Greetings, and welcome to the Bazaarvoice First Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Linda Wells, Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to today's conference call to discuss Bazaarvoice financial results for the first fiscal quarter ending July 31, 2017. I'm joined today by Gene Austin, Chief Executive Officer; and Jim Offerdahl, Chief Financial Officer. [Operator Instructions]. Please note that we are simultaneously webcasting this call on our Investor Relations website at investors.bazaarvoice.com. The earnings release with our results for the first fiscal quarter of 2018 was issued after the market closed today. Certain statements made during this call, including those concerning our business outlook and guidance, growth plans and opportunities, potential acquisitions, outlook on legal matters, sales execution and the ability to capitalize on our opportunities, are all forward-looking statements. Forward-looking statements are subject to a number of risks, uncertainties and assumptions that are described in our SEC filings, including the Risk Factors section of our Form 10-K for the fiscal year ended April 30, 2017, filed with the SEC on June 16, 2017. Additional information will also be set forth in our future quarterly reports on Form 10-Q, annual reports on Form 10-K and other filings that we may make with the SEC. Should any of the risks or uncertainties materialize or should any of our assumptions prove to be incorrect, actual results could differ materially and adversely from those anticipated or implied in these forward-looking statements. We do not intend and undertake no duty to release publicly any update or revisions to any forward-looking statements made during this call. Finally, some of the numbers that we will discuss today during this call will be presented on a non-GAAP basis. Today's press release, together with the accompanying tables, contains the calculations of these non-GAAP financial measures and a full reconciliation between each non-GAAP measure and its corresponding GAAP measure. Please note that we're unable to reconcile any forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. In particular, we cannot reliably estimate our future stock-based compensation expense, which is dependent on our future stock price, and we expect our future stock-based compensation expense to have a significant impact on our future GAAP financial results. With that, I'll turn the call over to Gene.

Thank you, Linda, and thank you all for joining the call today. The first quarter was a strong start to fiscal 2018. We were pleased to see both our revenue growth rates increasing and our adjusted EBITDA margins expanding as we begin our new year. We delivered revenue of $52.2 million, well ahead of our guidance and an increase of 4% year-over-year, our best growth rate since Q4 of fiscal 2016. We also exceeded our guidance on adjusted EBITDA posting $6.7 million for the first quarter, representing a margin of 13%, which was the highest in our public company's history. On the heels of these strong first quarter results, we are raising our full year revenue and EBITDA guidance, which Jim will cover in more detail. In addition, we launched Brand Edge during the quarter, which should drive additional revenue as we target the large market for brands with our newest CGC offering. And last but not least, our shopper advertising initiative produced a good quarter with increased sales productivity and a clear step forward in market awareness. Let me begin with more detail on our SaaS business. During the first quarter, our services revenue jumped nicely as we began to deliver on innovations in both professional and managed services. Over the last several quarters, we have introduced new services to ensure our clients are seeing strong value from our CGC offerings, which helps both revenue growth and retention. Managed services, which generally are recurring in nature, have grown consistently since launching last year led by our sampling offering. Market reaction to and demand for our increased portfolio of services has been very good, and we expect that to continue. On the heels of an over 500 basis point improvement in dollar churn last fiscal year, our dollar churn in…

