Bridgeline Digital Inc (BLIN) 2008 Q4 法說會逐字稿

Good day everyone and welcome to the Bridgeline Software fiscal 2008 earnings call. Today's call is being recorded. With us today from the Company is the Chairman and Chief Executive Officer, Mr. Thomas Massie, and the Chief Financial Officer, Mr. Gary Cebula. At this time I would like to turn the conference over to Thomas Massie. Please go ahead sir.

Good morning everybody. Thank you very much for taking the time from your busy day to join us today. We are very excited that we're going to continue to report continued record results.

Before we begin, our attorney asked us to remind all of you that all the statements made on this morning's call are protected by the Safe Harbor statement Private Securities Litigation Reform Act of 1995.

While our nation's economy has been in a recession for the past year, we are very pleased to report that Bridgeline Software's business remains strong and steady. In fiscal 2008 Bridgeline achieved record revenues of over $21 million. This represents a 91% increase over our revenues from fiscal 2007.

Year-over-year our customer base has increased 82% to now 651 active customers. It should be noted that 63%, or 408, of these customers pay Bridgeline a monthly subscription fee or a monthly managed services fee, creating a strong customer traction model for the Company.

In fiscal 2008 year-over-year recurring revenues increased 189% when compared to fiscal 2007. And from Q3 to Q4 2008 sequential recurring revenue growth was 28% for the period. And an very important number to report is our customer retention remains very strong at 88%.

Of course in any business cash is king, and we believe that EBITDA performance is a more accurate indicator of our true bottom-line results. In fiscal 2008 Bridgeline created and generated a record $1.3 million of EBITDA. In fiscal 2007 the Company reported an EBITDA loss of $239,000. So this represents a year-over-year EBITDA improvement of $1.5 million.

At the end of November, if you recall, the NASDAQ market index was down more than 50% from January of 2008. In return thousands of NASDAQ listed companies' market caps were declined by greater than 50%. Despite Bridgeline's positive operating performance, we too are one of these NASDAQ listed companies that has had a market cap negatively affected by this dramatic decline.

In addition in August our largest institutional shareholder was facing their own liquidity issues, forcing them to sell out of hundreds of their stock positions. Throughout the month of August and into early September over 600,000 shares of Bridgeline stock was dumped, causing additional downward pressure to our market cap.

In October the Dow Jones and the NASDAQ markets crashed, declining more than 30%. This put even more of an additional downward pressure on an already beaten up Bridgeline market cap. Because of the rapid decline of our market cap this triggered a question related to the value of goodwill that was recorded on our balance sheet from the completion of various acquisitions. Simply put, the question was, how can the Company justify goodwill valuation in excess of over $20 million on our balance sheet when the Company's market cap was under $7 million at this time.

So independent impairment evaluations were completed, and upon the completion of those impairment reviews it was determined that Bridgeline had recognized a onetime non-cash related impairment charge of $9.8 million in fiscal 2008.

At this time I want to turn the call over to our Chief Financial Officer, Gary Cebula, who will provide greater detail and highlights of the financial performance for this fiscal year.

Good morning to everyone. First, I would like to review the results of operations for fiscal 2008, which ended on September 30, 2008. Bridgeline Software generated record revenues of $21.3 million in fiscal '08. This is an increase of $10.1 million, or 91%, compared to fiscal 2007.

We recognized significant increases in all three categories of revenues. Software licenses and subscriptions increased 125%, managed services increased 99%, and application development services increased 67%.

Of our increase of $10 million, approximately $7 million was attributable to acquisitions completed in fiscal 2008. Over 50% of our revenue came from existing customers, while the remaining came from new customers. For the year our customer base increased 82% from fiscal 2007.

Our gross profit margin increased $4.9 million, or 79%, compared to the prior year. This increase in gross margin dollars is primarily the result of increases in the revenues. The minor decrease in gross margin percentage is principally the result of a revenue mix of lower margin application development services inherited largely from our two recent acquisitions in fiscal 2008. As these two acquired entities continue to adapt to Bridgeline's development methodologies and sell additional software licenses we are confident that their gross profit margins will increase as a percentage of sales.

As a percentage of revenue sales and marketing expenses remained consistent with fiscal 2007 at 30% of revenues. However to support our increase in revenues there was an increase of $2.8 million in absolute dollars when compared to 2007.

General administrative expenses as a percentage of revenues decreased to 17% compared to 22% in fiscal '07. This was an increase of $1.0 million in absolute dollars when compared to the same period of fiscal 2007. The increase is attributable in absolute dollars to a multiple of factors, including an increase in accounting, legal, consulting and professional fees associated with operating as a public company, and increases in payroll for finance, information technology and administrative support. We believe that there are limited need to hire additional personnel in corporate, and that the current infrastructure can absorb additional revenue growth without incremental increases in administrative personnel.

