Michael Prinn - CFO Ari Kahn - COO.

Howard Halpren - Taglich Brothers.

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call will be recorded.

I would now like to introduce your host for today’s conference, Mr. Michael Prinn, CFO. Please go ahead..

Thank you, Catherine, and good afternoon, 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 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 could obtain a copy of our earnings release by visiting our website. I’ll now turn the call over to Ari Kahn, Bridgeline Digital’s Chief Operating Officer..

Thank you, Mike, and good afternoon, everyone. I’m happy to report that we delivered our second consecutive quarter of positive adjusted EBITDA. Recurring revenue and gross margin have both grown and we did this while reducing our operating expenses. All of these improvements are on both a year-over-year basis as well as in sequential quarters.

Non-recurring low margin services revenue decreased as we focused on new customer acquisition and high margin recurring license revenue. This focused drove an overall increase in gross profit. Growing revenue primarily through sales of subscription and perpetual licenses will continue to be our focus.

The speed at which our financials have improved is exciting and we have both innovated and invested in increasing our market share while managing the bottom line. Our strategic goals with Express solutions are ahead of schedule. We have both commerce and franchise customer Express solution wins in the first quarter.

Its early success demonstrates the strength of inbound demand for quick-to-market enterprise class web solutions. Express solutions are high-margin SaaS-licensed sales with shorter sales cycles thanks to the unique capabilities that provide a clear return on investment for our customers.

In addition to our success with Express solutions, this quarter’s new enterprise customers include a residential mortgage company that services more than 1.5 million loans, totaling $350 billion. We also signed a multibillion dollar manufacturing company.

Acquiring large companies like these proves the strength of our platform and can lead to new technical innovations. In the first quarter, we launched the website for Camp Bow Wow, a franchise customer with more than 180 websites now running on our iAPPS ds platform.

We also released iAPPS 5.4 which includes expanded marketing automation capabilities for franchises. Sports Clips, a franchise with over 1,400 websites, can now use iAPPS to engage with 6 million of their customers through iAPPS Marketier marketing automation platform.

With this enhanced capability, they’re able to migrate customer communications away from a competitive platform and standardize on Bridgeline. I’m excited about Bridgeline’s future as we are well positioned to take advantage of a great market opportunity.

The web content management market is over $3.5 billion and expected to grow to over $5 billion by 2020. We can own more than 5% of this market which would yield over $150 million. Even 2% of this market triples our revenues to $6 million. We have less than 10 serious competitors and no one has substantial ownership of this marketplace.

We can beat any of our competition in the sales engagement. We just need to increase awareness so that we compete in more opportunities. To increase market share, in the first quarter, we doubled the size of our sales team and tripled our lead generation investments. We improved our sales processes to decrease our time to close new engagements.

We also better segmented our software to address a larger perspective customer base with Express solutions. And all this happened while reducing operating expenses to maintain our commitment to fiscal responsibility.

Given the strength of our products, fiscal responsibility and continued investment in sales and marketing, we can establish a much larger market share and drive strong shareholder value.

And at this time, I’d like to turn the call over to our Chief Financial Officer, Mike Prinn, who will provide details on the financial results for our first quarter of 2016..

Thanks, Ari. So I’ll review the results of operations for our first quarter, ended December 31, 2015. First quarter revenue was $4.2 million compared to $5 million in the first quarter of last year.

Although this revenue number is lower than last year, as we mentioned in our previous calls, we’ve been focused on higher margin revenue and on aligning our cost structure to our revenue forecast. You will see significant improvement to our bottom line, which I’ll talk about in more detail.

Let me give some additional color first around the various components of revenue. Our subscription and perpetual license revenue for the first quarter of fiscal 2016 increased 10% to $1.5 million compared to the first quarter of fiscal 2015.

Our licensing and our hosting revenue combined for the first quarter now make up more than 44% of our total revenue compared to about 36% of the total revenue in the first quarter of last year. This continued increase in our license and hosting revenue aligned with our improved cost structure has enabled us to significantly improve our bottom line.

And the Express solutions that Ari spent some time talking about will help to drive a higher proportion of license revenue to service revenue. Both of the engagements that we closed in the first quarter for Express solutions had a make-up of about 65% license revenue and 35% services revenue. So really, two-thirds license and one-third services.