Thank you, Gene, and thank you again to everyone who joined our call. Today, we are reporting results for our first quarter of fiscal 2018 ended July 31, 2017. For the first quarter, we achieved total revenue of $52.2 million, up 4% year-over-year and well above our guidance range of $49.4 million to $50.2 million. We achieved SaaS revenue of $49.3 million, up 3% year-over-year. As Gene highlighted, our SaaS growth rate has increased primarily due to strong delivery of services as well as our net bookings performance in fiscal 2017. We achieved total advertising revenue of $2.9 million, up 24% year-over-year. Productivity of our advertising team selling managed services campaigns grew nicely year-over-year, fueling 42% growth in such revenue, while our legacy advertising revenue continued to decline. We achieved positive adjusted EBITDA of $6.7 million, up significantly year-over-year and above our guidance range of $3.4 million to $4 million. At 13% of revenue, our adjusted EBITDA margins in Q1 where the best since becoming a public company, primarily because of higher-than-expected revenue as well as lower-than-expected headcount. We are quite pleased with our continued increases in adjusted EBITDA as we continue to improve profitability while strategically investing for growth. Our GAAP loss per share for the quarter is $0.03. Our non-GAAP earnings per share was $0.04, well above our guidance of a loss of $0.00 to $0.02. As Gene noted, we had a successful Brand Edge launch in Q1. Most of the bookings dollars were sold with annual or longer contracts, while some bookings, which are smaller brands, using our month-to-month offering. Such brands provide upsell opportunities in the future when they choose to syndicate to additional retailers. Please note that such month-to-month Brand Edge clients are not included in our active client count, our client retention rate or…

[Operator Instructions]. Our first question is from Scott Berg from Needham & Company.

A couple of questions there. I guess, first of all, Gene or Jim, how would you breakdown the revenue outperformance in the quarter from the SaaS business or the Brand Edge or the media segment? Trying to understand what drove that or it's still a combination of everything?

Well, on the revenue side, Scott, Brand Edge had minimal impact on revenue. But we would say it was a material piece of bookings and we continue to believe Brand Edge will be a more material piece of bookings as the year unfolds. So it's not really material to revenue, but we added 30 new ASF-based Brand Edge folks. Meaning, people that signed up to annual or longer contracts. So I thought that was a good start for Q1 for Brand Edge. On the revenue side, the outperformance is -- we had a significant uptick in the advertising space. Recall that we made some cutbacks on sales capacity. We had strong sales productivity with that team. We aligned them around verticals. Those verticals performed well. And so we had good, strong performance from the advertising business, such that we’ve added a little more sales capacity here in Q2 for advertising and we continue to watch it well. We feel like advertising has picked up some momentum, generally speaking. On the SaaS side, most of the outperformance of the SaaS revenue was just strong delivery of services. As you know, we've invested in services for quite a while. The capacity to deliver that services ramped up in this last half of last year, and we had our excellent performance in delivering services overall in the marketplace. Part of that is obviously services to the core business, but we've also seen a nice uptick in our sampling service business, which was part of the overperformance in Q1.

Helpful there. Gene, you mentioned a lot on services both in that question and during the call in some of the different areas. But Jim, I wanted to see if you can help us understand the margin impact on the business because, usually, when we think of services we think of lower gross margins and typical softer revenues, but I know the mix is small. But if that business continues to perform well, how should we think about that impacting the overall margins of the business?

Yes. Scott, this is Jim. At this point, the gross margin impact to services is immaterial because the services, as a percent of revenue this year is probably going to be around 7% for the full year, so immaterial at this point. We do expect our services margins to grow as we deliver more and more services and have more capacity and get economies of scale. Economies of scale, we expect that to grow. So at this point, don't expect really much of a gross margin impact this year, and we're confident that we can have a good gross margin business going forward in services.

Got it. Last question for me, because I'll save the rest for off-line is, Jim, I wanted to see what you think about the current structure of the balance sheet. You guys are clearly generating cash over the last year. The expectations are you're going to generate more cash. Yet you still carry some debt, probably more than you need to at this point, especially with net cash position greater than $50 million. Why not just pay off the balance and save the $1 million plus a year in interest expense today?

Yes. We have been paying it down quite a bit. We're down to $22 million compared to a high of $57 million a couple of years ago. Basically, what we've chosen to do is as we generate free cash flow or see free cash flow coming, we typically pay it down. You've seen the track record over the last 3 or 4 quarters of paying it down. We would like to maintain some flexibility on our balance sheet around potential acquisitions. We look at them. We obviously haven't pulled the trigger in a while, but we do look at them from time to time. And if one comes along, we want to make sure we have the flexibility to do so. That said, we do expect our cash flow this year, free cash flow to be better than last year's. The last year's free cash flow was positive $5.7 million. We've been saying for a couple of quarters we expect this year to be higher than that.