Inclusive of capitalized cost research and development spending in fiscal 2008 totaled $1 million compared to $791,000 in fiscal 2007, an increase of $225,000, or 28%. The increase in total spending during fiscal 2008 was incurred to continue development of our on-demand software products, iAPPS Framework, iAPPS Content Manager and iAPPS Analytics.

Expenses for research and development decreased $172,000 in fiscal 2008 compared to the prior year, net of the previously mentioned software development costs which totaled $397,000.

Depreciation and amortization increased $848,000 during fiscal 2008, or 210%. This increase is largely attributed to the additional depreciation and amortization expense associated with acquisitions, specifically as fiscal year 2007 included only one quarter of depreciation for acquisitions completed in Q4 '07.

Lastly, as Thomas mentioned, the Company recorded a non-cash charge in the fourth quarter of fiscal 2008 resulting from impairment of goodwill and definite-lived intangible assets.

Principally as a result of the rapid decline in the NASDAQ market and the recent rapid decline in our own market capitalization over the past six months, we determined an impairment triggered event had occurred, therefore in Q4 '08 we engaged an independent third party to assist us in the review of the carrying value of our goodwill and definite-lived intangible asset balances for possible impairment in accordance with the provisions of FAS 142, Goodwill and Other Intangible Assets, and FAS 144, Accounting for Impairment or Disposal of Long-lived Assets.

Based upon the results of the impairment review, we recognized a onetime non-cash related impairment charge of $9.8 million for the fiscal year ended September 30, 2008. For more information concerning the impairment charge please refer to our recently filed annual report on Form 10-KSB for the year ended September 30, 2008.

Including the onetime non-cash related impairment charge of $9.8 million, we incurred a net loss for the fiscal year ended September 30, 2008 of $10.3 million, or $1.09 per diluted share, compared to a net loss of $1.9 million, or $0.36 per diluted share, in fiscal 2007.

Excluding the onetime impairment charge, net income -- excuse me, net loss was $481,000 versus a net loss of $1.9 million in fiscal 2007. This was an increase -- or improvement of $1.4 million year-over-year.

As Thomas mentioned, because we have a fair amount of non-cash related charges such as depreciation and amortization in our income statement, we believe EBITDA is a much better indicator of our bottom-line performance. For the fiscal year ended September 30, 2008 the Company had generated $1.3 million of EBITDA, earnings before interest, taxes, depreciation and amortization before stock compensation and nonrecurring charges, versus an EBITDA loss of $239,000 in fiscal '07. This represents an improvement of $1.5 million, or 525%, from one year ago.

We use EBITDA before stock compensation and nonrecurring charges, including impairment charges, as a non-GAAP supplemental measure of our performance because we consider it an important measure of our performance by adjusting net income or loss primarily for non-cash charges and other nonrecurring expenses.

Next, I would like to draw your attention to Bridgeline's balance sheet. At September 30, 2008 the Company reported total assets of $24.3 million, with cash and accounts receivable representing $5.9 million, or 24%, with total liabilities of $6.1 million and total equity of $18.2 million.

As of September 30, 2008 the Company maintains a current ratio of 1.4 to 1, and maintains a bank line of credit of $3 million, which has not been drawn upon, and we have no current balance outstanding. At September 30, the Company maintained modest long-term debt of $158,000 compared to $165,000 at September 30, '07, which is comprised of capital lease obligations principally for purchases of capital equipment.

The Company maintains net deferred tax assets of $1.9 million, which a full valuation allowance has been applied. At this time I will turn the conference back over to Thomas.

We're very extremely bullish about Bridgeline's future. Despite a weak economy and a very depressed market cap, we will continue to grow while producing positive EBITDA from operations.

Tomorrow we will complete the first quarter of fiscal 2009, and we are pleased to report our new bookings continue to remain strong and steady. In addition, over the past 60 days the senior management team has executed initiatives that enhance operational efficiencies, reducing our workforce by approximately 12%, without hindering any of our revenue growth objectives or our software development plans. This equates to approximately $800,000 to $1 million in reduced operational expenses on an annualized basis.

With 63% of our customers paying Bridgeline a recurring monthly fee, we have developed an excellent customer traction model. Our SaaS-based Web Application Management software, iAPPS, is very innovative and will continue to strengthen our recurring revenue model. As mentioned earlier, our software licenses and subscription sales are the fastest-growing segment of our business.

