Ari Kahn - CEO Mike Prinn - CFO.

Manoj Nadkarni - ChipInvestor Group.

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Bridgeline Digital Fourth Quarter Earnings Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, CFO of Bridgeline Digital, Mr. Mike Prinn. Sir, you may begin..

Thank you. Good afternoon, everyone. I'm pleased to welcome you to our fourth 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 the 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 a copy of our earnings release by visiting our website. I'll now turn the call over to Ari.

Ari?.

Thank you Mike and good afternoon everyone. We're pleased to report that in fiscal 2017, we met our guidance of quarter-over-quarter increasing revenue and positive adjusted ea for the year.

In fact, we delivered positive adjusted EBITDA each quarter of the year with the improvement totaling over $900,000 compared to fiscal 2016, demonstrating our commitment to strong financial management.

The notable improvements to the company's bottom line highlight the impact of the many changes we made in 2016 that focused the business on its iAPPS software suite, which is the engine behind our high margin recurring revenue. We finished fiscal 2017 with all non-iAPPS recurring revenue removed from our revenue stream.

The non-iAPPS recurring revenue was low margin, sometimes, loss making residual revenues left over from historical acquisitions that we removed by either selling the accounts or converting the customers to use our iAPPS platform.

Although, shedding non-iAPPS revenue offset some of our top line growth, it made a big positive impact on our bottom line, which was the focus of 2017. And with this legacy lower margin revenue behind us, we have more transparent growth of our core iAPPS business, which is the primary value driver for the company.

In fiscal 2017, revenue increased by over 13% to $4.2 million for the fourth quarter.

This increase included the shedding of non-iAPPS accounts into iAPPS subscription and perpetual license revenue increased by over 17% compared to 6.4 million in the fourth quarter of fiscal 2016, which in turn grew from 4.9 million in the fourth quarter of fiscal 2017, showing the year over year over year growth of our iAPPS subscription perpetual license revenue.

This revenue is the number one driver of our business with over 70% gross margins. iAPPS professional services make up the remainder of our revenue now and it also has strong gross margins of over 40% for fiscal 2017.

In addition to the iAPPS recurring revenue, which is SaaS, hosting and maintenance, we saw iAPPS perpetual license revenue every single quarter of 2017. Perpetual licenses create near term increases in revenue for the quarter and also have an ongoing recurring impact as they're accompanied by recurring iAPPS hosting and maintenance agreements.

I'm happy to kick off 2018 with a fully focused company where it's easier to see our growth and the value that we deliver. We recently booked some great wins, especially in the B2B and in the franchise markets.

In Q4, we were selected by a Fortune 500 retailer to power four of its service franchise divisions and deliver over 350 websites with a first year engagement of nearly $1 million and strong opportunities for further growth in years two and three.

This engagement is largely iAPPS license and hosting high margin revenue with the customer performing much of the implementation services themselves using our team as mentors and staff augmentation.

The retailers’ 350 sites will be built on Bridgeline’s variant technology that allows a franchiser to control branding and curate content for its franchisees, while allowing franchisees to leverage their local knowledge and add further content to their websites to drive additional revenue.

Bridgeline is unique in its franchise capability, which gives us an advantage with franchises and brand networks in the sales process. Furthermore, we offer subject matter expertise for franchises in addition to our out of the box variant technology to drive greater value, expedite site launches and reduce implementation costs.

But not only did our competitive advantages in the franchise market help drive new business, our B2B capabilities are winning in competitive sales as well. We were selected by a division of a Fortune 100 global logistics company to power a self-service B2B e-commerce solution with an initial commitment of over $0.5 million.

The new site provides full cycle B2B e-commerce and leverages our marketing automation software to increase user engagement.

Another recent B2B win is with an analytical instruments company, based in Europe to deliver a unified multi-language site for several of its affiliate brands, including a shared product catalog that has an initial investment of over $600,000.

Part of the momentum we see in the B2B sector is due to our B2B specific e-commerce features, including attribution, auto replenishment and large order management. With over 30% of B2B customers not using content management platform on their website yet and the B2B market being twice the size of B2C, we believe this is a growth market for Bridgeline.

Our enterprise hosting systems give us another advantage of B2B by enabling tight integration with our customer's internal systems. Our recent investments in compliance for PCI, SOC 2 and GDPR differentiate us and help win these opportunities. GDPR is the new General Data Protection Regulation Act in the EU.

This act creates an important opportunity that has fueled part of our 2017 successes. Many of our competitors are not able to provide GDPR hosting and require their customers to either turn to a third-party or become experts in hosting and GDPR themselves. We, on the other hand, provide this out of the box.