Our next question is from Kevin Liu from B. Riley and Co.

Certainly, Q1 numbers looked pretty strong across the board. As you guided to Q2 here, it kind of implies revenue is down sequentially, and that really hasn't been the trend in either the SaaS or advertising piece historically. So just kind of curious, why -- which pieces would kind of drop off here in the second quarter and whether or not there is a fair amount of conservatism that's already baked in the numbers here?

Yes. Kevin, this is Jim. A couple of things. Advertising, we had a very strong Q1. Take rates were quite strong as well, and so that could be down sequentially, we're not saying that, but it could be. SaaS services was certainly stronger than we anticipated in Q1. Services delivery, that's harder to predict. And also churn in Q1, as I noted in my remarks was up from Q4, which impacts Q2 a bit as well.

Got it. That's helpful. And then on the receivable side, you talked about kind of the factors driving that up in Q1. As you guys start to sign up more clients on these semiannual or annual agreements upfront, should we expect the DSOs to remain elevated until you kind of start to lap the more recent trends?

Well, I mean, we've been running in the upper 70s to 80s in the last couple quarters. Some of that is driven by the longer billing terms. And again, the billing terms have been trending up a bit, so that's part of it. I do think we could probably do better. But that said, I mean, our aging is quite good, we had minimal bad debt expense and so I think our receivables are actually in pretty good shape, really good shape, actually.

And just lastly for me. Credio has been talking a little bit more about kind of the commerce marketing ecosystem that they hope to put together getting brands and retailers to work together to offset some of the data that Amazon has. It suddenly sounded a lot like what you guys have done already with your own shopper network. So curious as to whether you see this as a bit of a competitive offering or if it's something that you think you could ultimately participate in with kind of your retailers on your network?

From my standpoint, it is a validation of what we've done. I mean, I think it's -- I know we've had conversations with Credio over time and their strategy is to do something very similar to what we're doing. I think they've got some work to do to get there. They don't have that natural relationship with retailers and brands that we do from a content standpoint. But to me, it's validation of what we're doing. There's certainly an opportunity for us to work together, potentially, down the road. But right now, we continue to focus on innovating on the data we have, expanding the number of signals we get from each shopper. So I think, I like where we stand. I like the validation we're seeing, both in our personalization trials and also the advertising business, the repeat customer rate, the continued step up of our customers in buying more advertising.

[Operator Instructions]. And our next question comes from Mike Latimore from Northland Capital Markets.

This is Nick Altmann, on for Mike. Just a couple of quick ones. I believe you guys said last quarter that sales force productivity was up 15%. Can you just give us an update there?

On a transaction basis, sales force productivity was up 18%.

In Q1.

In Q1, now that was slightly offset by lower ASPs. So our ASPs were down. We expected ASPs to be down because if you all recall, we exited the small, medium business market a while back, but Brand Edge allows us to target small, medium business brands and so we have a product that we think really fits well there now. So ASPs came down, deal productivity went up. On a dollar basis, overall productivity was just don't slightly but still healthy.

Yes. And the number you cited was FY '17 dollar productivity per rep versus FY '16.

Okay. Okay. That's helpful. Great. And then how many people are selling Brand Edge now?

All of North America is in market with Brand Edge. We plan to launch in Europe later this month.

And we do have inside sales reps that we put in place to sell to small and medium-sized businesses. Brand Edge is to SMB, as Gene noted.

A lot of the Brand Edge market, we think, lends itself to inside selling. So we're excited about that capability and obviously, having a good portfolio of enterprise and inside sales folks.

Good. Good. Okay. And then just last one for me. What percent of SaaS bookings came from Europe in the quarter?

We don't generally quote that number. We're pretty consistent that revenues from the company, our international are 25%. So we don't publicly disclose the bookings breakdown by region.

Okay. Can you answer, did Europe bookings grow faster or slower than overall bookings?

