Michael Prinn - Executive Vice President and Chief Financial Officer Ari Kahn - President and Chief Executive Officer.

Howard Halpern - Taglich Brothers Manoj Nadkarni - ChipInvestor Group.

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital First Quarter Earnings 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 call is being recorded.

I would now like to turn the conference over to Mr. Michael Prinn, Chief Financial Officer. Sir, you may begin..

Thank you. 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 can obtain a copy of our earnings release by visiting our website. I’ll now turn the call over to Ari..

Thank you, Mike, and good afternoon, everyone. In the first quarter of fiscal 2018, we had revenue of $4 million, with the recurring revenue increasing to $1.9 million, which is a growth of 9.4% year-over-year for the recurring revenue.

Since 2016, we focused our business on expanding recurring revenue over perpetual licenses and professional services. Perpetual licenses and professional services are important, of course, but do not drive the same long-term value as the recurring revenue associated with SaaS and hosting subscription.

An interesting and growing part of our recurring revenue is our hosting enhancement. Our SaaS customers can subscribe to various enhanced hosting options that our perpetual license customers usually look to us for managed hosting and enhanced services to their subscription. Year-over-year growth in hosting was 26%.

Hosting is still a small part of our overall revenue, but this increase is interesting, because it’s related to a strategic trend that we’ve seen in the B2B market.

In 2017, in our first quarter of fiscal 2018, we saw great interest from B2B customers and found that we had a strong competitive edge, due not only to our out of the box B2B features in our software, but also due to our unique ability to provide highly customizable managed hosting.

The traditional commerce B2B market is twice the size of the B2C market, and B2B is a laggard in e-commerce, which rapidly trying to catch up now that e-commerce has become commonplace, and the new generation of B2B users expect to make their business purchases online. Our late largest new customers in 2017 were B2B.

And in Q1 of fiscal 2018, our greatest wins were also B2B customers. In the first quarter, we were selected by a division of a Fortune 100 logistics company to power a self-service B2B e-commerce solution. This customer requires advanced hosting capabilities, including PCI certification and back-end integration with their enterprise system.

The solution is typical of the trend that we’re seeing, where B2B companies need to increase online revenue and want to launch a new site quickly with the cloud solution.

As with other recent B2B wins, this customer was ready to make an initial investment of over $500,000, included the ability to connect their internal information systems to the e-commerce platforms and required a high-level of custom features due to the special relationships that they have with their customers, such as one-off negotiated rates, terms and payment methods.

We plan to launch the initial site for this company in our second quarter of fiscal 2018, that’s less than six months of development for such a custom solution.

The intention is then to have additional capabilities rolled into future releases throughout 2018 to 2019, they will be part of additional investments by this company beyond their initial $500,000 investment.

Another B2B win in our first quarter of fiscal 2018 was for a European analytical instruments company to deliver a unified multi-language site for several of its affiliate brands with an initial investment of over $600,000.

Our ability to provide GDPR compliant managed hosting was a key differentiator, as well as the specialty B2B features in our unbound timeless product. This company is able to use our configurable core template system from a rapidly launch insight and benefits from future enhancements that we’re making in our product each quarter.

This line competes well in the B2B market because of the many out-of-the-box B2B features that we provide, such as order attribution, inventory replenishment, custom price tiers, account roles and large order support with freight shipping.

Our enhanced hosting options, such as PCI certification, GDPR support and SOC 2 compliance are major differentiators for us in the B2B space as well. Custom integration to our customer’s internal systems, while still delivering the convenient stability of cloud managed hosting is unique to us.

Hosting subscriptions are long-term recurring contracts, and thanks to our efficient internal systems plus the great value that our customers derive from our hosting subscriptions. This is one of the higher margin components of our business.

We will continue focusing on the B2B market segment and have several B2B opportunities in our current sales pipeline to support this focus. Our partnership with Amazon Web Services and the resulting architecture that we’ve created on the platform laid the foundation for continued differentiations, especially in hosting for B2B.

Within our existing customer base, very happy to report that one of our largest customers was at the end of its three-year initial subscription and renewed their SaaS subscription by first quarter. This company subscription was scheduled for renewal in the third quarter of our fiscal 2018, but they’re likely to renew early.