Our customer base is strong and diversified. We do not have any one customer representing greater than 5% of our business, and approximately 30% of our customers are Fortune 2000 companies. We believe this speaks volumes to the quality of our Web-based software solutions and services.

In fiscal 2009 we will focus on continued organic growth, profitability and positive EBITDA. We have no plans of completing any expansion acquisitions this year.

At this time we would like to open up the line for any questions from our shareholders, potential investors and analysts.

(Operator Instructions). Brian Swift, Security Research Associates.

Could you comment a little bit on the fourth quarter results? [Pinched line out] it looks like you did about $6 million in revenues, but I noticed the EBITDA ended up being negative $172,000. And in the third quarter you were positive by a fair amount like I think $0.5 million. So were there some -- you know, Q4 adjustments or something like that were in that?

And maybe that could lead to any comments you might make on Q1, what we should be looking for, and what impacts, if any, the aforementioned write-down will have on some of your amortization numbers and what have you going forward?

Good question, Brian. I will cover the P&L part. Gary, you can maybe talk about the amortization piece. You are correct, the Q4 revenues were record quarterly revenues of about $6 million for the quarter. And yes, there were -- the losses of about $700,000, about $400,000 of that were network merger integration related issues with our most recent acquisition. So those are not ongoing expenses and losses.

And then the balance of those were year-end audit adjustments primarily attributable to increasing reserves in a couple of areas going forward into 2009. And Gary, do you want to comment on the impact of depreciation and amortization from the goodwill write-down?

Yes. As mentioned, the impairment charge of $9.18 million in a step two process under FAS 142 needs to be allocated, which we have done already an allocation to intangible assets. Unfortunately the majority of our intangible assets regarding -- or I should say fortunately the majority of them are performing. Our adjustments were very minimal in terms of adjusting our intangible definite-lived assets. However we are addressing goodwill of our most recent acquisition, and we do expect that the intangible assets assigned to that entity will be adjusted when that analysis is completed.

So at this point in time, we do believe there is going to be a slight improvement on a month-to-month basis in our amortization expenses of some of our intangible. And we will have more information as we finalize the purchase price allocation of the acquisition we recently completed. But we do think there is going to be some savings there. We're just not at a point where we can quantify those at this point in time.

Okay, any comment on going forward Q1 as to whether the revenue run-rate will be higher or lower than the $6 million in Q4?

We anticipate more growth, Brian.

Okay. And should you go back to being positive on a bottom line basis on EBITDA?

Yes. Yes, we will be.

Walter Ramsley, Walrus Partners.

I'm not that familiar with the Company, so you'll have to forgive me as these questions are kind of rudimentary, but the fourth quarter anyway, or maybe for the full-year, do you have a figure for the organic sales growth as opposed to the acquisitions?

Will I think, earlier, Walter, Gary said of the $10 million in growth, $6 million of that was attributable to acquisitions.

So the organic growth would be [close] to that?

Closer to $4 million.

So that would still be in the area of 40% to 50%?

Probably closer to upper 30s, 40%, right.

Okay. And the breakdown between new customers and existing customers, do you publish that figure?

I think we reported -- I mean, this time last year our customers was at --

357 last year, 651 this year. But historically our revenues -- over 50% of our revenues are derived from our existing customer base, whether it be new engagements on application services. And our revenue growth in the future is anticipated to be more highly driven towards our licensed products, which typically will generate new -- although, we will sell them to some existing clients and customers -- will be generated from new customer acquisition. That is what we are focusing on as a business strategy.

Yes, our total strategy is to, as we built this business, is to have over 3,000 customers that are licensing our recurring software products iAPPS.

So out of the 651, how many are licensing --?

We have 408 customers to date that are paying us reoccurring fees.

Okay, so that is how you came up with that one. Okay. The key applications that the customers are -- in highest demand now, what are they? What do they want you to do for them?

Well, we have three products that we are currently licensing. We have our Content Management, our Analytics and our eCommerce product. And our hottest -- our two largest sales are the Content Management and eCommerce. Analytics is just now getting more and more traction because it requires the iAPPS Content Management to be sold with it, so we are seeing a lot of our iAPPS Content Manager customers upgrading and acquiring the iAPPS Analytics product, so they have both.

You know the applications that they are using them for are very diversified. I mean, they could be for a very elaborate broker extranet, all the way to an online reservation booking system. So the applications themselves are very diversified.

But we tend to hang our hat in markets that are progressive spenders of these types of technologies. So we are very -- you know, the markets that require a lot of regulatory requirements tend to need these type of applications. I think that is one of the reasons why we're weathering the storm pretty well.

