Brett Maas - Investor Relations, Hayden IR Ari Kahn - Chief Executive Officer Michael Prinn - Executive Vice President and Chief Financial Officer.

Howard Halpern - Taglich Brothers George Melas-Kyriazi - MKH Management Company, LLC.

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital Earnings Release Conference 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 conference is being recorded.

I would now like to introduce your host for today’s conference Mr. Brett Maas. Sir, you may begin..

Thank you and good afternoon, everyone. I am pleased to welcome you to our second quarter earnings 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 the 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 financial results, as well as provide 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. I’ll now turn the call over to Ari..

Thank you, Brett, and good afternoon, everyone. Bridgeline has made several product advances and operational improvements in recent quarters that we have enabled the company to win more customers, deliver greater value to existing customers and at the same time for the core business to run more efficiently.

This took hard work and great innovations from the team, and I’m happy to see those efforts continue to drive growth. In the second quarter of 2017, we increased SaaS revenue, iAPPS recurring revenue, subscription and perpetual license revenue, hosting revenue and grew margins compared to last year.

We did all of this while reducing operating expenses by 7%. Our Pro-Series is not just allowing us to win business, where we could not previously even compete; it’s also allowing us to deliver great value to existing customers who want to expand in the success Bridgeline has provided them across other subsidiaries within their organization.

This is a trend that helps Bridgeline continue to produce more efficient customer acquisition cost and demonstrates the quality of our customer satisfaction. Our investments in marketing automation have allowed us to begin winning business from customers, who need Internet marketing but are not ready for a new website.

This not only expands our customer base, but also enables us to grow revenue with lower customer acquisition costs, with future upsells of WCM, Web Content Management, and eCommerce and marketing customers.

We’ve also helped business connect physical products to Bridgeline powered eCommerce sites with Internet of Things technology, enabling Bridgeline to demonstrate success and grow in this exciting new generation of commerce and customer service.

Cloud software companies like Bridgeline often have strong valuations, because much of their revenue is high margin, recurring and sticky. At Bridgeline, our iAPPS recurring revenue is our economic engine, includes our SaaS license, hosting and perpetual license and software maintenance agreements.

When I joined last year, we committed to focusing on growing our iAPPS recurring revenue. And we did so, and it grew by 27% last year. While our momentum continues with iAPPS recurring revenue increasing by 8% in the second quarter 2017 compared to the second quarter 2016.

In fact, our iAPPS recurring revenues increased for the last eight consecutive quarters, which along with the fact that our customers signed three contracts that ought to renew annually at the end of their term produces over $20 million of future iAPPS recurring revenue contracted over the next three years for Bridgeline.

This $20 million is yet to be recognized and serves as a strong foundation for future growth. Our focus on SaaS business helped to grow our higher margin iAPPS recurring revenue to 44% of overall revenue this quarter, compared to 38% in the second quarter 2016. As a result, we increased gross margins to 57% from 53% at that time.

Each new engagement includes professional services to customize our software for customers. Services are not only a profit center for the business, but also an innovation center where the latest real-world needs are hands-on developed with great new ideas coming back to our R&D group.

Bridgeline’s professional services increased services gross margin to 47% versus 40% in the second quarter of 2016. Through partnerships with our customers, we’ve begun developing stronger globalization capabilities in currency and languages, and we also have exciting Internet of Things initiatives that are ongoing right now.

Our new engagements not only include acquisition of new customers, but also expansion into business units of our current customer base, an important sign of customer success and the driver for even stronger customer acquisition costs.

As in our last two quarters, yet another subsidiary of a $4 billion water technology company, who is a customer of ours, purchased licenses from Bridgeline to build their website. We expect to continue to grow with this customer as more of their 30 brands move onto the Bridgeline platform.

Also, $1.7 billion technology-company engaged with Bridgeline to develop its corporate site, to support their AsiaPac initiatives. A marketing agency purchased Bridgeline’s marketing automation software as a platform to launch landing pages and e-mail campaigns for their customers.