Europe had a weaker quarter. Europe had a very strong Q4 and a weaker Q1. We're in a little bit of a cycle with Europe that we'd like a lot more consistency. I think, the thing -- we've made a leadership change there six months ago. The other thing, I think is exciting and a good future trend for Europe is that we are seeing a good focus on retailer acquisition in Europe. We have some nice deals working both in the continent and elsewhere. And as we add retailers, that creates our network, right? And as we create a network, that attracts more brands. So I think that there are good signals that Europe is on its way to the right spot. I wish the quarterly consistency was there, but I also have confidence in our new General Manager to straighten that out.

[Operator Instructions]. Our next question comes from Stephen Ju from Crédit Suisse.

So Gene, I think you answered this to some degree. But I was just wondering if there's any way to characterize the typical Brand Edge client? What vertical they may be in? And would this be something that is still far from household sort of recognized brands? And I guess, on the content syndication agreement with the unnamed search engine, are there any economics exchanging hands there? Or is it just the benefit, it's basically the pure, I guess, the traffic that you might be getting? I mean just pretty straightforward what they might be getting out of this agreement, but I'm not quite sure what you might be getting out of the agreement.

Sure. So there are definitely financial terms on this relationship for the content. There's a fixed fee amount. And then as we -- the more content we provide and we go out and get permission from our customers to share their content with the search engine, as we do that, we continue to pick up more revenue, right? And so we're very confident we will have a large number of our customers saying, yes, we want our review content on the search engine as they shop online. So I think that's going to be -- I think it's going to be a significant opportunity for us from a revenue standpoint. On the Brand Edge side, quickly, Brand Edge is targeting brands that rely solely on retailers for distribution and marketing, frankly. They do not have their own capability of selling or they don't do a direct-to-consumer sales model. We think that's about 60% of brands worldwide. And these are brands -- some of these brands are household names, multi-billion dollar global brands and some of them are going to be a lot of small, medium business organizations. What's different about Brand Edge is that it requires very little implementation effort. It is a very fast time-to-value product. And so we can go directly to a brand manager who is looking at 10 to 12 brands that he or she are going to launch this year. And the first thing they say to us is I need content and I need content in the retail channel as fast as we can go. And Brand Edge allows them to either contact their consumers directly and solicit content or they can engage with us on a sampling program and get content in a matter of weeks, syndicated to the retailers they care about and they're often running with their launch. We charge Brand Edge by their network, the amount of network they are able to access or syndicated to. So if the brands are very used to the pricing model which says, the more exposure my content has, the more I should be willing to pay. Early signs are faster sales cycles. We don't need IT's involvement to talk about this product and deploy it. We're talking directly to brand managers who have big budgets, especially around launches. So it's early, but we like the positioning of the product. We feel like we're uniquely positioned to sell it, and we're excited about what the rest of the year holds for.

A couple things that I would add to that is our retailers like this offering as well because, obviously, it provides more content and broader coverage for the SKUs that they have, that they're selling on behalf of the brands. And the other thing is we think it opens up a new market that would not buy conversations to -- for the reasons that Gene described, because a lot of brands just don't have the e-commerce capabilities, like Gene said, the direct-to-consumer model. And so it just opens up new market for us.

Understood. I mean this might be getting a little bit in the weeds, but I mean this is obviously marketing spend that they're reallocating to Bazaarvoice. So any idea -- I don't know if they give you this kind of feedback or not, but like where are they pulling budgets presumably to feed you guys? Is there any sort of feedback from the brands in that regard?

Well, what we know is the brand's launch budget is one of the largest budgets they have. We're tapping into that. They are content, and digital content is very important obviously for a launch of any brands. So the fact that we can talk about acquiring content and syndicating it very quickly for them, resonates well. I couldn't tell you at this early stage what they're pulling it from in their lunch budget, but I also know that the ability to get content quickly is resonating quite well so far.

Thank you. This does conclude the question-and-answer session. I'd like to turn the floor back over to Mr. Austin for any closing comments.

Thank you all. We look forward to seeing those of you at the Deutsche Bank conference next week in Las Vegas and reporting our Q2 results in 90 days. Thanks very much.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.