Bridgeline Digital, Inc. (BLIN) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Bridgeline Digital Inc. Second Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to your host, Mr. Mark Downey, Chief Financial Officer for Bridgeline Digital. Sir, please go ahead.

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 2020 second 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 earnings release by visiting our website. I would now like to turn the call over to Ari Kahn, our President and CEO. Ari?

Thank you, Mark, and good afternoon, everyone. Bridgeline continues to see growth in subscription and license revenue, as well as improvement to our bottom line. Revenue increased 20% over this quarter last year, and license and subscription recurring revenue is up 42%. Customer renewals for licenses and subscriptions are the foundation for the future growth and remain strong today. An important focus for the business is its bottom line, which has also improved. Our strategic goal for this year remains on track and specifically our profitability expectations have not changed. Net income is strong, but includes several non-cash adjustments, adjusted EBITDA is a better metric for profitability, which we expect to be positive in the second half of this year. My heart goes out to all those hurt by the COVID-19 pandemic, which is first and foremost a health issue, but also an economic one. The pandemic will create predictable and several unpredictable challenges as well as opportunities. One challenge and opportunity is that both commerce and community will become even more enabled through the online world. This is Bridgeline's expertise, and we're here to help our customers and other businesses get the most out of their online stores and employee portals. We can expect elongated sales cycles and delays and team coordination that impact implementation timelines as businesses adjust. I expect Bridgeline to come out of this crisis even stronger than we were when we entered it, with a more healthy bottom line, deep strategic value demonstrated to our customers, and an efficient sales organization. I'll take a few minutes to share the impact we have seen due to COVID-19 outbreak, the actions we've taken and how it relates to our longer-term strategic plans. Bridgeline's operations have supported remote work for years, which is common for software companies. Our processes and culture continue to operate as efficiently today as our work force at home, as they did prior to the outbreak. We conduct daily video conferences, regular internally as well as with our customers and in fact this afternoon, we have a company-wide Zoom scheduled, which helps maintain a strong team work and internal communications. We did cancel our bi-annual customer conference, now focused instead on one-on-one customer communications including video conferences to maintain strong relationships. Bridgeline supports these customers by empowering their online commerce, enabling online communication with our customer and employees and providing internal portals for their teams to collaborate. These capabilities are increasingly critical to our customers during the COVID-19 outbreak. We've participated in strategic conversations with our customers to ensure we can support their needs and to make suggestions on additional capabilities that we can provide to them, they may not be using already. This has resulted in some new sales within our existing customer base that may not that have occurred had we not been in this outbreak. Some of our customers are impacted more greatly than we are, especially those with brick-and-mortar operations like restaurant chains, franchises of gyms and salons. In a few instances, our customers have requested extended payment terms and in the spirit of compassion and partnership we've worked with them in this regard, but this has been an exception. Our DSO remains strong, so our customers have been able to make payments on time, and we don't expect that to become an issue. The primary economic impacts to Bridgeline are slowdowns and implementations and enhancements to our customers' online stores as they reorganize themselves for remote work within their operations. Bridgeline's professional services team typically collaborates closely with our customers and these projects, so when our customer is not available for certain parts of the project, the project must go hold. Since these projects are built on time material basis, the delays impact services revenue and we saw this in March. We have not seen customer projects cancelled, and in fact, there is likely pent-up demand, but we have seen the delays and with the summer upon this, we expect project delays to continue. So we've made some team adjustments that allow us to remain on track and achieve our profitability goals. Throughout the rest of this year, we are structured to maintain strong professional services gross margins, and also are prepared to respond to an uptick when our customers are ready to focus on their implementations and customizations again. We have not experienced and do not expect the COVID-19 outbreak to impact subscription renewals, which account for the majority of our gross profit and revenues. In general, customers have expressed that Bridgeline powered portals of the web stores are expected to be an even more strategic part of their businesses going forward. They continue to renew their subscriptions to our software with several customers choosing multi-year renewal contracts to lock in pricing for 2021 and beyond. Furthermore, the upfront investment and collaboration required to re-platform makes continued partnership with Bridgeline even more attractive for our customers during uncertain times. Our strongest demand is in our Celebros product line. Celebros provide immediate measurable growth in online revenue for our customers through its intelligent search capabilities. We recently published a study where Celebros help the customers grow revenues by more than 30%. New engagements with Celebros do not require customization services and therefore, Celebros has a more rapid sales cycle without the requirement of in-person meeting. Our Unbound and Orchestra product lines have several features that are out of the box like Celebros' such as online recommendation engines, marketing automation, campaign management as well as coupons and promotion engines. Historically, those capabilities were bundled with our platform systems that require personalized services. We are separating these capabilities in the independent product modules or bundling them with Celebros, so that we'll be able to grow customer base through online and telephonic sales for these products, as we do with Celebros. This is intended to reduce our customer acquisition cost and further increase subscription revenue relative to the services revenue for the business. We announced the strategy prior to COVID-19 outbreak and structured the business around these types of inside sales. But from a new customer acquisition perspective, it is very much in line with growth given the new constraints created by the pandemic. We have rebuilt our sales team around telephonic sales and are conserving much of our marketing budget until later in the year, as we expect buying decisions to be a little bit slower this spring as companies adjust to the crisis. New customer acquisition and our second quarter included businesses in the U.S., Europe and in Asia. The breadth of this geography is based on our out-of-the-box strategy and go-to-market strategy around telephonic sales. One of our recent wins was a retailer with over 2300 stores. With the decline in foot traffic, our online commerce solution becomes even more strategic to their business. We recently launched an online site for a manufacturing business, offering office and safety products including personal protection equipment, such as disposable face shields and social distancing markets for retail stores. Bridgeline helps this manufacturer to increase online traffic by 65%. Bridgeline had 90 renewals for the quarter, booking over $1.5 million in subscriptions. Renewals include multinational biopharma companies, an international chain of convenient stores with more than 50,000 locations and a chain of pharmacies with nearly 10,000 locations. Overall, Bridgeline is structured to be a successful business during this downturn based on its existing customers and subscription contracts. We've been fortunate and that the strategic changes that we made to our R&D efforts prior to the outbreak and some changes to our sales structure are compatible with the different economic and social environment that we're in today, and the strategic value we provide to our customers positions us well for the success in the long term. At this time, I'd like to turn over the call to our Chief Financial Officer, Mark Downey to speak to the specifics in finance.

