Good day, ladies and gentlemen, and welcome to the Bridgeline Digital First Quarter 2015 Earnings Conference Call. [Operator Instructions].

I would now like to introduce your host for today's conference call, Mr. Michael Prinn, Chief Financial Officer. You may begin. .

Thank you, and good morning, everyone. I'm pleased to welcome you to our first 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 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 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. .

Thank you, Mike, and good morning. Our first quarter of fiscal 2015 was not as strong as we anticipated, and it was very disappointing. .

Our legacy business decreased 45% in the first quarter of fiscal 2015 when compared to the first quarter of fiscal 2014, and anticipated revenues from some larger iAPPS engagements unfortunately pushed in the Q2 2015. .

Revenue for the first quarter of fiscal 2015 was only $5 million. However, as we deploy our backlog, revenue will increase in the second quarter of fiscal 2015 and beyond..

In fiscal 2014, Bridgeline generated $6.9 million of recurring revenues. And once our current backlog is fully deployed, we believe our recurring annual revenues will be increased by approximately $3 million or 43%..

I want to remind our shareholders, Bridgeline's recurring revenues enjoy a gross profit margin of 75% or greater, so the vast majority of this increase in annuity revenue would be additive to our operating income in the future..

To enhance our operating performance in future quarters, in January, we implemented expense reductions. These anticipated expense reductions will improve our gross profit margins by approximately $300,000 per quarter or $1.2 million on an annual basis.

Additionally, we reduced our operating expenses by an additional $500,000 per quarter or $2 million on an annual basis. Combined, these expense reductions will improve our quarterly financial performance by approximately $800,000 per quarter or $3 million annually. .

While the expense reductions we implemented -- that we implemented were in January, it's important to note, while we are realizing the impact of most of the expense reductions that were made now, we do not anticipate to realize the full impact of these reductions until next quarter..

These expense reductions, combined with the deployment of our backlog, will significantly reduce our operating cash requirements. And based on our fiscal 2015 operating plan assumptions, we do not anticipate the need for future equity financings..

In Q1 of 2015, Bridgeline launched iAPPS 5.2. This is a very exciting launch for iAPPS. In this latest version of iAPPS, it boasts significant enhancements, primarily to iAPPS Marketier, the platform's native e-mail solution..

Chief among the upgrades to the integrated e-mail solution is a new communication dashboard with intuitive features that power corporate marketing teams to develop, manage, execute effective e-mail campaigns.

Now with the latest release, iAPPS customers can build campaigns with custom e-mail designs or use new e-mail templates available to them right out of the box..

Additionally, new dynamic list segmentation capabilities allow customers to easily nurture specific audiences with targeted communications..

We are excited to be exhibiting at the International Franchise Association exposition next week. As our shareholders know, iAPPSds was specifically developed for the franchise and multiunit marketplace who need to provide superior website engagement tools to their numerous franchises and dealers while maintaining content and brand control. .

IAPPSds enables corporate franchises to provide a centralized digital marketing structure for their franchises and dealers. It's a cloud-based multi-tenant SaaS solution that's highly scalable, and we're enjoying quite a bit of success with this new product..

There are over 900,000 franchises in North America. And we believe there is no other Web platform solution in the franchise marketplace that can truly compete with the quality, the value proposition and scale of iAPPSds..

In December, which was Q1, we entered into a 3-year iAPPSds agreement with a leading North American pet care franchise. The total value of this 3-year agreement is over $800,000. And over 80% of that annuity revenue related to the agreement will be recognized as SaaS license revenue in the future..

IAPPS is an outstanding digital engagement platform that provides superior functionality, market differentiation and value. With a large backlog in place, a solid sales pipeline and operating expense improvements completed, we are very excited about fiscal 2015 beyond..

So at this time, I will turn the call back over to Mike who will provide you with more details of the financial results of our first quarter.

Michael?.

Thanks, Thomas. I'll review the results of operations for our first quarter ended December 31, 2014. .

So revenue, as Thomas mentioned, was $5 million compared to $6.5 million in Q1 of last year, a decrease of 23%. So let me give some color around the various pieces that make up that decrease..

Our subscription and perpetual license revenue decreased 12% compared to the first quarter of last year. This decrease was a result of a decrease in our perpetual license revenue specifically. As we have discussed in prior calls, a majority of our new opportunities are SaaS licenses and engagements. .

The perpetual licenses that we do sell on occasion can be lumpy from a revenue recognition standpoint. And in the first quarter of last year, we had a bulk of perpetual license that we sold and also were working on 2 to 3 more perpetual implementation projects than we are in the first quarter of this year.

