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

Howard Halpern - Taglich Brothers Manoj Nadkarni - CIG.

Good day, ladies and gentlemen and thank you for your patience. You have joined Bridgeline Digital’s Second Quarter 2018 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 be given at that time.

[Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the call over to your host, Chief Financial Officer, Mr. Michael Prinn. Sir, you may begin..

Thank you. Good afternoon, everyone. I am pleased to welcome you to our second quarter conference call.

Before we begin, I would 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, 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 will now turn the call over to Ari..

Thank you, Mike and good afternoon everyone. In the second quarter of fiscal 2018, we had revenue of $3.7 million, which is about $300,000 lower than our first quarter.

The difference is primarily due to lower professional services with customers using more of the out-of-the-box features in our closed series and investments being made with key customer to enhance our product and create new sales opportunity.

Recurring revenue was slightly lower compared to Q1, but was up year-to-date in the long-term nature of our staff contract gives us a strong recurring revenue stream that has our strongest gross margins. Hosting grew by 12% this quarter totaling nearly 20% year-to-date.

We expect to add new hosting engagements due to increased requirements in security and regulatory needs such as the American Disabilities Act in general data protection regulation.

Our SaaS customers can upgrade their subscription to various enhanced hosting actions and our perpetual license customers usually look to us for managed hosting with enhanced services to their subscription. SOC 2 certification has been helpful in winning B2B customers and demand for PCI hosting is found in both B2B and B2C engagements.

We continue to see great interest in B2B sector, where we have strong competitive edge due to our out-of-the-box B2B feature set in our commerce product. In partnership with key B2B customers, Bridgeline is enhancing its products to provide even more competitive features.

Some of the key differentiators that help Bridgeline compete so well in the B2B sector are out-of-the-box order attribution, inventory replenishment, customer price tiers, account roles, and large order support with freight shipping.

In addition to commerce features, our highly customizable managed hosting options proved to be a decisive advantage when selling into B2B accounts. Traditional commerce B2B market is twice the size of the B2C market, but B2B is a laggard in e-commerce that was rapidly trying to catch up.

Now, that e-commerce has become commonplace in the new generation of B2B users. We expect to make their business purchases online. We continue to focus on growing sector and expect continuing success winning B2B accounts.

Bridgeline presented its latest capabilities that the B2B online digital marketing conference in Chicago last week, where we found great interest and initiated dialogues with several prospective customers.

Few of our larger B2B customers are expanding their web deployments into Europe, right now, where higher regulatory requirements make us a great fit. We expect to launch both new European sites this summer, which demonstrates not only our capabilities for those regulatory challenges, but also our speed to market for large enterprises.

These are great revenue opportunities for us. In addition to the growth in the B2B sector, we continue to see B2C demand one of our most recent new customers is the healthcare system servicing 150,000 patients throughout New England that operates several hospitals in primary care practices as well as the public health department.

To help increase their customer engagement, they have engaged Bridgeline to create a multi-language site with high levels of content for self-help and self-education as well as advanced health blogs and physician directories. Bridgeline recently engaged with AARP International to enhance its desktop and mobile websites.

We are partnering with AARP to create an online interactive aging readiness and competitiveness report and an interactive sub sites that will provide visitors with access the per country needs feeds and other localized content.

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

This team has built a strong pipeline of new opportunities within our existing customer base and created additional services products to further help customers, including training, ADA compliance, GDPR audits and other initiatives.

In our first quarter, we noted that Bridgeline made a strategic investment in services organization with the key customer and in the second quarter, we completed that investment which had $150,000 impact on Q2 revenue that paves the way for future sales opportunities and created further improvements to our product line.

Bridgeline has seen an increase in referrals from channel partners and has begun expanding its channel network with reseller agreement for digital agencies and system integrators.

In these partnerships, we expect to be included in more sales opportunities with our partner performing some of the professional services for each engagement and the license revenue coming to Bridgeline.

Investments in our product, especially enhancements to our core templates and other marketing capabilities, added in Version 6.0 that made our software even more compelling for partner channel sales.

In October, we released Version 6.0 of our product suite, which included an updated user interface with more flexible content offering, enhanced search and new marketing campaign builder.

Version 6 also includes improvements for multi-language and multi-currency e-commerce site, which tie in well with our GDPR hosting capabilities and we are the foundation for the two commerce sites that we are launching in Europe this summer.

This year we are further investing in our software with several B2B enhancements specifically requested by new B2B customers. These capabilities further differentiate us in the B2B market to drive greater revenue from those customers.

At this time, I would like to turn the call over to our Chief Financial Officer, Mike Prinn who will provide more details on the financial results for our second quarter.

Mike?.

Thanks, Ari. So let me go through the results of operations for the second quarter of fiscal 2018 ended March 31. Total revenue for the second quarter of fiscal 2018 was $3.7 million compared to $4.0 million in the second quarter of last year. Let me give some additional color around the different parts and pieces of revenue.

So, our service revenue was $1.9 million in the second quarter of fiscal 2018 compared to $2.2 million in the second quarter of last year.

