Michael Prinn - EVP & CFO Roger Kahn - President, CEO & Director.

Howard Halpern - Taglich Brothers.

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital's Third Quarter 2018 Earnings Call. [Operator Instructions]. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Michael Prinn, Chief Financial Officer. You may begin..

Thank you. Good afternoon, everyone. I'm pleased to welcome you to our third 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 with 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 of 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'll 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. Bridgeline acquired customers in the banking and health care markets during our fiscal third quarter and also saw a multiple license upsell within our existing customer base, including several health care organizations that license our new Unbound Insights software.

We see great interest from our current customers in leveraging our experience in their selection of marketing technology. They seek our advice, not only because we are experts in the field but because compatibility with Bridgeline's platform is one of the most important factors in their selection process.

So it's the core technical platform on which the other marketing and commerce systems rely, which then serves as the central hub for the integration and communication with many marketing software systems for them and great value as we see prior customers with seamless integration between the systems in the Bridgeline platform.

Our customers' trust and dependency is highlighted with their interest that we found in our recently released Unbound Insights software that allows Bridgeline-powered websites to analyze traffic and better understand the behavior of these areas to create more efficient marketing campaigns.

It's also seeing that role in our customers' selection of payment gateways, taxation systems, transaction services and enterprise search tools, among other technology.

This interest was central to the decision to launch our customer success team this year, and that team has helped us better identify and quantify customer needs that has led us to defining our strategy going forward.

This strategy is identifying new marketing technologies and demand by our customers and fully embrace them as Bridgeline-compatible through partnership or acquisition, and do not only offer them to our customers but also introduce Bridgeline's platform to the customers of these new technologies to create cross-sell opportunities in both directions.

This strategy is expected to increase sales volume against those lower customer acquisition costs. Bridgeline has a strong success rate and there's been a competitive sales scenario because of the breadth of our software suite and its proven ability to perform for enterprise customers.

We are not listening to sales evaluations as we would like because of our size and our marketing budget and the general brand awareness. With this strategy, we expect to accelerate growth by building on our customer confidence and the competitiveness of our software suite.

Our criteria for identifying new technology also includes finding fast solutions that can leverage the investments we've made into our cloud infrastructure to take advantage of the scalability and differentiating compliance features such as PCI and SOC 2.

Building on these investments is expected to drive greater gross margins for software that can be included in our cloud and can make new products even more successful by adding to their scalability and compliance status.

Bridgeline is not only identifying new marketing technologies with compatible customer bases and delivery systems but is also partnering with existing customers to create new products.

Bridgeline is partnering with a major B2B manufacturing customer to create a set of B2B commerce capabilities that enable product catalog to be shared across multi-language and multicurrency regions that are managed through a central console with native support for translation services.

This new product will be released next quarter and is called Unbound Commerce variant. One of our most recent new customers acquired in our third quarter is a health care organization in New England that operates several hospitals and primary care practices with more than 150,000 patients.

To help increase patient engagement, they intend to create build a multilanguage site with content for self-help and self-education as well as advanced health blogs and physician directory.

Using Bridgeline software, this increased availability of information online with email marketing is expected to help patients identify the need to visit hospitals sooner to improve patient treatment and drive greater revenues for the organization.

In our fiscal third quarter, a federal bank in New England selected Bridgeline to power their new website and marketing automation campaign. This bank has several locations and have used Bridgeline's capabilities to deliver more timely and relevant content to their customers to drive more traffic to their location.

We continue to see demand in banking and expect to build off this and our other new customers in this sector to grow in this industry. We sold several licenses in the health care sector this quarter, and our existing health care customer base continues to express interest in new services and products from our team.

We signed multiple licenses for Unbound Insights and health care alone during the third quarter. The newly launched customer success team has been successful in expanding customer relationship and is helping drive our strategy of identifying new technology needed by the existing customers so we can partner and acquire products from them.

This team has not only created opportunities to help customers with ADA-compliant new website features and better expansion of the usage of our software, it has also helped adoption of Unbound Insights this quarter through a procurement services provider in Washington state who helps school districts comply with all legal procurement requirements.