And although, they are only required to make a one-year renewal, they need a three-year renewal. This adds tremendously to our backlog and it demonstrates the long-term value we delivered to our – and the strong relationships we have with customers.

The company above and beyond renewing its SaaS subscription, expanded its marketing automation e-mail subscription with a commitment to over $1 million in e-mail marketing from Bridgeline over the three-year term of its renewed SaaS subscription.

We did see marketing automation sales in our first quarter, but marketing automation is a standalone product that’s not driving revenues striving with our B2B differentiators, and we expect B2B the primary driver for growth in 2018.

We do find that nearly all of our new sales in both B2B and B2C will include a license to marketing automation software.

But marketing automation is a standalone product, it’s not a common sale for us in part due to the commoditization of marketing automation space, but more importantly, because the core value and differentiator for us is in the tight integration with our commerce and content management products to better personalize the online experience and nurture relationships that convert to new sales for our customers.

In our first quarter, 100% of our new customers purchased SaaS licenses compared to fiscal 2017, wherein each quarter, there was at least one customer who elected for a perpetual license instead of a SaaS license. This means that all of our new engagements booked in the first quarter add to our SaaS recurring revenue in our backlog.

But it also means that, we did not receive the one-time revenue bump in license revenue that we saw in each quarter of fiscal 2017. And as a result, the combined subscription in perpetual license revenue in our P&L is lower than in quarters where perpetual licenses were purchased.

This is the long-term trend in customers electing to purchase SaaS rather than perpetual licenses. And although, we’ll continue to provide perpetual licenses as an option, we expect SaaS to be the overwhelming choice going forward.

Interestingly, we do receive recurring revenue when we saw perpetual license, not only in the associated maintenance contract with perpetual license, but also because, although not required, all of our perpetual license customers in recent years have elected to subscribe to our managed hosting to manage their perpetual license.

Our professional services division launched a customer success team to more deeply understand our customers’ needs and further expand the value that we deliver to them.

The customer success team is building a strong pipeline of new opportunities within our existing customer base and creating additional service products to further help customers, including training, ADA compliance, advanced search and other initiatives.

In our professional services group, Bridgeline chose to make an investment of almost $150,000 in delivery services for the success of a particularly key customer in the first quarter of fiscal 2019, and this investment did impact our margin for professional services.

This is a strategic decision that is expected to create a relationship with great benefits for the customer and for Bridgeline going forward. In October, we released version 6.0 of our product suite, which includes an updated user interface with more flexible content offering, enhanced search and new marketing campaign builder.

Version 6.0 also includes improvements for multi-language and multi-currency e-commerce sites, which tie in well with our GDPR hosting capabilities. This year, we’re further investing in our software with several B2B enhancements, specifically requested by some of our newer B2B customers.

These capabilities will further differentiate us in the B2B markets to drive greater value from those customers. And at this time, I’d like to turn the call back over to our Chief Financial Officer, Mike Prinn, who’ll provide more details on the financial results for our first quarter..

Thanks, Ari. So I’ll review the results of operations for our first quarter of fiscal 2018 ended December 31, 2017. First quarter revenue remained constant at $4.0 million compared to the first quarter of last year. Let me give some additional color around the various components of revenue.

So our services revenue increased 1.7% to $2.1 million in the first quarter of fiscal 2018 from $2.0 million in the first quarter of last year.

Subscription and perpetual license revenue for the first quarter of fiscal 2018 decreased 6.9% to $1.6 million, compared to $1.7 million in the first quarter of fiscal 2017, which is really due to the lumpiness of the perpetual revenue as Ari spoke to.

In the first quarter of last year, we had a large perpetual license for 220,000 and in our first quarter of this year, all of our new customers purchased SaaS licenses, which spreads the revenue over 36 months.

So while the total license revenue decreased year-over-year, when you look at the components, you see that our SaaS revenue increased 7.3% to $1.5 million in the first quarter of fiscal 2018, compared to $1.4 million in the first quarter of fiscal 2017, and our hosting revenue increased 26.2% from 240,000 in the first quarter of 2017 to 303,000 in the first quarter this year.

As we saw the perpetual license engagements that we closed in fiscal 2017 generate hosting revenue. All of our perpetual customers in recent years have also chosen Bridgeline to host their website.

We’re excited about the growth in this piece of our recurring revenue, because the great value our customers derive from it and hosting is also a high margin revenue stream for us because of internal efficiencies.