In Q4 of fiscal 2017, Bridgeline launched a GDPR hosting data center in Germany and Ireland for some of our European customers. We expect GDPR to drive both B2C and B2B opportunities that requires many companies to change or completely rebuild their commerce websites. Our early adoption of this standard is a competitive advantage.

In addition to B2B deals strengthening our business, we're pleased to see expansion in our existing customer base and many of our customers own several brands with separate websites and they proactively recommend us to expand across their organization.

To build upon this trend of expansion in existing customers, we launched a customer success team in Q4 of fiscal 2017 that helps customers better understand the breadth of our software suite and delivers additional opportunities where we can help them grow.

This team is revenue driven and has initiatives that include GDPR, ADA compliance, enterprise search, SEO and strategic revenue growth with our marketing automation platform.

In our professional services division, we added several new engineers and project managers to deliver on both our newly won customers and also on the initiatives driven for our new customer success team. This increased capacity will help us drive even more services revenue.

We invested in our engineering team in 2017 as well by adding new leadership with Carl Prizzi leading product management and Jim Voss leading engineering. We added several new team members to engineering, hosting and support organizations.

In Q4 of fiscal 2017, these teams released version 6.0 of our product suite, which includes an updated user interface, more flexible content offering, enhanced search and a new marketing campaign builder. The new version includes our updated analysis product, Insights, which provide an at a glance site performance data for our customers.

Version 6.0 also includes improvements for multi-language and multi-currency e-commerce sites, which will tie in well with our GDPR hosting capabilities.

In addition to launching sites for our customers, we launched a new corporate website for Bridgeline itself in the fourth quarter along with improved branding centered around the term unbound to better describe our capabilities and we're moving away from our previous iAPPS brand, which can be confused with mobile phone apps.

Bridgeline received industry recognition from top analysts in Q4. Gartner recognized Bridgeline by including us in their annual vendor guide report for digital commerce and Forrester has featured Bridgeline through channel marketing blog.

By delivering fiscal 2017 with repeated positive adjusted EBITDA, sequential quarterly revenue growth and a continued growth in our high margin recurring revenue, we start 2018 with an opportunity to build on our successes and invest in top line growth with confidence and efficiency in operations of our team.

I look forward to a great and focused 2018 that can deliver strong shareholder value. At this time, I’d like to turn the call over to our Chief Financial Officer, Mike Prinn who will provide more details on the financial results for our fourth quarter..

Thanks, Ari. So I’ll go through the results of operations for the fourth quarter ended September 30 as well as some color around our full fiscal year. Fourth quarter revenue was 4.2 million compared to 3.7 million in the fourth quarter of last year, an increase of 13.7%.

This was within the range of guidance we gave of 4.1 million to 4.3 million and this is now the fifth quarter in a row where we've had sequential revenue increase. Let me give some additional color around the various components of revenue.

So, our services revenue increased 15.2% to 2.2 million in the fourth quarter of fiscal 2017 from 1.9 million in the fourth quarter of last year. Subscription and perpetual license revenue for the fourth quarter of fiscal 2017 increased 17.3% to 1.8 million compared to 1.5 million in the fourth quarter of last year.

SaaS revenue increased 6.1% to 1.4 million in the fourth quarter of fiscal 2017, compared to 1.3 million in the fourth quarter of last year. Our hosting revenue decreased from 306,000 in the fourth quarter of 2016 to 263,000 in the fourth quarter of this year, however, our iAPPS hosting revenue increased 5.8% in the fourth quarter of fiscal 2017.

This decrease was attributable to non-iAPPS hosting that we had in Q4 of last year that as Ari mentioned earlier is one of the legacy revenue streams that was a distraction, hurt our margins and we sold it off in the first quarter of this year.

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

And I would like to point out that while the total recurring revenue remained constant year-over-year, included in the 2016 number is the non-iAPPS recurring revenue component that we strategically shed.

So our iAPPS recurring revenue did increase 5.7% to 1.8 million in the fourth quarter of fiscal 2017 compared to 1.7 million in the fourth quarter of last year. We're pleased with this progress and expect it to continue.

And right now, our annualized recurring revenue or ARR at the end of the fourth quarter was approximately 7 million and we expect that to grow each quarter throughout fiscal 2018. Now that we're finished shedding our non-iAPPS recurring revenue, this more common measurement of ARR more transparently represents the quality of our revenue.

All of our new engagements are typically three years with one year auto renewals, making our ARR particularly sticky revenue compared to many competitors with only year to year agreements. And our services revenue increased 15.2% to 2.2 million in the fourth quarter of fiscal 2017 from 1.9 million in the fourth quarter of last year.