I see. So do you break down the vertical markets?

We do not break them down by percentages. We do talk to them that -- so the markets that we address. So we address financial services market, primarily insurance though, so the majority of our financial services revenue comes from insurance companies.

And like one of our larger customers is Depository Trust Company, which they are somewhat agnostic to these market conditions, because their business is all based on trading volume.

And we do extremely well in professional sports, both individuals and teams. We do well in the health care space. We also do well -- like some of our bigger customers are in the transportation industry, like Budget Rental Car and PODS, and folks like that.

So do you go up against IBM and Art Technology, or who do you compete against?

No, we actually, on the services side, will come up against folks like Sabient and Accenture, or Avenue A. On the software side, it is probably more companies like Vignette or Interwoven or RedDot. RedDot is a division of Open Text. Armature on the analytics side.

And what do you have that is a competitive advantage against those companies?

Well, our biggest competitive advantage, and we're the only ones that have this, so the real secret sauce in what we have with our applications is the deep integration of the applications. Because when you have -- the four product suites you have Content Management, you have Analytics, you have Commerce, and you have Marketier, all four of them sit on top of the iAPPS framework, so there's this extremely deep integration of the data that none of our competition can provide.

Because the iAPPS framework sits at the core of the application, then the actual product suite itself sets on top of it. And then there is very deep integration with the data in the application, which gives better real-time data, more accurate data, and better flexibility of managing the actual application.

So that is the real unique secret sauce. And no one in the market has this. So if you look at it compared to like how Salesforce approaches their application, and then Salesforce has all these other apps that integrate with Salesforce, it is kind of the same approach, but we do it specifically for the application market.

Okay. Well, if somebody else has some questions, I will hop off.

You know, Walter, feel free to reach out to Gary and myself if you want to understand the business a little bit better. There's also a pretty good PowerPoint presentation under the Investor section of our website that -- it is not a big deck so you can walk through it pretty quickly.

(Operator Instructions). Walter Ramsley.

I guess I will just ask one more. As far as the financial strategy is concerned, do you have your salesforce and your administrator activities pretty well in place, so that you can leverage those fixed costs with higher sales and expanded margins?

We do. And I think Brian Swift, who was alluding to it earlier -- we make a modest profit, and about probably $500,000 to $600,000 of positive EBITDA at the $6 million per quarter level. Then of course it scales from there. We believe -- I mean, our goal and the way we have our model structured is for us to generate our goal of about 18% to 19% operating income, we have to be at a $7 million per quarter level. So we're not too far away from that.

That would do it? Well, okay. And I guess just one other thing, you did have a 88% renewal rate, but what happened to the other 12%?

Well, typically if you look at the industry of most renewal rates anything in the high 80's is considered excellent.

I understand. I'm just kind of curious if they got --

It is attrition. It is companies going out of -- you know, some customers have -- of our customers have unfortunately gone out of business during this economic time. We have had various customers had to cancel various projects because of the economic time.

And then there is also just some -- an acquisition we did earlier a couple of years ago, we also are finding that these were lower end customers that probably are not a good fit with Bridgeline today with our margin requirement. So we continue vet through those and push towards the higher end customers.

Okay, so based on the way the economy currently stands is it realistic for the Company to get to that $7 million per quarter mark?

It is a very difficult question to respond to. We believe we're very -- we think we are very well postured in 2009 to weather the storm and generate a profitable -- have profitable results at each quarter and for the year. Whether that is $24 million in sales or $30 million in sales, we have very strong visibility that goes three to six months out.

And after that -- and yes, we have a strong recurring base, but it is very difficult to tell with what is going to happen beyond two quarters. We believe that not only are we postured, I think when we really set up our infrastructure to continue to generate positive EBITDA, positive cash flows and operating income throughout fiscal '09, once the economy reinvigorates and starts to build again, we think we are in an outstanding position to really take off. Because we're seeing even some of our smaller competitors financially really struggle. And we think that the smaller competitors will be eliminated, creating more market opportunity for us. We think after the economy comes back we're really going to take off.

Okay, well anyway, thanks a lot Tom, and you too, Gary. I appreciate it.

Well folks, with that we want to thank all of you for attending this morning's conference call. As I said to Walter, if any of you have any questions don't hesitate to reach out to Gary or myself at anytime. You can easily find our e-mail contact information on the Bridgeline Software website. We want to wish all of you a very happy and healthy and prosperous 2009. Thank you.

Once again that does conclude today's call. We do appreciate your participation. You may disconnect at this time.