And we continue to find interest in the credit union industry with yet another federal credit union re-platforming their site onto Bridgeline.

Several existing customers have also engaged Bridgeline to revamp their online presence, which resets their subscription engagement to start a new three-year license agreement and further strengthen our future contractually committed iAPPS revenue that we have our business built upon.

These sales and expansion of existing customer engagement have helped the company deliver a second quarter with positive adjusted EBITDA this year. And we ended the first half with over $1.2 million in cash, further demonstrating our focus on fiscal strength.

At this time, I’d like to turn the call over to our CFO, Mike Prinn, who will provide details on the financial results for our second quarter..

Thanks, Ari. So I’ll review the results of operations for the second quarter ended March 31, 2017. Second quarter revenue was $4 million compared to $4.2 million in the second quarter of last year. This is in line with the guidance range we gave of $3.9 million to $4.1 million last quarter.

As Ari mentioned, we’re making steady and accelerated progress in our efforts to transform Bridgeline into a SaaS-focused company, as evidenced by a greater mix of license revenue.

As we mentioned in our previous calls, and as Ari talked about earlier, we’ve been focused on rebuilding our sales team and focused on our new product offering, iAPPS Pro, which will generate more license revenue at higher gross margin levels compared to our previous offerings.

This is the third quarter in a row where we have had a sequential revenue increase. So let me give some additional color around the various components of revenue.

Our subscription and perpetual license revenue for the second quarter of fiscal 2017 increased to $1.6 million compared to $1.5 million in the second quarter of last year, helping to drive this increase was our increased SaaS revenue.

Our SaaS revenue increased 8.1% to $1.4 million in the second quarter of fiscal 2017 compared to $1.3 million in the second quarter of last year. I’d like to note that our iAPPS SaaS revenue increased 16.5% to $1.4 million compared to $1.2 million in the second quarter of last year.

At this point, all of our SaaS revenue right now is from our iAPPS product base. Our licensing revenue for the second quarter makes up 39.6% of our total revenue compared to about 36% of the total revenue in the second quarter of last year.

And our license revenue and hosting revenue combined make up 46.1% of our total revenue, so that’s up from 43.5% in the second quarter of last year. So you can see even though our total revenue is decreased, we’re driving a higher percentage of license revenue to total revenue and expect to continue to do that in future quarters.

Our recurring revenue which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting remain constant at $1.8 million in the second quarter of fiscal 2017 compared to the second quarter of last year.

I’d like to point out that while the total recurring revenue remain constant year-over-year, included in this number is a decrease of approximately $100,000, as we’ve completed the transition of shedding some of our smaller non-iAPPS customers on another software platform from a prior acquisition in 2013.

I also want to breakdown our recurring revenue, and note that our iAPPS recurring revenue increased 7.8% to $1.7 million in the second quarter of fiscal 2017 compared to $1.6 million in the second quarter of fiscal 2016, so very pleased with that progress. Our iAPPS revenue has shown consistent sequential growth over the last eight quarters.

We ended the quarter with a total monthly recurring revenue or MRR of $583,000. And this would put our annual recurring revenue or ARR right now at about $7 million. Our services revenue did decrease by $238,000 from the second quarter of last year.

As we discussed previously, we made some changes in the last three quarters to align our delivery team with our revenue projections. We’ll continue to focus on our billable utilization and our resource planning to make sure we drive the forecasted service revenue.

This is the third sequential quarter that we have reported an increase in service revenue. I also think it’s very important to point out that although our service revenue decreased by $238,000 year-over-year.

Our cost of providing that service revenue decreased by $290,000 in the current quarter, demonstrating our commitment to streamline costs in line with our revenues, and that’s evidenced in our gross margin improvement, which I’ll speak to now.

We significantly improved our gross margin in the second quarter demonstrating the benefits of our SaaS based model, as well as our successful transition to selling the services component of our engagement as time and materials rather than fixed price. Gross margin for the second quarter was 57% compared to 53% from the second quarter of last year.