The decrease in service revenue is primarily attributable to time that we strategically encourage provide capabilities to a key customer that creates future revenue opportunities for us as well as improvements to our software.

We talked about this little in Q1 as well and I am pleased to report we successfully launched the customer website in March and the investments made by Bridgeline are now complete for this customer and opportunity.

This made up most of the decrease in service revenue from Q2 of this year compared to Q2 of last year and most of the decrease in our overall revenue number. Subscription and perpetual license revenue for the second quarter of fiscal 2018 decreased to $1.5 million compared to $1.6 million in the second quarter of fiscal 2017.

SaaS revenue decreased 6.3% to $1.3 million in the second quarter of fiscal 2018 compared to $1.4 million in second quarter of last year. Our hosting revenue increased 12.4% from $261,000 in the second quarter of last year to $293,000 in the second quarter of 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 are excited about the growth in this piece of our recurring revenue because of 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 SaaS licenses annual maintenance on perpetual and hosting decreased 3.9% to $1.7 million in the second quarter of fiscal 2018 compared to $1.8 million last year. The decrease in the SaaS license and recurring revenue is attributable to one customer that migrated off our platform.

This customer had a change in ownership and the parent company determined that this business as well as other subsidiaries should migrate to a common content management platform.

Our annualized recurring revenue or ARR at the end of the second quarter was approximately $6.9 million and as a reminder our new engagements are typically 3 years with 1 year audit renewals. Gross margin for the second quarter was 49.1% compared to 57% in the second quarter of last year and lower than where we have been recently.

Our gross margin decrease can be primarily attributable to our services gross margin. Our services gross margin decreased to 32.7% in the second quarter of this year compared to 46.8% in the second quarter of fiscal 2017. The reason for this unusually low service margin is the strategic investment that we mentioned earlier for a key customer.

We expect to see much more improved services margin in our third and fourth quarter. Our operating expenses were reduced by 12.7% to $2.4 million for the second quarter of fiscal 2018 compared to $2.7 million for the second quarter of fiscal 2017.

We have continued to make improvements to our facilities cost over the past few quarters, which has helped drive the decrease each quarter. In the second quarter, we did incur our restructuring charge of $181,000.

This is related to our corporate facility in Burlington, we have spoken in prior quarters about the excess space that we have in our intent to sub-lease.

In the second quarter, we completed a lease restructuring and incurred some expense in terms of commission and moving expenses also about $60,000 of the $181,000 restructuring fee was a non-cash charge related to writing off the value of the leasehold improvements in the portion of the space that we gave up.

We are pleased with our restructured lease as on a go forward basis, it will reduce our operating expenses by about $75,000 per quarter. The restructuring of our leases has also led to the reduction in depreciation and amortization expense in the second quarter. We will continue to see this number decrease in future quarters.

Moving to the bottom line, our net loss was $680,000 compared to $530,000 in the second quarter of fiscal 2017. Our non-GAAP adjusted net loss was $306,000 or a loss of $0.07 per diluted share in the second quarter compared to non-GAAP adjusted net loss of $114,000 or a loss of $0.03 per diluted share in the second quarter of last year.

Our adjusted EBITDA for the second quarter of 2018 was a loss of $185,000 compared to a gain of $22,000 in the second quarter of fiscal 2017. Turning to the balance sheet quickly at March 31, the company had cash and accounts receivable of $3.6 million, total assets were $17.2 million and total liabilities were $6.8 million.

Our total debt at March 31 was $2.7 million comprised of $2 million outstanding on our line of credit and the remaining amount related to our term note. Now, I’d like to wrap up with some financial outlook for the remainder of the fiscal year.

So, we expect that our revenue for fiscal 2018 will be between $15 million to $15.5 million and we expect to generate adjusted EBITDA between negative $500,000 and positive $100,000 for the full year of fiscal 2018. Thank you. And at this time, I’d like to open up the call for Q&A..

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

Good afternoon, guys..

Hey, Howard..

Hi, could you talk maybe a little bit about your active customer pipeline that your sales force is actually working on and how is it weighted more towards the B2B, B2C, could you talk about what’s in the pipeline basically?.

Yes, we are seeing more on the B2B side than on the B2C and we are also seeing larger deals nowadays. So most of the customers in our forward-looking pipeline I would say about 60% of them are B2B.

And generally, we are seeing deals with an initial engagement in the $400,000 plus range and that’s a little bit different than last year, where we were looking at smaller engagements, I am not sure exactly why, but last year lot of our engagements were initial engagement in the 250K range.

We are seeing a number of deals that are being brought to us from channel partners. So, we are making a focus on that. We don’t have a very large channel program right now, but we are expanding that, that we signed two channel partners just last quarter and that’s going to be part of the forward pipeline..

Okay.

And have you structured the sales force any differently or different type of salesperson to go after B2B rather than B2C?.

Well, it’s not so much a different type of salesperson, but the marketing venues are a little bit different. We are for instance – last week we are in Chicago at B2B online manufacturing expos. So, in terms of lead gen that’s a little bit of the different deal.