Our recurring revenue, which consists of the SaaS licenses, annual maintenance on perpetual licenses and hosting increased 9.4% to $1.9 million in the first quarter of fiscal 2018, compared to $1.7 million in the first quarter of last year. Our annualized recurring revenue, or ARR, at the end of the first quarter was approximately $7 million.

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. Our gross margin for the first quarter was 50.7%, compared to 57.5% in the first quarter of last year.

This is lower than the first quarter of last year and lower than where we’ve been recently. Our gross margin decrease can be primarily attributable to our services gross margin. Our services gross margin decreased to 32.2% in the first quarter of fiscal 2018, compared to 44.3% in the first quarter of fiscal 2017.

As Ari mentioned, the reason for the unusually low service margin is that, we decided for strategic reasons to incur approximately 150,000 in cost to ensure success of the key customer. We expect to see an improved services margin in our second quarter.

Our operating expenses were reduced by 11.5% to $2.4 million for the first quarter of 2018, compared to $2.7 million for the first quarter of fiscal 2017. We’ve added resources to our research and development team to focus on improving our product, which is driving the increase in R&D from last year.

However, that increase is being offset by decreases in all of our other operating expenses, as well as our depreciation and amortization expense in the first quarter. Moving to the bottom line. Our net loss was $430,000, compared to $408,000 in the first quarter of fiscal 2017.

Our non-GAAP adjusted net loss was $233,000, or a loss of $0.05 per diluted share in the first quarter, compared to non-GAAP adjusted net loss of $161,000, or a loss of $0.04 per diluted share in the first quarter of last year.

Adjusted EBITDA for the first quarter of 2018 was a loss of $94,000, compared to $10,000 in the first quarter of fiscal 2017. So from an adjusted EBITDA perspective, we’re about $104,000 less than the first quarter of last year. This really is attributable to the extra cost that we incurred related to the strategic customer we talked about.

Otherwise, our first quarter is similar to Q1 of last year and generally consistent with our quarterly performance in fiscal 2017. Moving to the balance sheet. At December 31, 2017, the company had cash and accounts receivable of $4.3 million. Our total assets were $18.1 million. Our total liabilities were $7.2 million.

Our total debt at December 31 was $3.2 million, comprised of $2.5 million outstanding on our line of credit and the remaining amount related to our term loan.

Now just wrapping up with some financial outlook for the remainder of the fiscal year, we expect that our revenue for fiscal 2018 will be higher than the $16.3 million reported for fiscal 2017, and we expect to generate positive adjusted EBITDA for the full-year of fiscal 2018. Thank you. At this time, I’d like to open up the call to Q&A..

Thank you. [Operator Instructions] Our first question comes from the line of Howard Halpern from Taglich Brothers. Your line is now open..

Good afternoon, guys. Good afternoon..

Hey, Howard..

Congratulations on those two wins and the implementation cycle that you appear to have for those guys.

But my question regarding those two, could you give some sort of breakdown between hosting revenue services and recurring revenue? What kind of percentages are we looking at?.

Yes. So, Howard, for the large customer sort of renewal win that Ari talked about, there’s a very, very small service component, but it’s primarily all SaaS revenue and all recurring revenue..

Okay.

And – but those two – the two new ones that you had, one, the European one and the other 500,000 one, are they?.

Yes, news deals like that generally are around 50% license and 50% services.

It’s a great kind of rule of thumb to the initial engagement, so you would be looking at, for instance, [$0.25 million] [ph] in license and hosting fees over a three-year period and then a $0.25 million in professional services over a six-month period for the initial implementation.

And then after that, most of these companies will have a – future releases of their website, so there’ll be ongoing professional services that might be in the $25,000 a month range for the first few years, if there’s continual updates and new things that are happening for the site.

In the B2B world, it will tend to be a little bit more on the services side, because there are so many custom things that are happening in that space with one-off negotiated prices and products and so forth for each one of their customers.

So we feel a little bit more on the services side than you do on the license side than you would on the traditional B3C type engagement..

Okay. And you seem very excited about the B2B side.

How many, I mean, how many companies have – are possibly in the pipeline that you’ve contacted? And how long is the sales – is the sales cycle any different in the B2B, because I know you seem like the implementation is going to go swiftly, but is the sales cycle any different?.