We continue to see the benefit of all the infrastructure improvements that we’ve made throughout the last four to five quarters. We’re seeing a delivering team that has a much higher billable utilization. And ultimately, as we continue to sell more license engagements we believe we can drive a higher gross margin in future quarters.

Also contributing to the gross margin increase are improvements we made in facilities and overhead reductions. I also want to reiterate one thing that I mentioned on our last quarterly call, during Q1 and Q2 of this year we upgraded and transitioned our hosting facility and capabilities from our network operations center to Amazon Web Services.

During Q1 and Q2, we had to some extend both environments running in parallel to complete this migration and transition. During Q1 and Q2, we incurred approximately $100,000 per quarter in additional costs.

So excluding these costs from our gross margin, which we reported at 57%, we really would have been around 60%, and our license and hosting gross margin would have been about 5 points higher at approximately 73%. The transition is now complete and we look forward to increase gross margins in the future.

Our operating expenses were reduced by 6.7% to $2.7 million for the second quarter of fiscal 2017 compared to $2.9 million for the second quarter of last year.

While our sales and marketing expenses, and general and administrative expenses were generally flat year-over-year, we made a significant reduction to our depreciation and amortization expense recorded in Q2. We’ve recorded $157,000 in the second quarter of this year compared to $338,000 in the second quarter of last year or a reduction of 53%.

This is due to the end of life of a lot of our network operations center equipment and the disposal of older fully depreciated equipment. I’d like to make one additional important note around operating expenses and adjusted EBITDA.

As you know, we’ve made a significant amount of progress with our facilities and infrastructure the last couple of years, although I do want to point out that we have a low occupancy rate at our corporate facility outside of Boston.

We have approximately $60,000 of quarterly costs related to unused space, we are actively pursuing sublease options and have approximately 18 months left on our lease.

We thought that it’s worth pointing out that when you look at our reported adjusted EBITDA numbers that upon fixing occupancy here, we could potentially report higher number by about $60,000 per quarter. So net loss was $530,000 in the second quarter of fiscal 2017, compared to a net loss of $1 million in the second quarter of last year.

Our non-GAAP adjusted net loss was $162,000 or $0.01 per diluted share in the second quarter compared to non-GAAP adjusted net loss of $643,000 or a loss of $0.12 per diluted share in the second quarter of last year.

Adjusted EBITDA for the second quarter of 2017 was $22,000 compared to adjusted EBITDA of $25,000 in the second quarter of last year, so excited to be able to report positive adjusted EBITDA for the second consecutive quarter.

At the beginning of the year, we gave guidance that we expect to drive positive adjusted EBITDA for the full fiscal year of 2017, and we are pleased that we generated positive adjusted EBITDA in both the first and second quarter of fiscal 2017.

Very quickly in the balance sheet at March 31, we had cash and accounts receivable of $3.5 million and our DSO was a healthy 44 days. Total assets are $17.7 million, total liabilities are $6 million, and our line of credit balance at March 31 was $2.2 million. So I’ll wrap up with some financial outlook for the third quarter.

We expect our third quarter revenue in the range of $3.9 million to $4.1 million. We got three straight quarters of sequential revenue growth and hope to continue that trend throughout fiscal 2017. We made significant improvement to our adjusted EBITDA from Q3 and Q4 of 2016 to Q1 and Q2 of 2017.

And we expect to see continued improvement throughout fiscal 2017. We also believe that we significantly reduced our cash burn and our goal is to get to a point, probably in the fourth quarter where we’re generating operating cash in a quarterly basis. Lastly, I’d like to give some color around our NASDAQ listing.

In August of 2016, we received an initial notification letter that we failed to maintain our minimum closing price of $1 for 30 consecutive days. So we’ve received an extension, so we’ve maintained all our other listing requirements.

We got until into August 14 of this year to regain compliance and management is committed to maintaining its NASDAQ listing and regaining compliance. So thank you. And at this time, we would like to open up the call to Q&A..

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

Congratulations. Nice incremental improvements in the first quarter..