One customer who has several contracts with Bridgeline gave notice in July that one of its contract needs to be canceled and that it will continue with all of its other license agreements.

This cancellation is due to strategic redirection of that organization and only impacts one contract but will impact our future revenues by approximately $375,000 per quarter. Bridgeline plans to adjust its expenses as the contract will no longer need to be serviced.

This revenue could be replaced by a new engagement and strategic opportunity that the company may choose to pursue with its focus on identifying synergistic technologies for our customers.

We're excited and committed to prioritize identification of new technologies and customer bases to reduce customer acquisition costs and increase sales volumes through cross-sell. Leveraging our investments and expertise in our cloud -- SaaS cloud will be part of this focus that enable opportunities to deliver greater gross margin.

We're hopeful this focus results in us finding appropriate technologies in the near future and drive accelerated growth going forward. 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 of the third quarter..

Thanks, Ari. So I'll review the results of operations for the third quarter of fiscal 2018 ended June 30. Total revenue for the quarter of fiscal 2018 was $3.1 million compared to $4.1 million in the third quarter of last year. I will give some additional color on the various components of revenue.

So our hosting revenue increased slightly from $242,000 in the third quarter of last year to $243,000 in the third quarter this year. Subscription and perpetual license revenue for the third quarter of fiscal '18 decreased to $1.3 million compared to $1.7 million in the third quarter of fiscal 2017. There are 2 primary reasons for this decrease.

The first is, as we have mentioned before, our perpetual license revenue can be lumpy. And in the third quarter of last year, we had approximately $186,000 in perpetual license revenue from 2 new engagements. In the third quarter this year, all of our new engagements were SaaS so we didn't see the uplift from a new perpetual engagement.

The other reason was that we had one customer whose company was acquired and as their contract term came to conclusion, they made the decision to move their website platform to the acquiring company's platform. SaaS revenue was $1.1 million in the third quarter of fiscal '18 compared to $1.4 million in the third quarter of fiscal '17.

The reason for this decrease is primarily the loss of the customer via acquisition that was mentioned above. Our recurring revenue, which consist of SaaS licenses, annual maintenance on perpetual licenses and hosting, decreased to $1.5 million in the third quarter of fiscal '18 compared to $1.8 million in the third quarter of last year.

Again, this decrease was driven by the loss of the customer via acquisition that was mentioned above. Our annualized recurring revenue, or ARR, at the end of the third quarter was approximately $6 million. Our new engagements are typically 3-year contracts with 1-year auto renewals.

And our service revenue was $1.6 million in our third quarter of fiscal '18 compared to $2.1 million in the third quarter of last year. So about half the revenue decrease was related to services. We're focused on increasing our pipeline for new engagements as well as providing services to our existing customer base.

Gross margin for the third quarter was 50.2% compared to 55% in the third quarter of last year. This is lower than the third quarter of last year and lower than where we have been recently. Our gross margin decrease can be primarily attributable to our license and hosting gross margin.

The reason for the low margin is due to the customer who migrated off our platform, combined with the reduced pricing given to another customer in exchange for a multi-year renewal agreement, while our fixed cost did not change year-over-year.

So always reviewing our hosting infrastructure, which is highly scalable and thanks to the baseline investments we've made, can deliver greater margins as the customer base grows and the new products hosted for existing customers. Our operating expenses reduced by 17.2% to $2.1 million for the third quarter of fiscal '18.

That's excluding a $4.6 million goodwill impairment charge, which I'll talk about shortly, compared to $2.6 million for the third quarter of fiscal '17. We've continued to make improvements to our facility, cost and general spending over the past few quarters and really, over the past few years.

So in the third quarter, we've recorded a noncash goodwill impairment charge of $4.6 million. While the goodwill impairment test is usually seen in conjunction with the year-end, the company's required, on a quarterly basis, to assess and determine if there any triggering events.

