Thomas Massie - President and CEO Michael Prinn - EVP and CFO.

Howard Halpern - Taglich Brothers, Inc..

Good afternoon, ladies and gentlemen, and welcome to Bridgeline Digital Second Quarter 2015 Earnings Call. At this time all participant lines on the telephones are in listen-only mode to reduce background noise. But later we will be conducting a question-and-answer session. Instructions will follow at that time. [Operator Instructions].

As a reminder this conference call is being recorded. I would now like to introduce your first speaker for today, Michael Prinn, Chief Financial Officer. Sir, you have the floor..

Thanks Andrew, and good afternoon, everyone. I’m pleased to welcome you to our second 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 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 the 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 afternoon, everybody. Our second quarter and first half of fiscal 2015 was not as strong as we anticipated.

Our legacy business decreased 44% in the second quarter of fiscal 2015 when compared to the second quarter of fiscal 2014 and anticipated revenues from larger iAPPS engagements that have already been booked have pushed into future quarters. Revenue for the second quarter of fiscal 2015 was $4.8 million.

However, as we deploy our backlog we believe revenue will increase in the third quarter of fiscal 2015 and beyond. Subscription and perpetual license revenue increased 4% to $1.4 million for the second quarter of 2015 and recurring revenue was $1.6 million.

In the second quarter we announced and we entered into a multi-year agreement for $1.8 million for a national franchise to launch and power its eCommerce capabilities on the iAPPSds platform. This is strategically significant as we will bring iAPPS commerce capabilities to the forefront of our multi-unit growth initiatives.

In Q2 we announced iAPPSdsr a customizable pre- templated mobile friendly digital platform that we developed for growing franchises and multi-unit networks. The release of iAPPSdsr was driven by the success of iAPPSds.

ds stands for distributed subscription; the "r" stands for rapid and the iAPPSdsr provides a multi-unit organization with a digital engagement micro site platform that gets them to market in approximately 90 days with scale. iAPPS DSR sales cycles will be much shorter and with a pre-templated system deployment time will be significantly reduced.

The easy to use digital engagement solution will help corporates maintain its brand standards with preapproved templates while enhancing regeneration by significantly improving visibility and traffic through local search engine optimization capabilities.

Users will be further empowered with best-in-class features and functionality that’s built in to our standard iAPPS platform with iAPPS Content Manager, iAPPS Marketier, iAPPS Analyzer, iAPPS Social and iAPPS Commerce, and all-in-one encompassing deeply integrated platform.

In the second quarter, we announced a multi-year licensing agreement with a North American pet care franchise Camp Bow Wow. Once deployed the highly scalable IHTS platform will power over 150 of the franchise locations across North America.

Camp Bow Wow selected Bridgeline because they required a highly scalable, feature rich digital engagement platform to power its growing franchise base.

We were excited to recently also announce the launch of iAPPS 5.3, which included new page builder functionality, API enhancements that improve site performance and a best-in-class couponing engine that empowers non-technical users to execute dynamic e-commerce campaigns.

iAPPS Commerce now has the best couponing functionality in the commerce platform marketplace. We're also pleased to recently announce that iAPPS Content Manager was named 2015 CODiE Award Finalist for the Best Content Management System globally, and iAPPS Commerce was named 2015 CODiE Award Finalist for the best e-commerce system globally.

For the past 30 years these awards are the premier awards in the software and information industries by the SIIA. I would now like to steer the discussions towards operations. Bridgeline has a backlog currently that's in excess of $23 million and one of the largest engagements we have in our backlog is experiencing significant delays.

These delays are exclusively customer related and not iAPPS related or deployment capabilities related. Once our current backlog is fully deployed we believe the recurring annual revenues will increase by approximately $3 million per year or 43%. I want to remind our shareholders that our recurring revenues enjoy gross profit margin of 75% or greater.