Thanks, Howard..

First question regards, is this the last quarter we’re going to see the restructuring charge in the income statement?.

Yes. I believe so. So this charge for this quarter just was related to our India office, we when were a different company, primarily services, we get a model utilizing some headcount over there. As we transition to a SaaS company, we don’t have any headcount there. But we still got a little bit of time left on the lease that we restructured in Q2.

And I think the only reason you would see a continued material restructuring charge would be - what I mentioned in terms of the corporate facility. We find some sort of sublease or someone to take it over. We would just take a charge for the difference between whatever that event was in the current rate.

But for the most part, I believe we’re through with the restructuring charges..

Okay. And it was also nice to see, I guess, hosting actually sequentially from the first quarter jumped up a little bit.

Is there a particular reason for that or is that a trend that could continue a little bit?.

Yes. I think - I hope it is a trend. So over the last year we’ve been talking about shedding a lot of the smaller non-iAPPS customers. They are paying $200, $300, $400 bucks a months. And we’re done with that.

And now we are still finding that although maybe 8 out of every 10 deals is a SaaS deal for that 9th to 10th deal that a customer that wants a perpetual license, they’re usually asking us to host as well. It’s a good price point. It’s anywhere from $15,000 to $30,000 per quarter.

So just adding one customer every quarter - every other quarter, I think we can still maintain some healthy growth in the hosting line..

Okay.

And with the sales force now been around a little while, what are they seeing in terms of what the customers are desiring, want in terms of its initial products and some potential upgrades? And are they seeing anything different in opportunities out there than you had, so what they would see?.

I’m sorry, you’re referring to our sales force, we are seeing different opportunities?.

Yes.

I mean, in interacting with customers, are they seeing different things out there that are opportunities…?.

Yes. We are seeing some things. There are two places that is really bringing a lot of interesting innovations. One of them is existing customers finding out what they need and going into sales engagement. So one of the things that we’ve been discovering is interest in what’s broadly classified as the Internet of Things.

And we have active customers today that have physical inventory on the ground within their customers, that is now being shipped and connected directly back to the commerce sites that we build for automatic replenishments.

We have companies, customers of ours that have inventory all over the world within their own customers that is automatically connecting to the commerce websites we build and allowing them to make purchases and directly monitor their sites. And that’s an area where there is a tremendous amount of growth.

We are on the cutting edge of it and delivering real-world solutions today. And I would expect to continue to see opportunities in that area..

Okay. And you’re seeing now that Pro has been around a little while, and I know automations really just getting going.

But are you seeing customers you have now desire or talk about upgrading more towards the enterprise area?.

We see two things with regards to Pro - I guess three things. So, first of all, not surprisingly, Pro is - in terms of the volume of sales, we saw more in Pro than anything else. We have companies who have a large number of brands.

Companies like, for instance, L’Oréal has a bunch of brands underneath, some other companies of ours that have multiple brands that need a separate site for each of their brands. And what they do is they come to us. And Pro is the right departmental or brand solution for them. And they continually buy more and more Pro licenses from us.

We also have companies that start off with Pro, and they expand to Enterprise. And it’s a great way for us to win a customer quickly, show them great success and then growing their organization. Pro has certain limits, for example, the number of pages on a website, the amount of traffic that it can occur and so forth within that site.

And companies, especially smaller companies, start off with Pro, makes sense. But after the site really kicks in and they start driving more business in it, already today even though Pro has only been out for a year we see people exceeding those limits and then coming to us to expand Enterprise.

And that’s about four times increase in license revenue between Pro and Enterprise for us and it’s happening already in the short period of time..

Okay. Okay, guys, keep up the great work..

Thanks, Howard..

Thanks, Howard..

And our next question comes from George Melas from MKH Management. Your line is now open..

Hi, George. Thank you..

Hi, guys.

How are you?.

Good.

How are you doing?.

Good, very well. I’ll just follow up on a few of Howard’s questions.

The marketing automation, are you seeing some traction there?.