This compares to probably a 75%-25% split in some of our larger historical enterprise engagements with the 75% being services. As we’ve mentioned, our focus on quicker-to-market Express solutions to complement our existing enterprise business is what we believe will help transform Bridgeline to a true fast business model in the future.

Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, was $1.7 million in the first quarter and this is consistent with the first quarter of last year. Our services revenue decreased by approximately $860,000 from the first quarter of last year.

As we’ve discussed on our prior calls, we’ve made some changes in the last couple of quarters to align our delivery team with our revenue projections. We will continue to focus on our billable utilization and our resource planning to make sure we have the right team to continue to drive the forecasted service revenue.

We believe that with our focus on increasing the sales team and our focus on Express solutions, we can drive the service revenue driver back towards $3 million by the end of the year. We’ve made progress in the first quarter in terms of expanding the sales team and increasing our spending on lead generation.

We expect to see the results of these investments pay off in the upcoming quarters. As we mentioned in our last couple of calls, we initiated expense reductions that started in the second quarter of last year and have continued throughout this fiscal year.

Our goal is to align our cost structure with our revenue forecast and be in a position to drive positive adjusted EBITDA. We’re very pleased that we were able to do that in the fourth quarter of last year and now in the first quarter of 2016. So, two consecutive quarters of positive adjusted EBITDA.

Now, our focus has to be on keeping our cost structure intact and remaining fiscally responsible, while executing on our strategy and ultimately growing our top line. In terms of gross margin, we’re pleased to report that our gross margin for the first quarter was 51% compared to 39% in the first quarter of last year, a significant improvement.

We expect to continue to see an increase in our gross margin, and specifically our service margin in the coming quarters as we see the full impact of the expense reductions we discussed and we see a delivery team with a much higher billable utilization and eventually, business model that drives a much higher license to service ratio.

Our operating expenses, excluding a one-time restructuring charge, were $2.6 million for the first quarter of 2016, down from $3.9 million in the first quarter of last year. We’ve made every effort to reduce our operating expenses to be in line with our current revenue and we have initiative that we will continue to focus on in fiscal 2016.

For example, we’ve made a number of changes in our office footprint and these changes alone account for approximately $400,000 in annual savings compared to prior years. We will also continue to look for opportunities to reduce our operating expenses while not impacting the investments to our sales team and our marketing spend.

The other first quarter item I want to cover was our restructuring charge. We’ve talked about headcount reduction and other expense reductions. In the first quarter, we initiated further reductions that included both headcount and facility cost.

As a result of this initiative, we recorded a restructuring charge in the first quarter of 2016 of approximately 586,000. This is a onetime charge and a portion of the charge is paid in the first quarter and the remaining amount will be paid out over the next couple of years.

As we talked about before, we’re very pleased to report positive adjusted EBITDA for the first quarter of 2016 and our second consecutive quarter. We took significant action the earlier part of fiscal 2015 to align our cost structure to driving improved bottom line. And in the first quarter, we generated 65,000 in adjusted EBITDA.

In the first quarter of last year, we reported a loss of 1.2 million so this is an improvement from last year in adjusted EBITDA by over 1.3 million. Our fiscal 2016 operating plan just focused on generating positive adjusted EBITDA throughout the year with the goal of generating cash to reporting operating income.

Our non-GAAP adjusted net loss was 583,000 or a loss of $0.11 per diluted share in the first quarter compared to non-GAAP adjusted net loss of 1.9 million or a loss of $0.43 per diluted share in the first quarter of last year. That’s an improvement of 1.3 million or $0.32 per share.

Our GAAP net loss was $1.4 million in the first quarter of fiscal 2016 compared to a loss of $2.1 million in the first quarter of last year. The 1.4 million GAAP net loss in Q1 this year of course includes the 586,000 restructuring charge.

On our balance sheet at December 31st, the company had cash and accounts receivable of 3.1 million and our DSO was 53 days. We will continue to manage our cash and operating expenses to remain fiscally responsible as we continue to generate positive adjusted EBITDA and execute our operating plan for fiscal 2016.

Before I move to Q&A, I just want to say that both Ari and I believe that the company is positioned to executive in fiscal 2016.

We’re both pleased with the recent changes that have been made to align our cost structure to a more appropriate level and are excited our Express solutions which have the ability to drive a true SaaS model and accelerate our timeline to profitability. Thank you. At this time, we’d like to open up the call to Q&A..

Thank you. [Operator Instructions] Our first question comes from Howard Halpren with Taglich Brothers. Your line is open..

