Michael D. Prinn - Chief Financial Officer and Executive Vice President Thomas L. Massie - Founder, Chairman, Chief Executive Officer and President.

Howard Halpern - Taglich Brothers, Inc., Research Division Mark Stafford - Stafford Holdings Ltd..

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital Third Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Michael Prinn..

Thank you, and good afternoon, everyone. I'm pleased to welcome you to our third quarter conference call.

Before we begin, I'd 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 based 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 in talking about the company's financial performance. We report our GAAP results, as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures, in our earnings release.

You can obtain a copy of our earnings release by visiting our website. At this time, I'd like to turn the call over to Bridgeline Digital's President and CEO, Thomas Massie..

Thanks, Mike, and good afternoon, everybody. Bridgeline continues to execute against a strategic plan to strengthen and grow a high-traction, scalable iAPPS business model. Our legacy business declined 28% in the third quarter of fiscal 2014.

However, and more importantly, our year-over-year total revenue grew 10%, and our core business revenue grew 20%. Recurring revenue increased 50%, and subscription and perpetual license revenue increased 64%.

In addition, in the third quarter, we booked over $9 million of new bookings, including the signing of a multiyear iAPPSds agreement with one of the fastest-growing hair care franchises in North America.

The total value of this new agreement is over $3 million, and 94% of the revenue related to this significant engagement will be recognized as SaaS license revenue beginning in late Q2 of 2015. Bridgeline contractually booked backlog. Our backlog is now approaching $26 million, and our qualified pipeline remains strong.

Bridgeline plans to have booked over 10,000 iAPPSds location licenses by the end of this calendar year. This would be up from 2,300 location licenses just 6 months ago. In addition, we are executing a well thought out plan that will potentially capture well over 40,000 various iAPPS location licenses in the coming years.

I am pleased to report our average iAPPS enterprise engagement remains to be at approximately $350,000. Mission-critical websites, Internets or Web stores are being developed around our award-winning platform, iAPPS, creating a high-retention customer base.

In the third quarter of 2014, we executed and we secured new engagements, enterprise engagements with organizations such as Allscripts, Broadridge. A large association for the supervision and curriculum development, and one of the most prominent social media companies in the world.

The areas of growth of our iAPPS business model is what's going to maximize shareholder value. As we deploy over 5,000 new iAPPSds licenses in fiscal 2015, Bridgeline will considerably increase its recurring SaaS revenue, providing significant improvements to gross profit margin, EBITDA and profitability.

At this time, I'm going to turn the call back over to our Chief Financial Officer, Mike Prinn, and he will give you more details about our third quarter fiscal 2014 financial results.

Mike?.

Thanks, Thomas. I'll review the results of operations for the third quarter ended June 30. Our third quarter revenue was $6.2 million compared to $5.6 million in Q3 of last year, an increase of 10%. Our subscription and perpetual license revenue increased 64% compared to the third quarter of last year.

This significant increase was the result of revenue from our iAPPSds sales, an increased demand in our iAPPS platform and the incremental revenue from our acquisition of ElementsLocal. Revenue from our core business increased 20% to $5.3 million in the third quarter from $4.4 million in the third quarter of last year.

This increase was also a result of an increase in our iAPPSds business, as well as the incremental revenue from our acquisition of ElementsLocal.

Our recurring revenue, which again consists of SaaS licenses, annual maintenance on our perpetual licenses and hosting, increased 50% in the third quarter of 2014 to $1.8 million as we continue to see an increased demand for our iAPPS product suite.

We continue to see a significant increase in our recurring revenue in future quarters as we deploy additional iAPPSds customers that are part of our $26 million backlog. Revenue from our non-iAPPS or legacy business decreased by approximately 28% when compared to the third quarter of last year.

We're now at the point where our quarterly revenue of the legacy business is consistently less than $1 million per quarter. Turning to gross margin. Our gross margin for the third quarter was 51%, which is consistent with the third quarter of last year.

Our adjusted EBITDA in the third quarter was a loss of $336,000 compared to an adjusted EBITDA loss of $899,000 in the third quarter of last year.

The $560,000 adjusted EBITDA improvement was the result of the increases in our third quarter revenues compared to last year, as well as operating expenses being approximately $100,000 less in the third quarter this year compared to the third quarter of last year.

Our non-GAAP adjusted net loss was $1 million or a loss of $0.04 per diluted share, compared to non-GAAP adjusted net loss of $1.4 million, or a loss of $0.09 per diluted share in the third quarter of last year. Our GAAP net loss was $1.3 million in the third quarter compared to a loss of $1.6 million in the third quarter of last year.

Turning to our balance sheet. At June 30, the company had total assets of $35 million with cash and accounts receivable of $5.4 million, and our DSO was 48 days. We will continue to remain fiscally responsible in managing our expenses as we grow our business.

In terms of the potential for additional financing, I'll message what we've consistently said in the past, that management will constantly review our needs for working capital requirements on an ongoing basis and determine if our needs require any additional capital. Turning to our guidance.