Now, when you are in the B2B sales cycle that is more of an enterprise sales cycle and you need to have a seasoned rep that can have an executive conversation, but we already had a team that was built around that profile so that doesn’t require change from us..

Okay.

And now as a consequence of good consequence as of larger value deals, any kind of constraint on or how many deals you can start in the pipeline I guess based on what your workforce is at this point?.

Yes. Well, the B2B sales cycle is the longest sales cycle, it tends to be in more of the 6-month range and compared to 4 and they tend to be a little bit bigger. In terms of the overall quota per sales rep that’s not changing and B2B sales although they take a little bit longer they stall out a number of times in the middle of the sales cycle.

So, the sales rep is able to manage more deals in this pipeline, because you have periods of inactivity..

Okay.

But also in terms of deployment do you have enough which will be a good thing if you had a bunch of deals hit almost at the same time or can you manage when the deals might have to start deployment do you have enough staffing consultants and such to get the deals going?.

Right. So what we have done is we don’t internally have enough to manage a bunch of B2B simultaneous deployments and what we did to that extent was created a systems integrator partner network that we used as bench.

So, our internal people of the top level architect build its top dollar with an average bill rate of close to $200 an hour, which is an average for our team members. And then we are able to augment that staff and even markup significantly the partner network. And that model will continue.

We will grow and expand our services team as demand grows, but we will also grow that network. Right now, we have got I think a little more than 20 services people in-house and in terms of outside network we are probably in the low-teens..

Okay. Well, I look forward to seeing those deals come in. Keep up the good work..

Great. Thanks..

Thank you. Our next question comes from the line of Manoj Nadkarni of CIG. Your question please..

Hi Manoj..

Yes, good afternoon and thanks for taking my call. So, in the investor conference in New York a couple of weeks ago you showed backlog of $18 million spread over 36 months, I assumed that was at the end of December 2017.

May I ask you how has your backlogs changed as of the end of March quarter?.

Yes. Our backlog is slightly less than that, nothing material. So, I think those numbers are pretty consistent. It’s just a reminder that was sort of 36-month backlog. So there was a service piece that’s a little smaller than it was, but everything you saw for sort of license, hosting and maintenance, there has really been minimal change..

Yes, that kind of slides up and down as we complete projects as things come out of the backlog and come back in..

Yes.

And if I remember correctly, there were about $8 million or so in backlog that was 12-month duration, so that would be recognized sort of from the December that would be recognized during the current the calendar year, right?.

Correct..

Okay..

I think I am saying – I am probably going to say the same thing a different way, if the number hasn’t changed that much from March 31, that number is going to be over the last two quarters of this fiscal year and in the first two quarters of our fiscal ‘19 I think we are saying the same thing in the next four quarters..

Okay. And Ari, you gave an example of developing smart oil cap for Perkins, one of your customers. To me, this seems like an IoT, or Internet of things type application.

If this just for one customer or do you see more business along these lines from other customers in future?.

Yes. We do expect to see more business along these lines, especially in the B2B space and the manufacturing space, where individual devices are being shipped more and more frequently and everything from warehouses and logistics to the end-user products.

We have got a couple of conversations that are going on right now with customers that are not doing exact same thing that Perkins did, but other similar things. That’s a trend that we expect to continue and some of the innovations that we made alongside of Perkins rolled into our products are going to enable us to win more of those opportunities..

Okay. So this is more so for winning new business or extra business from existing customers rather than adding revenues to your existing contract.

Any color?.

It will do both. So, even within our existing contracts as customers are continually updating their implementations to be more and more competitive we have a team we call our customer success team, which is dedicated to helping our customers understand future opportunities for their site and engage them to do new things.

So, we share with all of them examples like the Perkins one and hopefully that creates opportunities for them to expand their projects..

Very good. Also a question on your balance sheet, did you improve upon your balance sheet, especially in terms of debt.

I don’t have the numbers from last year or how does it compare to last year?.

Compared to year end, the debt is pretty much the same. It’s $2.7 million compared to $2.5. There is two pieces. There is a $1 million term note that we have outstanding.

We drew upon that in October, so that’s new and then the accounts receivable baseline of credit is a maximum of $2.5 million, but we only had about less than $2 million outstanding at year end, so just minor fluctuations..

Okay. And your ARR or the annual recurring revenues you are running around $7 million a year on that, should we expect it to and that’s roughly what about 40% or so or maybe more than 40% of your revenues, total revenues, should we expect it to stay around that level or do you see that building up.

Any color?.

Yes, I think, so $6.9 million was the number that we gave in the call. And I think that’s just a good rate as of today and as we win deals and if we have any customer attrition, I think we will just continue to keep you posted on that basically every quarter..

Okay, very good. Thanks..

Thanks, Manoj..

At this time, I would like to turn the call back over to Ari Khan for any closing remarks.

Sir?.

Great, thank you. 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. Thank you for joining us today. We look forward to speaking again in August 2 on our Q3 2018 conference call. Thanks..

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