This is a result of us driving a higher utilization from our team and we’re excited that this is the third quarter in a row where the services revenue has been above 2.1 million. We've been winning new business at a higher rate in fiscal 2017 compared to last year and this has helped us build up our services revenue backlog.

Turning to gross margin, our gross margin for the fourth quarter was 54.8% compared to 59.3% in the fourth quarter of last year. This is a 4.5 point drop from prior year and there is two primary reasons for this lower gross margin.

In the first half of fiscal 2017, we transitioned our network operation center to Amazon Web Services and we’re seeing a cost structure that is slightly higher than we anticipated. We do have some opportunities that we’re evaluating in order to reduce these costs and expect to see a reduction in the AWS cost in the upcoming quarters.

I'd like to point out that by moving our NOC to the cloud, we reduce and almost eliminate the need for purchasing our own equipment.

So while the AWS costs have increased slightly, the amount of capital expenditures has been reduced significantly and you can see that in our income statement that our depreciation and amortization went from 287,000 in the fourth quarter of last year to only 113,000 in the fourth quarter of fiscal 2017.

We expect to continue to see a depreciation and amortization decrease in fiscal 2018. And secondly, some of our gross margin decrease can be attributable to our services organization and structure.

So we've been adding resources which helps drive the significantly higher services revenue in the fourth quarter of 2017 compared to last year, but we've been using subcontractors and depending on the project, the timing and the skill set, we have, in some cases, incurred more costs than what our internal resources would be.

Our operating expenses were reduced by 13.6% to 2.6 million in the fourth quarter of fiscal 2017 compared to 3 million for the fourth quarter of fiscal 2016. While our general and administrative expenses increased slightly via significant reductions to our sales and marketing expense and a depreciation and amortization expense in Q4.

Moving to the bottom line, we had an improvement of 3.1 million in the fourth quarter compared to last year. Our net loss was three 332,000 in the fourth quarter of fiscal 2017 compared to a net loss of 3.4 million in the fourth quarter of last year.

This is a significant improvement year-over-year and is a result of a much better operating performance in the quarter combined with one significant item from last year. So if you remember, we recorded a non-cash charge in Q4 of last year of 2.7 million related to the inducement of a convertible debt on our balance sheet.

Our non-GAAP adjusted net loss was 98,000 or $0.02 per diluted share in the fourth quarter compared to non-GAAP adjusted net loss of 429,000 or a loss of $0.12 per diluted share in the fourth quarter of last year. We’re excited to be able to report positive adjusted ea for the fourth consecutive quarter and that makes all of fiscal 2017 positive.

Our adjusted ea for the fourth quarter of 2017 is 41,000 compared to a loss of 300,000 in the fourth quarter of last year. At the beginning of the year, we gave guidance that we expect to drive positive adjusted EBITDA for the full fiscal year in 2017 and we were able to deliver that in fiscal 2017 and again in every quarter.

Turning to our results for the full year fiscal year 2017 compared to fiscal 2016, our revenue for fiscal 2017 increased 2.5% to 16.3 million compared to 15.9 million for the same period in last year. Our subscription and license revenue increased 11.6%.

The increase in our iAPPS recurring revenue was 8.8% as that increased to 7 million for fiscal 2017 from 6.4 million in fiscal 2016, which as Ari mentioned was up from 4.9 million in 2015. We expect our iAPPS recurring revenue to continue to grow as we enter fiscal 2018.

While our services revenue remain constant at 8.5 million, our related cost of service revenue decreased by 232,000, resulting in better services gross margin for the year. Our gross profit for fiscal 2017 was 9.1 million compared to 8.6 million for fiscal 2016.

I think it's important to point out that while our revenue increased by 398,000 for the year, we were also able to reduce our cost of revenue by 122,000 for the year. This resulted in increasing gross margin from 54.2% in fiscal 2016 to 56.1% for fiscal 2017.

We’re pleased with the gross margin improvement we made throughout the year and we think that we can see continued improvement in fiscal 2018. Our operating costs for fiscal 2017 were reduced by 13.5% to 10.5 million compared to 12.2 million in fiscal 2016, an improvement of over 1.6 million.

We had net loss of 1.6 million in fiscal 2017 and this was an improvement of over 6.2 million compared to the net loss of 7.8 million in fiscal 2016.

As a reminder, a portion of the 6.2 million improvement is related to the non-cash charge for the inducement of our convertible notes, but even excluding this charge, our net loss improved by 2.8 million. This was a result of increased revenues, lower cost of goods sold and lower operating expenses.