This made up approximately $200,000 of perpetual revenue in the first quarter of last year, and that was the reason for the decline year-over-year. .

Our recurring revenue, so that consists of our SaaS licenses, the annual maintenance on perpetual licenses and our hosting, was $1.7 million. And this is consistent with the first quarter of last year..

Going forward, we have approximately 4,000 iAPPSds units in backlog, tied to a couple of different iAPPSds engagements that we're in the process of deploying. The deployment process has taken us a little longer than we expected, and that's reflected in our revenue number this quarter. .

However, as Thomas mentioned, the license revenue of those units is approximately $250,000 per month or $750,000 per quarter, and our delivery team is focused on executing our statement of works [ph] for these engagements and driving these launches and migrations..

Our iAPPS services revenue decreased by approximately $1.1 million in the first quarter compared to the first quarter of last year..

We've discussed on our prior calls that our average engagement size has grown significantly over the last couple of years. And as we're working on larger but fewer engagements, balancing our staff utilization has become a more little complex. And that's resulted in our lower-than-expected service revenue in the first quarter..

So ultimately, we need to win more engagements and we need to balance our projects and our people better. But as we discussed in the last call and Thomas previously mentioned, we've made some adjustments in the second quarter to help us drive an appropriate billable utilization and cost structure for the remainder of fiscal 2015..

Finally, in revenue, our revenue from our non-iAPPS or our legacy business decreased by approximately $460,000 or 45% when compared to the first quarter of last year. We're at a point now where our quarterly revenue legacy business is consistently less than $1 million per quarter.

And in the last 2 quarters, our non-iAPPS or legacy business has been between $550,000 and $600,000 per quarter, and it's probably expected to remain in this range for the foreseeable future..

Turning to gross margins. Our gross margin for the first quarter was 39% compared to 54% in the first quarter of last year. This decrease is primarily a result of our lower-than-expected service revenues in the first quarter, which obviously impacted our service margin.

Our license and hosting margin in the first quarter was relatively consistent with the first quarter of last year..

We do expect to see an increase in our gross margin and, specifically, our services margin in the second quarter as we see the impact of the expense reductions that we recently completed..

Our operating expenses were $3.9 million for the first quarter, down from $4.1 million in the first quarter of last year. As Thomas mentioned, we made every effort to reduce our operating expenses in light of the revenue for the quarter. .

The expense reductions that Thomas talked about previously were all done in January, so we expect the operating expenses to continue to decrease in the second quarter and beyond while we work on increasing our revenue back up to $6 million per quarter minimally..

Our adjusted EBITDA in the first quarter was a loss of $1.2 million compared to positive adjusted EBITDA of $20,000 in the first quarter of last year. We expect a much improved adjusted EBITDA number for the second quarter and are positioning ourselves to drive positive adjusted EBITDA in the second half of fiscal 2015..

Our non-GAAP adjusted net loss was $1.9 million or a loss of $0.09 per diluted share, compared to non-GAAP adjusted net loss of $0.6 million or a loss of $0.03 per diluted share in the first quarter of last year. Our GAAP net loss was $2.1 million in the first quarter compared to a loss of $777,000 in the first quarter of last year..

And finally, on our balance sheet, at December 31, the company had total assets of $33 million, with cash and accounts receivable of $4.2 million. And our DSO was 50 days..

Thank you. And at this time, we'd like to open up the call to Q&A. .

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

In terms of the cost savings for the SG&A, the $500,000 in cost savings, is it -- is that going to be relative to Q1 of this year or Q2 of 2014? And if you could just explain how that cost saving is going to be achieved, is it through headcount reduction, salary reductions? If you could just add some color to that. .

Sure. So it is primarily headcount reductions. And it's really from -- I think if you want to look at the -- measuring the decrease, it's primarily from our Q4 when we last spoke and when you put the plan together. And I think our operating expenses were about 4 -- a little over $4 million, $4.1 million.

But it is primarily headcount and then some other targeted spending in a couple of different areas, but I would say it's probably 75%, 80% headcount. .

And is there going to any kind of onetime charge in the upcoming quarter for that?.

No, because everything we did was within the quarter. So we had no remaining obligations or liabilities at the end of the quarter. So everything that you see -- well, you don't see the Q2 numbers yet, but there won't be like a restructuring charge. .

Okay. And in terms of, I guess, revenue, what you sourced ph] in the beginning, is the Q2 anticipated a higher revenue based on -- from the first quarter or from last year's second quarter or... .