In the third quarter, we determined that we need to perform an interim analysis and then as a result, we determined that our carrying value exceeded our fair value by $4.6 million. So we recorded this charge in the third quarter, a noncash charge.

It's our belief that the goodwill impairment post-adjustment is appropriate, and we do not expect an additional charge as part of our annual impairment testing we'll continue to do in the fourth quarter. Moving to the bottom line. Net loss is $5.2 million compared to $323,000 in the third quarter of fiscal '17.

Again, $5.2 million for this quarter included the impairment charge of $4.6 million. So excluding the goodwill impairment charge, the net loss is about $600,000.

Our non-GAAP adjusted net loss was $344,000 or a loss of $0.08 per diluted share in the third quarter compared to non-GAAP adjusted net loss of $51,000 or a loss of $0.01 per diluted share in the third quarter of last year.

Our adjusted EBITDA for the third quarter of 2018 was a loss of $332,000 compared to a gain of $49,000 in the third quarter of fiscal '17. Turning to our balance sheet. At June 30, the company had cash and accounts receivables of $2.5 million. Total assets were $11.4 million, and total liabilities were $6 million.

Our total debt at June 30 was $3 million, comprised of $2.3 million outstanding on our line of credit and the remaining amount related to our term loan. So in terms of financial outlook, I'd like to wrap up with some outlook for the remainder of the fiscal year.

We expect our revenue for fiscal '18 to be between $13.7 million to $14 million, and we expected to generate adjusted EBITDA between negative $900,000 and negative $700,000 for the full year fiscal '18. In our next call, we will be able to give some guidance about what we expect for fiscal 2019 to look like. Thank you.

And at this time, we'd like to open up the call to Q&A..

[Operator Instructions]. Our first question comes from Howard Halpern with Taglich Brothers..

Could you, I guess, describe a little bit more about the Unbound Insights product and the new product that you're expected to launch? What have you seen so far in customer interest in that one?.

Okay. Great. So Unbound Insights is an analytics and reporting package. It's compatible with Google Analytics.

What it does is it tracks customer behavior on your website, on your landing pages and in email open, provides reports on that and integrates tightly with Google Analytics so that it actually stores information and expands the underlying Google Analytics database so that all the traditional information that's requesting through Google is incorporated with this advanced info.

It's particularly valuable for commerce customers as it also tracks the interest in specific products and conversion, sales conversion ratios of visitors to the site purchases. So that's Unbound analytics. We've seen great demand within existing customer base for that.

And Commerce variant, the Unbound Commerce variant product, which will be released next quarter is a system for commerce customers who are in multiple regions with different currencies, different payment gateways, taxation systems, logistic systems that allow them to manage their entire product catalog through a single console, integrate with third-party translation services so automated translators and human translating workflows, and then publish that content out to the different regions in the appropriate language.

We have multiple customers that are signing up to this already, including the large B2B manufacturing company that is planning on leveraging as early as October, it's -- that's in two months. So we'll be releasing it, and we partnered with 2 customers in developing it.

This is something that's from a B2B perspective, global perspective, commerce perspective is a unique set of capabilities. I haven't seen it in any other product suite and I think that it's going to be a differentiating advantage for us..

And sales of these products, they're primarily going to be -- fit into the recurring revenue stream that you're going to generate?.

Both of these products here are sold with SaaS licenses and are delivered through our cloud. They do have the ability to be sold with perpetual licenses for customers who, for compliance reasons or historical reasons, need to manage their own license in the old-school perpetual way. We don't see very much demand for that anymore.

We expect -- so they are available that way as well. However, we're expecting that most of the licenses will be recurring fast. And even in the perpetual license, you do have the recurring maintenance stream and potentially, hosting stream if they're sold in that way as well..

Okay.

And in terms of, I guess, what you've done over the past couple of quarters, looking at your customers and the new customers that have been coming on, do you have any sense as to what type of increased penetration level you could achieve over the next couple of years within your existing customer base?.

Yes. Well, the existing customer base is a key part of our strategy going forward that I spoke about. And what we're saying is since the marketing budget within our existing customer base are several times greater than the amount that they invest in us.