Right. The implementation is always fast. But the sales cycle in B2B is – it’s probably similar in length, maybe a little bit longer than in the B2B – in the B2C space and B2C, what trips up your sales cycle is that you have first third-party that get involved on the design side that can slow things down.

And B2B space that tends to be less of that, more focused on the – on just the core business itself and there seems also be more willingness to do what we call an MVP, minimal viable product, where you can just sign an agreement, more rapidly make an initial launch for our site that perhaps doesn’t have all of the bells and whistles and then follow that on.

But because there’s so much more revenue behind the B2B sites, that balance is out and you end up with about the same length in the sales cycle. And that length is about six months, so that would be a typical sales cycle on the B2B space – four to six months, I would say, is the [indiscernible].

And in our pipeline, we’ve probably got about a half of our deals in our pipeline, they go a little bit more than that are actually B2B, which is a different trend from just a few years ago.

And we’re seeing that in the B2B space that a lot of these younger people who are now on the purchasing departments, for instance, are making a lot of noise internally and saying why are we so antiquated when I can go on to Amazon and buy something and have it delivered the same day, and that drives some of it.

B2B in general, the space itself is twice the size of B2C space, but that’s for larger area. In terms of e-commerce, it’s a much smaller still, because they are such laggards and now they’re trying to catch up..

Okay.

And you believe you have the right sales force to capture a good portion of what is in your pipeline or in your sales cycle?.

I actually think that our software and our services team and our sales team are probably better positioned today for B2B than B2C.

And the reason is that, our software enables a tremendous amount of customization, and the B2C space is becoming commoditized, where a lot of the features are well understood straight out-of-the-box and are driving prices down.

Now as a consequence, you don’t need to have as deep of knowledge as you do in the B2C, so we compete better, because we’re a little bit deeper in that regard..

Okay.

And I saw – is there anything to read into that you guys read that at the franchise conferences, their customers or regeneration that’s coming from that?.

I don’t know if there’s much to read into that. We were at a franchise conference just this week, and we continued to have unique capabilities in that space. But it’s a much smaller market. It’s a very niche market. And when you take out the quick-serve restaurants and franchise, which is sort of different animals from what we deliver on value to.

It’s a great area. We differentiate there, but it’s not the big growth area for us as a company..

Okay. And one last one on the gross margins. When you take out that the one-time expense, it brings it close to that 40% area for the digital engagement services side.

Is that a good number going forward for that line item?.

Yes, Howard….

It is a good number, and one thing to add to that, when we invest $150,000 towards enhancement, that also means that those resources are not growing. So the revenue goes down, because you have more capacity and the cost go up a little bit. So it’s a big deal for us to choose to do something like that and we don’t like to do that for just any reason.

But we have three customers that has serious needs and we’re going to invest side by side with them. And in that case, that customer was investing $300,000-plus towards the solution. Together, we are able to do things and payoff take any long-term..

Okay. It’s good to know how [Multiple Speakers].

Yes, Howard, that’s a good number to use, Howard. And the way we’ll continue to drive that higher than that 40% on the services side is, how we can manage our use of subcontractors as we grow. But if you back out that one-time adjustment, that’s a good number to use going forward..

Okay. Well, keep up the good work, guys..

Thanks, Howard..

Thanks..

Our next question comes from the line of David Shirley [ph] private investor. Sir, your line is now open..

Hey, thank you for taking my call, Ari and Michael. And Bridgeline is doing a real good job on the bottom line, it’s clear – you still have a little work to do on the top line..

Thank you, David..

Howard’s questions pretty much went in line with mine. Just want to follow-up on one thing he was talking about. I know, we were one of the exhibitors at the franchise conference since weekend or over the weekend.

Are there any plans in the future for maybe being exhibitors at some of the other areas of the businesses that were involved in, the water plant companies, the technology, the physicians-related type conventions that they have, would that be something that would be positive cash flow for a company?.

So that is a good marketing initiative.

And what’s interesting when it comes to exhibiting at these conferences, that the best conferences where we see most success are the industries of our customers like the brand IFA, the International Franchise Association for Franchise Space, and are not the technology conferences, where all of the software companies are.

And the reason why is that that software conferences are really just – become a social event, where software companies talking to each other as opposed to being on the ground where people are really talking about serious business problems like at IFA, for instance.