We expect our fiscal 2014 revenue to be approximately $24 million. Over the past 5 months, we booked approximately $9.5 million in license revenue that we will recognize over the next 3 years.

Depending on the deployment ramp time of approximately 5,000 iAPPSds microsites, approximately $2 million of incremental license revenue will be recognized in fiscal '15, and then over $3 million of incremental high-margin license revenue in fiscal '16 and each year beyond.

On our next quarterly conference call, we look forward to sharing more details about the full fiscal 2015 guidance and outlook. But in the interim, we can say that we expect significant license and recurring revenue growth in fiscal 2015, driven by our large $26 million backlog. Thank you. And at this time, we'd like to open up the call to Q&A..

[Operator Instructions] The first question comes from Howard Halpern from Taglich Brothers..

I don't know, I won't necessarily hold you to this, but do you have some sort of time frame in next fiscal year of those 5,000 deployed? Will it sort of be evenly spread? Or do you think there will be a clustering in maybe like the second or third quarter of those licenses?.

Yes, I think it's probably going to become be pretty evenly after the first quarter. And I think we have a good chunk of them sort of ramped up and deployed in recognizing revenue sort of as you ramp up that third quarter..

Okay. That sounds good.

And of course, associated with that, from this level, you expect the gross margins to continue to improve?.

Yes, absolutely..

Distributively..

Our license margin is 70%, 75% plus and we expect all this license revenue to be the same and ultimately drive a higher gross margin..

And in terms of operating expenses, do you think you could hold it pretty much in this 4.2% and slight increases from that level?.

Yes, I would say a slight increase. There's some things we know we want to do in R&D and sales, of course. They'll continue to drive growth, especially in iAPPSds. But I would say, overall, on that $4 million, it's maybe 5% or so..

And you sort of answered this question in your commentary, but I wanted to really get your sense of what the ds market is like. And I guess, you put a number out there, $40,000.

Do you think you can achieve that within the next 3 years or so?.

The total addressable market for iAPPSds, we estimate to be approximately 1.5 million locations in North America. That's approximately 780,000 franchises. There's another 125,000 dental practices, another 300,000 independent doctor offices.

And you're having the balance is made up of national insurance companies, the national certified financial advisers from the large investment banks. So the answer is, absolutely yes, for us to capture, because we believe we had best-of-breed product, and it's very highly scalable as we've proven and we've demonstrated.

So for us to be able to capture 2%, 2.5% of that market for North America is very reasonable..

Okay.

And I guess, turning to the enterprise business, are you seeing existing customers also expanding on what the offering was? And how is that developing in terms of from your initial talking with a potential customer to what actually gets implemented over time?.

Well, the enterprise business is an area that also can have significant growth for us. It has 2 very strong tails once you close the engagements, and you deploy the initial enterprise engagements there's 2 very strong recurring revenue streams that we see building our business.

One is the SaaS revenue that continues to become additive, and it's an annuity. And the other one is recurring services.

We've demonstrated over the last 4 years, every single year, every single quarter, we measure and we poke at it and analyze it, but we generate, on average, close to $70,000 a year per enterprise engagement post-launch in recurring services.

And these are our customers coming back to us to add certain things to their already existing iAPPS platform and provide other digital engagement related services to -- in relationship to the device platform. So that it in itself is already is matured into multimillion dollar business for us as we speak today, and will continue to grow.

So right now, our enterprise business is approximately $19 million in size in total, and has every bit of it easily growing to $50 million and beyond in the coming years. So we're very excited about the growth of that along with what we call the multiunit business, which is where the ds platform plays..

Howard, additionally, one other thing too, we've talked about our engagement side and the enterprise side becoming larger, and you've seen the sort of the blue-chip customer base and some of the names we've been talking about.

We are seeing -- I think a piece to your question, we are seeing additional follow-up opportunities within these customers in different groups..

At this time, I'm showing no further questions. [Operator Instructions] The next question comes from Mark Stafford..

What was the comment about a social network company that you're doing business with? Did you get a contract? Or are you working on one?.

We have closed an enterprise, iAPPS enterprise engagement, actually multiple ones, to Howard's point earlier, one of the most prominent social media companies in the world, which we will hold their name in confidence, but we had one of those prominent social media companies in the world has engaged with Bridgeline and iAPPS, and we have a multiple iAPPS enterprise engagements that have taking place there..

Okay.

And on the Elements side, is there still several companies that you need to convert?.

Yes, absolutely. We've got -- so we converted the largest one, and then we still have probably another half dozen to dozen opportunities that we're working on..

That's about 8, Mike?.

About what?.

That's about 8 of them..

Okay. And they'll be coming this quarter or over the next....

Probably over the next 2 to 3 quarters, right? It's all we have a sunsetting plan, and there is -- it does take time, because iAPPSds is very disruptive, and that's the good news. And the better news is once you're in place, it's very sticky..

[Operator Instructions] And I am showing no further questions..

All right. Well, we really appreciate the support and the patience of all of our shareholders. And it's our goal, we're going to continue to build a very scalable business model, which in turn is going to really build shareholder value. Thanks for joining us today, and have a great weekend. Thank you..

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day..