Thanks Ari. Today, I will review our financial results for the second quarter of fiscal 2020 ended March 31, 2020. In March, the World Health Organization declared the outbreak of the Novel Coronavirus Disease, COVID-19 as a pandemic. And while we anticipated our operations in all locations to be affected, we have a robust business continuity plan even as the virus continues to proliferate. We have adjusted certain aspects of our operations to protect employees and customers, while still meeting customers' needs for mission-critical technology. We will continue to monitor the situation closely and as possible that we may implement further measures. Total revenues for the quarter ended March 31, 2020, increased 20% to $2.7 million as compared to $2.2 million for the same period last year. The following are the various components of revenue. Recurring revenue, which is comprised of SaaS licenses, maintenance, and hosting revenue increased 42% to $1.8 million for the quarter ended March 31, 2020, from $1.3 million for the same period last year. As mentioned in prior earnings calls, deferred revenue accounting rules associated from our 2019 acquisitions dictated that full contracts are not recognized upon acquisition. But only a portion of those revenues associated with OrchestraCMS has been reflected. We are now able as of March 1, the first annual license payment after acquisition to recognize the full 100% value of these acquired contracts. Subscriptions and license revenue which is comprised of recurring revenue and perpetual license revenue, increased 63% for the quarter ended March 31, 2020 to $1.5 million from $1 million for the same period last year. Services revenue was consistent at $900,000, for the quarters ended March 31, 2020 and 2019 respectively. As a percentage of total revenue, services revenue decreased 9% to 33% of total revenue for the quarter ended March 31, 2020, compared to 42% of total revenue for the same period last year. Bridgeline's focus is on increasing license revenue with some of our newer products, such as the Celebros product line, which require little or no service to implement. This focus along with the company's new partnerships and customers' ability for self-service are expected to further increase our license to service ratio over time. Total revenues from our two acquired businesses comprised approximately 38.5% of the total revenues for the quarter ended March 31, 2020. As I mentioned earlier, this does not represent a full normalized quarter due to purchase accounting principles, where acquired deferred revenue contracts are not realized at the first - at their full value upon acquisition date. Upon the first annual renewal license payment and to acquisition, we are now able effective March 1 to recognize the full value of these acquired contracts. Gross margin increased to 57% for the quarter ended March 31, 2020 compared to 27% for the same period last year. Cost of revenue decreased 26% or $400,000 to $1.2 million for the quarter ended March 31, 2020, compared to $1.6 million for the same period in 2019. Operating expenses remained consistent at $2.6 million for the quarters ended March 31, 2020 and 2019. Included within the quarterly totals as of March 31, 2020, are restructuring charges of $365,000 related to reduction in force of our U.S. and Canada operations aimed at improving efficiencies by eliminating redundancies and combining functions and certain responsibilities. And for the quarter ended March 2019, acquisition charges of $304,000 related to the acquisition of Stantive respectfully. As we have previously stated on conference calls, we have concluded on March 12, 2019, the sale of 10,227.5 units of Series C preferred stock and associated warrants with a market value of $21.5 million less the gross proceeds received of $10.2 million, which resulted in a noncash charge to warrant liability expense of $11.3 million. The net proceeds for this transaction were allocated to each of the freestanding financial instruments, based on their fair values were comprised of the preferred stock and warrants. Due to fair value derivative accounting rules, the derivative warrants are independently revalued on a quarterly basis. For the quarters ended March 31, 2020 and 2019, this revaluation resulted in a $1.8 million and $1.1 million non-cash gain to change in fair value of warrants, liabilities respectfully. Also included within the March 31, 2019 results are the write-off of unamortized debt and cost to discharge loans in the amount of $221,000. Net income applicable to common shareholders for the fiscal quarter ended March 31, 2020 is $795,000 compared to a net loss of $12.6 million for the same period last year. Adjusted EBITDA loss for the quarter