So the vast majority of this $3 million of increase in annuity revenue would be additive to operating income. Due to one of the largest iAPPS engagements in our backlog experiencing significant unwanted delays, we have revised our revenue forecast and reduced our operating expenses accordingly.

Over the past few months, we have reduced our expenses by over $1.1 million a quarter or over $4.5 million annualized. Our revised projections have been made with the initiative to improve gross profit margins and maximize cash flow generation, while driving minimal to no service revenue growth and reduced investment risk.

As a past licenses in our large backlog deploy we anticipate to see strong recurring revenue growth. iAPPS continues to remain as an outstanding digital engagement platform that provides superior functionality market differentiation, scalability and value.

With a very large backlog in place, a solid sales pipeline and operational adjustments that have been made we are very excited about our future. So at this time I'm going to turn the call back over to Mike, who will provide you with more detail of the financial results of our second quarter.

Mike?.

Thanks Thomas. So I'm going to review our results of operations for the second quarter ended March 31, 2015. Our second quarter revenue was $4.8 million compared to $5.3 million in Q2 of last year, a decrease of 9%. So let me give some color on various pieces that make up that change.

Our subscription and perpetual license revenue increased 4% compared to the second quarter of last year. We continue to work on deploying on our iAPPS SaaS and iAPPSds SaaS backlog.

We do expect to launch one of our recent iAPPSds wins late in the third quarter and that should add an incremental $40,000 per month or over $120,000 per quarter in SaaS revenue once it’s launched.

Our recurring revenue which consists of our SaaS licenses, the annual maintenance on our perpetual license and our managed service hosting was $1.6 million in the second quarter and this is consistent with the second quarter of last year.

Our iAPPS services revenue decreased by approximately $550,000 in the second quarter compared to the second quarter of last year.

So couple of reasons for this decline, one is that we're working right now on some of our iAPPSds implementation projects that we intentionally sold at a lower than desired margin in order to secure the recurring license revenue.

And secondly, as we mentioned in prior calls our billable utilization is not what we had hoped it would be in the second quarter. As a result we made some adjustments to our delivery headcount and I will discuss this in a detail in a bit.

Revenue from our non-iAPPS or legacy business decreased by approximately 44% when compared to the second quarter of last year.

We are now at a point where our quarterly revenue legacy business is consistently less than a $1 million per quarter and in fact last two quarters our non-iAPPS or legacy business has been between $450,000 and 550,000 per quarter and is expected to remain in this range for the foreseeable future.

So as a reminder, as we previously discussed this amount comes from a handful of customers who either have their platforms and we provide service work at healthy margins or customers who we believe will eventually re-platform for that iAPPS solution at some point in the future.

So a little additional color around the expense reduction that Thomas mentioned. So as we mentioned in our last call in February we initiated expense reductions that started in second quarter. Our goal is to align our cost structure with our revenue forecast and be in a position to drive positive adjusted EBITDA in the coming quarters.

We have taken initiatives to reduce headcount to the appropriate side and scale as well facilities and other operational expenses. We will began this processes in January and continue the process through the quarter end and into April.

As Thomas mentioned previously the combined impact of our expense reductions is approximately $1.1 million per quarter or about $4.5 million annually.

Because these reductions were made throughout the second quarter and continue in April, which is our third quarter the full impact on the total savings will be seen in our fourth quarter of this year, which is the three months ending September 30th and into fiscal 2016.

Turning to gross margin, our gross margin for the second quarter was 36% compared to 40% in second quarter of last year. This decrease is primarily a result of our lower than expected service revenues in the second quarter which obviously impacted our service margins.

Our license and hosting margins in the second quarter were relatively consistent with the second quarter of last year. We do expect to see an increase in our gross margin and specifically our service margin in the second-half of the year as we see the impact of the expenses reductions that we recently completed.

And in terms of licensing margin we expect that to increase as well as an increase in our licensing revenue but do not have to add any significant increase to our cost basis. Our operating expenses were $3.6 million for the second quarter down from $4.2 million in the second quarter of last year.