We are, we are. We’ve got a couple of good sales so far in marketing automation. We think that the best is yet to come still as the sales team is fairly young with regard to sales for that. And we’ve already seen, even within the existing customer base, companies buy marketing automation.

One of the things that we’ve discovered, that we didn’t anticipate originally and it’s a good thing, is that companies that have bought marketing automation from us, sometimes own other competitive marketing automation solutions and they’re fine with that. So it becomes actually a little bit less competitive.

We don’t have to knock someone else out of a business to win them. As a marketing automation solution, we’re kind of more of a point product, and still get in there and then compete head to head in the company after they own both of us. And we’ve seen that already..

Okay.

Do you mean that they would own both you and your competition or is that you don’t have to knock out, they can keep their existing marketing automation and you can sort of sell around that?.

We sell around it. Yeah, so for instance, a company that bought marketing automation from us last quarter owned HubSpot. They owned HubSpot and they kept it. But saw that we could do things that they couldn’t do with HubSpot.

They needed an expansion in a particular part of the organization and they chose us over expanding their license in HubSpot, and now we’re in there. And, well, we’ll see how long those guys survive. But we’re doing well with the customer..

Well, that’s really interesting. Okay, great.

Just going back to the past, ds, are you seeing some traction there?.

We are - and I thought of ds as not necessarily a completely separate product. It’s really a use-case, an interesting use-case for our enterprise solution. We have a large number of content contributors and large number of websites that it produces. And we’ve gone from - this time last year there were around 6,680 ds sites.

And today, there are 7,200 ds sites. We’ve increased the number of sites significantly. We’ve won customers. We have customers in our pipeline. We market to it differently than we expected that we would a year-and-a-half ago. We don’t necessarily market just to franchisees, our franchise meets with ds.

We find that it’s useful for any company that has dealer networks or just needs a large number of sites for a variety of reasons. That makes it a broader marketplace for us..

Got it. Okay, interesting. And then, I was looking at the numbers, the cost of - the sales and marketing cost. I was surprised that it was down sequentially and year-over-year, because I understand you’re beefing up the sales force.

Can you sort of explain that number?.

Yes, we stated out there for a second.

You said the total sales and marketing budget year-over-year?.

Yes. No, for the quarter, I think the sales and marketing expense was $1.17 million..

From around $1.3 million to $1.17 million this quarter, and that really had to do with some specific marketing campaigns that we were executing last quarter that completed - be repeated this quarter. In terms of the way we budget that’s around flat.

Now, when you take a look at Q4 last year, we made a specific investment in the conference and some other things that added about $100,000 that quarter relative to our Q1. And now, in terms of the way we’re budgeting, it’s probably going to stay around this level for a while, between $1.2 million and $1.3 million..

Okay. Great.

And can you just update us a little bit on your sales headcount, both on the direct and on the - so that the tele-sales?.

Yes, so our total headcount in our inside team is - we held that flat. That’s got three inside people underneath our manager, who also is dialing as well as managing. And on our direct team, we have four people selling direct to one person running the phone. So that’s actually a little bit lighter than we were at the beginning of last quarter.

And we’d probably be bringing that up. We are finding that right now with our marketing budget, six or seven people is probably our optimum number, so little bit lighter today than where we want to be..

Okay, great. Okay. Thanks a lot. Good job, guys..

Thanks, George..

Thanks, George..

And at this time, I’m showing no further questions..

Okay, great. Well, hey, everybody, we really appreciate all of you, all of our shareholders. And our goal is to continue to build a scalable business, which in turn will help to build great shareholder value. Today, we have annual recurring revenue of $7 million.

This is strong ARR, just based on three-year contractual commitments rather than the shorter-term contracts that many other SaaS businesses have.

Our professional services are continuing to drive strong gross margins that are approaching 50% today and we believe these financial fundamentals plus the tactical innovations and investments that we made in sales marketing are the foundation of a strong company and an opportunity for great stock appreciation.

So thank you for everything and for joining..

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