So the – I don’t know that necessarily water as a specific industry would be one that we would invest in. But manufacturing in general and some of these other conferences that are related to both our customers and our pipeline are great places for us to generate leads..

Hey, guys. I really appreciate it.

Keep up the good work and look forward to hearing from you guys in a few months, okay?.

Thanks, David..

Thank you, David, and thanks for all your support..

[Operator Instructions] Our next question comes from the line of Manoj Nadkarni from ChipInvestor Group. Your line is now open..

Hi, good afternoon, and thank you for taking my call..

Hi, Manoj..

Yes..

Manoj..

Hi.

What do you see as primary growth drivers for Bridgeline Digital in calendar year 2018?.

Okay. In – a year ago, I was expecting a lot of our growth to be residual of selling marketing automation. A year ago, I thought that we’re going to sell a large number of marketing automation licenses, standalone and then up-sell those to our Web Content Management.

But I see things a little bit differently now than I did at that point, because that particular space is so commoditized and it really is becoming saturated quickly. I think that our growth is happening on the more complex solutions, I think B2B is very likely to continue to drive our new engagements.

It is by far our – if we were to sector out all of our – the new wins that we have, B2B is a huge part of that. And yes, both the enterprise and pro sales for our unbound commerce and unbound Web Content Management will be a big part of that. Marketing automation, every single one of our customers buys marketing automation to get great value from it.

They buy enhanced packages from it. So that’s going to continue to be a part of it. But B2B space, I believe is going to continue to lead our new engagements..

Okay. And in terms of verticals, you talked about manufacturing and you have had wins in few other areas.

What verticals look promising to you?.

Yes. Well, manufacturing is certainly one of them. Now manufacturing has a particularly long sales cycle and it’s a little bit tricky in that regard. But that is one where we’ve got great traction and similarly have traction in logistics, shipping is an area that we’ve seen success.

But the broader underlying trend there is in B2B, which I know is very – it’s extremely broad. But that, of course, had a fundamental capabilities is where we make our investments and then the particularly industries within that are ones that will – would be a little bit more opportunistic over time..

All right. And I have a question about your recurring revenue model.

So when you win recurring revenue business, how much of it is reflected in the quarter that you get the business? For example, you had $1 million commitment from a major client, another $500,000 from another customer, how much of that showed up in the reported revenues?.

Yes. So we’re typically….

We generally – all right, go ahead, Michael..

We’re typically – yes, we’re typically able to – our contracts, we bill right away. But for example, like that $1 million, those are 36-month agreement. So typically, when you see us report contract values, the subscription is for 36 months, and it generally commences upon execution of the contract for the month after..

Okay. I see.

So it’s kind of equally rated, equally spread across the duration?.

Yes..

I see..

Yes, absolutely. It’s pretty much straight line with there being some variables, right? So like part of the subscription could be what they pay for e-mail sense and someone may have three x one month compared to one x than x. But for the most part, the subscription is spread out fairly ratably over the 36 months..

Okay.

So if instead that revenue had been a licensing revenue, most of it would show upfront, or a 50% of it would show upfront, how would you compare those two?.

Yes. No, I think what Ari was saying is, in our typical call it, enterprise engagements that have – say it’s a $400,000 engagement with half of it being in services and half of it being in license. The services half we recognize as we do the work, so let’s say, that spread over four to six-month period.

The other half, call it, 200,000 in this example, it would be one of two things. If the subscription revenue with SaaS engagement, we’d recognize it ratably over 36-months. If it’s a perpetual engagement, that is typically one, one-time upfront license payment. And so those you hear us use the word lumpy.

Those – for every 10 deals that we close, we typically see eight or nine of them are SaaS, and only one or two are perpetual. So the perpetual what you see large upfront and those just come in, but it’s a minority compared to the total deals we win..

Okay. I think that explanation helps quite a bit. Thank you..

Great..

Thanks..

And I’m showing no further questions. I would now like to turn the call back to Ari Kahn, Chief Executive Officer for any closing remarks..

Thank you, Brian. Well, we appreciate the support and patience of our shareholders and it’s our goal to continue building a scalable business model, which in turn will build shareholder value. Thanks for joining us today, and we look forward to speaking again in May Q2 fiscal 2018 conference call. Thank you, and have a great day..

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