So let's say that they're investing $150,000 a year with us, we might have a $500,000 annual marketing budget for digital technology, not for ad spend and other -- and content creation, but the technology itself.

What we're also finding is that we are the platform, the most fundamental software that all of their digital marketing technology is based upon. We're the website. We're the most visible part of their marketing infrastructure. We are the hub for all of the different technologies to communicate.

And that surprisingly, we are the strategic adviser to our customers for their choices of technology purchases.

What we're finding, and a large part of this is research and relationship expansion that we did this year when we launched our customer success team, is that our customers very much want us to be deeply invested in other core technologies to be able to buy them from us so that they know they're fully supported and compatible with our platform for the long run or for us to have a deep relationship with the technology, provided it gives them the same hint of comfort.

And that is driving our strategic decision to identify new technologies wire or partner with those technologies. And that strategy has a couple of different facets to it. First of all, the marketing technology factor, our market, is a significant market. It's large. It's $5 billion annually just for the web content management component.

And you start putting in enterprise search and payment gateways and marketing automation and so forth and it's even much larger than that. And we're a very small percentage of that. If we even got to 1% of that, we could triple our revenue.

Yet our software itself is fundamentally proven with companies like Caterpillar, other large organizations, to be able to deliver. So our challenge is that we're not well enough known and we're not in enough sales scenarios, but when we are in the sales cycle, we win a great percentage of the tech.

If we're able to acquire technologies where we can sell them into our existing customer base, we have this much larger budget than what they just spend onto us, that's a growth opportunity where we know we're going to be included in the evaluation because there are customers and they look to us as their strategic adviser.

And if we're able to acquire technologies that have synergistic customers that at the appropriate time in their own business cycle, we'll be replacing their core Web Content Management platform or using other technologies that we're offering, then we'd be at the table to be able to sell those. And this is going to be a core part of our focus.

Of course, we're still going to be focusing on direct sales and marketing and customer acquisition. But adding to our technical stacking, to our customer base and being able to cross-sell will help us, and being included in more opportunities, so the very fact that we have such strong technology and we win when we're included can be built upon.

And there's another advantage here, which is that we have really, really excellent cloud hosting capabilities, not just the technological underpinnings but also the processes that allows us to receive PCI Level 1 certification, to be entrusted with GDPR-compliant sites in Europe to be certified as SOC 2.

And by taking other technologies and including them in our processes in hopes in infrastructure, we'll be able to add capabilities and credibility to those technologies as well as have greater margins because the baseline investment for having all these capabilities have already been made by Bridgeline.

And the more software we can put into our cloud, the more those investments are leveraged and the higher our gross margins can be..

Okay. And one last one for me.

In terms of what your customer success team has learned over the past couple of months, has that changed your overall sales force or sales strategy going forward? And will you be able to tweak that strategy over time?.

It has changed our understanding. So the -- our customer success team was officially launched at the beginning of our fiscal year, which was last October. During the first quarter, they got to know all of our existing customers and find opportunities within that customer base.

In the second quarter those relationships deepened, and now they're getting so strategic that we're seeing our customers saying, "We really love you guys. We want to do something strategic with you." We can't do everything, but we see a pattern for those demands in there.

Now that impacts our sales methodology and thought process strategy to a certain extent and that we're recognizing that there's such great demand within our customer base that we need to reprioritize that, take advantage of it.

We're recognizing that we should speak even more strategically with new prospective customers rather than as a -- as truly a product to match that's impacting our marketing and lead generation messages so that we are less product-centric and more strategic in those messages and even impacting the big news.

Ultimately, I'm sure that it's going to impact the investments that we make in the team and how the team grows and is allocated because we're really finding how great things and it's resulting in a significant strategic focus with the company..

And I'm showing no further questions at this time. I would like to turn the call back to Mr. Ari Kahn for any closing remarks..

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, and we look forward to speaking with you in December on our Q4 2018 conference call. Have a great week..

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