Higher than the first quarter, I think, is the -- is what Thomas and I were messaging. .

Okay.

And in terms of, I guess -- so I can get maybe a little bit of a window here on the large health care deployment that you have in process, when do you anticipate first sites to go live? And when do you expect, I guess, the last sites, so all of them would be live?.

We just began to deploy those sites this quarter, and those will gradually increase every month as we continue to deploy. And we anticipate this deployment process of those sites to be a 1-year period, 12-month -- a 12-month process. .

Okay. And in terms of, I guess, if you could sort of explain, I guess, for lack of a better word, I guess the deployment issues that you had -- that are there with the enterprise deployments because that's what, it appears keeps slipping. From the fourth quarter, I guess, there was some slippage. Now there was more slippage.

If you could just explain what is occurring in that segment. .

The 2 primary slippages that caused the pain to the last 2 quarters on the deployment side, and it does -- it significantly does impact the financials. One of them is an -- well, they're both existing customers, and one of them is a -- is the large health care customer that has had some unwanted delays to deployment.

But we've -- that is now behind us, and we're now starting to scale and ramp that. The second is an existing customer that's a very large existing customer that there's a significant new engagement that we unfortunately got tied up in our -- in the whole legal review process. But now that's all behind us as well. .

Howard, just some additional color. We've talked about our average engagement size. When you go back 3 years, we talked about it being $120,000. And we talked about it growing, and we've given metrics, that $300,000, and I think we said even a little bit larger. We're, specifically in the last couple of quarters, seeing some deals.

The last couple that we won, one was for $700,000, one was for $800,000, and then the one that Thomas was talking about that's sort of almost ready to get over the goal line is -- the services piece alone is over $1 million, and... .

The total engagement -- the total engagement is $1.9 million, right?.

Yes. And it's just -- it's doing a little bit -- it's lengthening the process a little bit on -- from its sales cycle, so before the deal is even closed. And then these are larger projects that are more complex, and we're feeling a little bit of that on the delivery side as well. .

Okay. And I guess one last one. I know every quarter, you talk about the non-iAPPS business. Is there -- going forward, I guess, is there a real purpose to having that type of business? Does it generate enough margin for you? And if you could just talk about that. .

Yes, sure -- I'm sorry, go ahead, Thomas. .

Well, the number for the non-iAPPS customer is now down to approximately $2 million a year, $2 million to $2.5 million. And the customers that are in that number are customers that we believe will become eventually iAPPS customers. So we're going to continue to nurture them and deliver that revenue.

However, I think we're going to see the -- throughout each quarter this year, the statements of decline of 30%, 40%, 50% of that segment will diminish significantly to single-digit percentages because of just -- it's going to -- we think it's going to maintain flatness between $2 million to $2.5 million a year. .

And is that break-even business for you basically?.

Yes, it is. It's a services-only business. Very little of it's any software-related. And over the last few years, we've done a -- I think intentionally, we have terminated customers and moved on if they had no future with iAPPS because you're right, it didn't make a lot of sense for us to maintain that relationship.

But the current customers we have that do make up the majority of that revenue is -- they do have a future with iAPPS. I think Howard, there's one point I want to point out to you and the rest of the shareholders on the call.

When you talk about the -- some of the service woes as well, one of the things that we did with the cost reductions, a lot of it was focus, especially when you look at the cost of goods area, that was all people-related. And it was -- but what we did was we looked at all of our service revenue.

We analyzed in detail the need and the demand that our customers have. And we have a very high demand from our existing customer base for .NET development and for field development. There is not much of a demand that comes around strategy, personnel, design, folks like that.

So what we -- when we made these adjustments, we did pull back, and we reduced our headcount in the areas that did not have demand. However, we increased our field development team of .NET development capacity by 30%.

So while we had a net reduction, we actually did some hiring linked to it over the last 90 days as well to meet the demand of our customers on the development side, which is going to turn into very good service revenue for us in the future. So we're off to a really good start this quarter.

The 2 big things that were hindering our performance in the last 1.5 quarters are behind us now. And so we're feeling operationally -- and with these expenses that were needed and necessary, it takes the pressure off of cash burn.

And I know our shareholders are -- including myself as a shareholder, are -- you don't want to have any unwanted dilution at these levels, so we're feeling very good about these upcoming quarters. .

And actually I'm not showing any further questions at this time. .

Well, thanks for everyone joining us today. We too look forward to reporting much improved results in Q2 2015 and beyond. Have a good day, and have a good long weekend. .

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day..