We really made every effort to reduce our operating expenses in light of the revenue for the quarter. We expect the operating expenses to continue to decrease in the third quarter and beyond while we work on increasing revenue and driving positive adjusted EBITDA.

Our adjusted EBITDA in the second quarter was a loss of $1.2 million compared to a loss of $1.3 million in the second quarter of last year. We expect a much improved adjusted EBITDA number for the third quarter and again position ourselves to drive positive EBITDA in the coming quarters after.

Our non-GAAP adjusted net loss was $1.8 million or a loss of $0.43 per diluted share compared to non-GAAP adjusted net loss of $2 million or a loss of $0.55 per diluted in the second quarter of last year. Our GAAP net loss was $2.1 million in the second quarter just slightly better than the $2.3 million in the second quarter of last year.

So turning quickly just to the balance sheet, at March 31st, company had total assets of $33 million, cash and accounts receivable a little over $5 million and our DSO was 50 days. We will continue to manage our cash and operating expenses and remain fiscally responsible as we drive towards generating positive adjusted EBITDA. Thank you.

At this time we like to open up the call to Q&A..

Thank you. [Operator Instructions]. And our first question today comes from Howard Halpern from Taglich Brothers. Your line is open..

Good morning.

When you talk about your anticipation for third quarter revenue growth, that’s sequentially growth, correct?.

Correct..

Okay.

And also in terms of what was said earlier we could think about the digital engagement service line and the managed service hosting line, staying pretty constant in that $3 million, 3.1 million for the digital, the $370,000-$385,000 for managed services?.

Yeah, I think we remain pretty confident. I mean I think there will be some modest growth.

I think we certainly plan on driving a higher engagement services revenue and I think from a hosting prospective we get one or two engagements that we are working on, that are scheduled to launch at some point in this quarter, that will drive a little bit higher hosting revenue.

But I think what you are getting at is those two lines, of services and hosting are going to remain fairly stable with some modest growth and when you will see the growth in the upcoming quarters is really the license line as we launch our IFTS recent wins..

And in terms of expenses, I saw in this G&A was up sequentially it was at just to get every single line correctly and it is going to start decrease going forward?.

No, we had a onetime non-cash accounting charge. We will give a little more detail in our Q. Those were 135K and I think when you take that out G&A is fairly flat sequentially and you will see that go down again in our third quarter..

Okay.

And in terms of the $23 million backlog that you have is that well could you put a timeframe and that is that 12 month 24 month 4 month?.

Sure, there is a couple of different pieces, about a third of it, $8 million is services backlog and that obviously is probably within 12 months as most of our services engagements are three to six months, we have some annual retainers and some logic projects but a third is 12 months or less remaining license and hosting piece you know it should be other 15 million or so.

That’s typically over a three year, 36 month period. Most of our contracts are 36 months and then you know that 23 million-24 million dollar number is really like a 36 month outlook..

So what’s important is 65% of our backlog is high margin SaaS future revenue..

And can you talk about in your qualified pipeline that you see maybe coming at getting contracts over the next 12 months?.

We have a very exciting pipeline, numerous engagements and potentially thousands of additional DS licenses that are inside the pipeline I think that from an IS engagement perspective, our qualified pipeline is in probably one of the better shapes then it has been in a long time so we are very excited about some upcoming new venture we will be able to add and help us drive future revenue growth..

Thanks guys..

Thanks Howard..

Thank you. That’s all the questions that we have today. So I would like to turn the call back over to management for closing remarks..

Thank you for joining the call today. Just want to reiterate that we are very excited about the future.

We do costs well under control now and we are going to want to get the most leverage driving the growth in the SaaS revenue line item that Howard was mentioning while maintain the services revenues be flat really get that leverage in economy to get that SaaS revenue to drop to the bottom-line.

If anybody has any questions please feel free to give Michael or myself call at any time. Thank you..

Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program, and you may all disconnect your telephone lines. Everyone have a great day..