And our adjusted EBITDA for the year improved by 907,000 from a loss of 785,000 in fiscal 2016 compared to a positive 122,000 for fiscal 2017. This is again a combination of our increased revenue, significant reductions to our facilities and our reduced operating expenses.

For September 30, the company had cash and accounts receivable of 3.8 million and our DSO was 56 days. Total assets were 17.6 million and total liabilities were 6.3 million and our line of credit balance at September 30 was 2.5 million. I just want to wrap up with some financial outlook.

So we expect our revenue for fiscal 2018 to be higher than the 16.3 million we reported for fiscal 2017 and we expect to again generate positive adjusted EBITDA for full year of fiscal 2018. Thank you. And at this time, we’d like to open the call up to Q&A..

[Operator Instructions] Our first question comes from the line of Manoj Nadkarni of ChipInvestor Group..

You talked a bit about customer base in your commentary.

Can you please elaborate further where you’re seeing revenue traction, say, small companies versus large companies, what type of verticals, US based companies versus non-US?.

Sure. Sure. So for us, most of our business is either in -- we're seeing the traction in 2017, the companies between say as small as 500 million in revenue and as big as 2 billion, maybe a little bigger than that, 4 billion. Now, we have some Fortune 500 and Fortune 100 wins this year.

Now, those are departmental wins, not corporate, the departments would similarly be 2, maybe $4 billion group within those companies. Our business is primarily US based.

We do have some European customers and those customers for us started off building their US site and then we began powering their European sites and we are seeing a lot of interests in Europe. I think a lot of it driven through the new GDPR standards where people just have to rebuild their site in order to be compliant.

B2B, especially in the manufacturing space is an area that we have had a lot of the success recently and we think that in general, B2B is going to be an area for 2018 that we'll see growth and we'll make some investments in marketing in that area and we've already got a number of product enhancements, specifically for B2B.

The B2B space by the way, according to Forrester, 32% of B2B sites do not even have a web commerce, content management engine behind them. They're still legacy technologies and the B2B market itself is twice the size of B2C, yet, it's a laggard.

So, I think that in general, everybody is going to start seeing more and more B2B activity and we're a little bit ahead of the curve I think in terms of the feature sets that we have and we're really happy with our momentum in that space this year..

Okay.

So the challenge for you in growing business, let's say, in B2B, is that mainly just making the customers aware of your offerings or is it more competitive, any color on that?.

I think that our primary challenge is market awareness. We win a very large percentage of the deals that we’re in, but our pipeline is not big enough.

We need to be better known, our marketing budget is limited by the size of our company and the product itself wins when it gets to compete, but there's a lot of opportunities out there that we're not participating in that we don't know about..

Okay. And Ari, you yourself had strong background in artificial intelligence.

How much AI is built into your offerings so far or do you see incorporating deep learning AI features into Bridgeline products?.

Well, I think that, especially on the marketing automation side that there's going to be a number of interesting AI opportunities coming into the products.

It is just a very simple example when we're sending out emails to be able to have the subject line of the email through AI, customized for every individual user to increase the likelihood of them opening would be something that wouldn't be terribly difficult to implement nowadays that we have a large enough data set.

We do not have a lot of AI built into our software today and we would be partnering with Watson and other technologies, incorporating that rather than building it ourselves. We do see that as an important area. We do have expertise in that space and we're going to be innovating there as well..

Very good. Very good.

And the current quarter is mostly over now, so if I may ask -- is it fair to say that you expect some year-over-year improvement compared to last year's December quarter?.

All right. Well, one of the big things that impacts our quarters is whether we sign perpetual licenses or not. And in the first quarter, our fiscal first quarter last year, we had some very strong perpetual licenses that spiked our revenue that quarter.

I don't spend -- there's pluses and minus with perpetual license as you do get the near term hit, but you don't have the long term recurring revenue from them, although you do get recurring revenue from -- if you do that hosting.

We do not have perpetual licenses lined up for this quarter itself, so we're not going to see that short term spike, but we have some great wins this quarter already, including the Fortune 100 logistics company, the European analytics business and a few other ones.

So we're pretty happy with how the quarter is shaping out, although, I can't say that it's going to have one of those perpetual license spikes..

[Operator Instructions] Okay. As there appear to be no further questions in queue, I'd like to turn the call back over to Mr. Ari Kahn for any closing remarks.

Sir?.

Great. Well, we really appreciate the support and patience of all of our shareholders and it's our goal to continue building a scalable business model, which in turn will build shareholder value. Thank you for joining us today. We look forward to speaking again in February for our Q1 2018 conference call.

And as always, please feel free to reach out to Mike or myself if you have any questions. Thanks again..

Thanks, everyone..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day..