ended March 31, 2020 is $331,000 or a loss of $0.08 per diluted share, compared to $1.5 million or a loss of $5.09 per diluted share for the same period in 2019. Our non-GAAP adjusted net income for the quarter ended March 31, 2020 is $1.5 million or a gain of $0.33 per diluted share, compared to an adjusted net loss of $12.1 million or a loss of $39.94 per diluted share for the same period in 2019. At March 31, 2020, the company had cash of $234,000 and accounts receivable net of $874,000. Total days sales outstanding for the quarter ended March 31, 2020 was 45.3 days, an improvement from a beginning of the year high of 48.8 days. The primary reason for these improvements for the three months ended March 31, 2020 can be attributed to our exceptional strong customer relationships and consistent conversion of accounts receivable into cash. In February 2016, the FASB issued an ASU 842 lease which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. This new standard requires lessees to recognize most leases on their balance sheet or the rights and obligations created by those leases. As a result of adopting the new standard as of October 1st, 2019, the company has recognized as of March 31st, 2020, operating lease assets and liabilities of approximately $385,000. On December 31, 2019, the company filed a first amended and restated certificate of designations for the Series A convertible preferred stock, which amended and restated the Series A preferred stock conversion price, mandatory conversion, redemption option and dividends. The company has 264,000 shares of Series A convertible preferred stock, which may be converted into the same equivalent number of shares of common stock. As of March 31, 2020, Series A preferred shareholders have converted 41% or 107,416 shares of Series A convertible preferred into 613,806 equivalent shares of common stock. On April 17, 2020, the company entered into a loan with BNB Bank as the lender in an aggregate principal amount of $1,047,500, called PPP loan, which is pursuant to the Paycheck Protection Program under the CARES act, the Coronavirus Aid, Relief, and Economic Security Act. The PPP Loan is evidenced by a promissory note. Subject to the terms of the Note, the PPP Loan bears interest at a fixed rate of 1% per annum, with the first six months of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the Small Business Administration. The company may apply to the lender for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of payroll costs, covered rent obligations, and covered utility payments, incurred by the company during the eight-week period beginning on April 21, 2020, calculated in accordance with the terms of the CARES Act. Our total assets are $10.8 million and total liabilities of $6.1 million. There is no debt on the balance sheet as of March 31, 2020. Financial outlook, I want to wrap up our presentation with some financial outlook. We expect to generate positive adjusted EBITDA for the second half of fiscal 2020. Thank you all for listening and at this time, we would like to open up the call to Q&A.

[Operator Instructions] Your first question comes from the line of [David Hoff]. Your line is open.

I'm a Private Investor. And I was - just got into your call a few minutes late, but I see that the market has reacted very favorably to news, so I'm anticipating that the positive earnings and as a shareholder, one of the things about your company that I'm very - unique and interesting is that, there are 2 million plus shares outstanding, is that correct?

In terms of total shares outstanding, it sounds about right.

Yes. 2,800,060. And I guess that was due to a reverse split that took place in the past. So I'm wondering that's the extremely low amount of shares, for the average company to have. Would your company anticipate the possibility of having a split at a certain price if the stock price was to go up to a certain point, to increase the number of shares?

Well, I can see something like that happening or as we grow in the stock and improve significantly in our market, there are acquisition opportunities, whether it could be a chance to increase the share price in the context of the number of shares, in the context of the financing and acquisition, but neither of those are really something that we expect happening in the immediate future.

[Operator Instructions] I'm showing no further questions at this time. I would like to turn the conference back to Mr. Ari Kahn, President and CEO. Sir, please go ahead.

Thank you. 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. Thank you for joining us today. We look forward to speaking again on our Q3 fiscal 2020 conference call this summer. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.