You had results that you promised that it’s a good sign for going forward..

Thanks, Howard..

First question is regarding the two enterprise customers.

Would they impact any of the revenue in the first quarter?.

They’ll derive some of the revenue in - or like in the first quarter, no, very little but it closes at the end of the quarter..

Okay.

And will that yield basically or help boost a little bit of the services revenue going forward?.

Yes, it will add services revenue and license revenue as well. The enterprise customers generally have a large services implementation. They have very specific custom needs. So they’ll have a fair amount of services upfront and then the ongoing licenses through the rest of the life of the customer..

Okay.

And is it a little bit more adjustment to be made on some of the margin services revenue that is there or have you sort of come to the end and now we’re really focusing on driving growth in that area?.

Yes, Howard, I think we’ve come to the end. We’ve got very select amount of customers that have sort of non-iAPPS or lower service margins. And I think going forward, we’re focused on increasing that top line.

And the customers that still remain that aren’t on the iAPPS platform, there’s either a strategic reason or maybe a very attractive bill rate that goes along with them still being with us..

Okay.

And the two new customers for the Express solutions, are both of them part of a recurring monthly revenue model?.

Yes. They are part of recurring months of revenue model. And as Express solutions, they have very small services compared to the license. And the sale cycle for both of those was less than a quarter compared to an enterprise customer which is often a several months sales..

Okay.

I guess could you describe maybe a little bit about I guess the sale cycle plus, are you adding some sales people, what kind of pipeline do you hope to build by, I don’t know, say Q4 in terms of the Express solutions?.

Yes. Well, for the Express solutions, by the fourth quarter, we really started off with last quarter with not really having any plus line at all. We didn’t expect to sell Express services until this quarter or second quarter but we’ve still sold two during last quarter.

So we would expect to see a couple of million dollars in the pipeline in the fourth quarter, a couple of million dollars from the sales of the Express solutions achieved in the pipeline. It’s very doable and we’re filling that pipeline right now.

One thing that’s really encouraging with the express solutions is that last quarter, one of our customers which is a franchise of dental and orthodontics offices is a franchise customer and we closed that whole deal in one quarter. And traditional franchise customers are often nine months sale cycles.

So that shows how much quicker with Express solution, it really is packaging up best practices and key features for our customers to be able to launch a site very quickly or to extend their own site or quickly those sales can happen..

So Howard, I guess just to add a little bit financially to that, we’ve said this before but it’s probably worth repeating. On the enterprise level, we could have a six to nine months maybe sales cycle for an enterprise engagement.

And then probably a six months delivery cycle and then that’s the path to get to maybe $4,000 a month in SaaS description revenue. Our Express solution as Ari mentioned, we had one that sort of popped up and we closed down within a quarter. And then that’s really a delivery cycle of less than three months.

And then that’s the path to $2,000 to $3,000 per month in subscription license revenue. So shorter sale cycle, shorter delivery time and still probably 75% of the monthly SaaS revenue that we would see for a larger enterprise customer.

So it’s just the first two, but eventually, we’re going to work on volume and I think that’s really going help the mix of what we look like when you look at services and license revenue and the percentages and sort of drive that higher percentage of license revenue and obviously higher margin revenue..

And will the implementation especially with the demo franchise, how important is that going to be? Is this [indiscernible] first reference customers for your sales team to go out and say this is what we have and this is what we can do..

It is going to be important to be able to show that to new prospective customers. And one of the great things with Express solutions is I use the term configuration versus programming. So with an enterprise, the traditional enterprise or franchise customer, we have to program a bunch of custom business license.

And instead with the Express solutions, we’re configuring their site to have their logo, their layouts, their color scheme, their product, but we’re not doing a bunch of custom coding.

So when we show them as a reference customer going forward, we’ll be able to also be able to explain the explain that exactly what you see right here, you can rearrange, reconfigure it to create your own look and feel. But that functionality is yours out of the box..

Okay. Well, congratulations and I look forward to this coming year..

Great..

Thanks for your support, Howard. Thank you..

Thank you. [Operator Instructions] And I am showing no further questions in the queue at this time..

Okay, great. Well, everybody, we really appreciate the support and patience of all of you, our shareholders. And it’s our goal to continue to build the scale of the business model which in turn is going to bring shareholder value. So thank you for joining us today. And have a good afternoon..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day..