for the period ended June 30, 2019 is $1.6 million compared to $300,000 for the same period in 2018. Our non-GAAP adjusted net income for the period ended June 30, 2019 is $8.6 million or earning of $4.21 per diluted share compared to non-GAAP adjusted net loss for the same period in 2018 of $300,000 or a loss of $4.06 per diluted share. Turning to a review of Bridgeline's balance sheet, at June 30, 2019 the company had cash of $1.3 million and accounts receivable and unbilled receivables net of $1.7 million. Our total assets are $13.2 million and total liabilities are $10.1 million. There is not debt on the balance sheet as of June 30, 2019. Thank you all for listening and at this time we would like to open the call up to Q&A.

Thank you. [Operator Instructions] And we have a question from the line of Howard Halpern with Taglich Brothers. Your line is open.

Good afternoon guys.

Hi Howard, how are you?

Good afternoon.

I'm okay. With I guess, the restructuring complete, can I guess you go over a little bit of now what and you have now offered units what's the average sales cycle time and then implementation once a customer is acquired?

Sure, sure. So the Celebros product line has an average sales cycle of two or three weeks, so we had made six sales and 12 weeks in our third quarter, so I guess that's a two-week average and there is very little implementation effort on that is may be a week worth of implementation. On both the OrchestraCMS and the Bridgeline Unbound, the sales cycles there are four to six months with implementation times and with six-month range as well. The OrchestraCMS sales we tend to commence those deals later in the sales cycle because we're being introduced by salesforce.com in many cases. So the sales cycle might already be two months in before we enter that [indiscernible] four months of our participation.

Okay, and now, I guess in terms of really nice outlook for 2020, what for modeling purposes I guess, what would you estimate what top line revenue would get you to operating income or operating breakeven?

Sure. So, we're going to have top line income in the $5 million range to be generating net income and most of that revenue is kind of locked in already. We are not recognizing all of that yet because of this transaction accounting and the acquired contracts. But the first anniversary for all the acquired contracts is February 2020. And at that point, based on what we have already we're going to be pretty close there and we think that we're going to be generating positive net income early in 2020. And also, you know, we've got no debt on the books right now. We finished the quarter with decent cash balance and do not anticipate doing any equity raising or anything between now and then, possibly establishing a credit line or something, but that would be it.

Okay and now that you've sort of established this industry platform are there any, is there a pipeline that you're looking at a potential bolt-on type acquisitions that could leverage what you've done?

Right, well we are being approached by companies regularly, like more than once a month to review acquiring them. So we're seeing a lot of activity there and we able to integrate these businesses very quickly within three months. The company operates as a single company. So from an operational perspective, integrating another $2 million to $5 million business would not be a problem at all. That said, we want to establish a couple of quarters of showing bottom-line results. We think that that's going to be meaningful to investors. So our primary focus is operations right now is more of an opportunistic review of incoming acquisitions. We do think that strategic acquisitions are a key part of our future and in 2020 we'll make an even greater concerted effort to review opportunities.

Okay, well keep up the great work. It seems like the transformation is going as planned.

Great, thank you.

Thank you. [Operator Instructions] Our next question is from Pearl Lee with Accord Partners

Hi. We just have a brief question on the goodwill impairment and financial, can you repeat what the goodwill impairment is for this quarter and then go and explain why you have the goodwill impairment cost impact over the past like five quarters?

Sure. So we did not have goodwill impairment this quarter. We had goodwill impairment the same period last year. And that impairment is really just based on our stockholders equity versus the share price. So it was not a cash event and had nothing to do with operations or revenues or anything like that.

Okay, so going a little bit further on that, I think for your quarter two 10-Q and the goodwill portion you kind of noted that some of the goodwill impairments costs came from what was CMS acquisition, are you saying that that's true?

Looking at the previous quarters?

Yes.

So that would be, I got to pull off last quarter's to look at that. So this quarter Q3 there is not, and in Q2 it is really related to the same thing. So we did a capital raise in Q2 that changed stockholders equity and the market price of the stock is what invokes the goodwill impairment. That was the same thing I was talking about a year ago.

All right, thank you.

Thank you, Pearl.

Thank you. And sir, I'm not showing any further questions in the queue. I would like to turn the call back to Ari Kahn, the President and Chief Executive Officer for his final remarks.

Great, thank you. Well we appreciate the support and patience of all of our shareholders and it is our goal to continue building a scalable business model which in turn will build shareholder value. Thank you for joining us today and we look forward to speaking again on our Q4 fiscal 2019 conference call.

And with that, ladies and gentlemen, we thank you for participating in today's conference. You may now disconnect. Have a wonderful day.