Bridgeline Digital Inc (BLIN) 2010 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Bridgeline Digital fiscal 2010 conference call. Today's conference call is being recorded and at this time I'd like to turn the presentation over to Ron Levenson, Chief Financial Officer.

Thank you and good afternoon, everyone. 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 results of 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 record 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 results to differ materially from those expressed or implied in the projections or forward-looking statements made today. For more detailed information made 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 on the call today, we will discuss 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 release by visiting our website. At this time, I would like to turn the call over to Bridgeline Digital's President and Chief Executive Officer, Thomas Massie.

Thank you, Ron. Good afternoon, everyone. Thanks for joining us. We are very excited about the excellent growth of iAPPS and we believe fiscal 2011 will be a break out year for Bridgeline Digital. In Q4 2010, Bridgeline's revenue increased 29% to $6.9 million for the quarter ending September 30, 2010, when compared to $5.3 million for the quarter ending September 30, 2009. Based on our Q4 revenue, without any further growth, we should be on a $27.6 million annual run rate for fiscal 2011.

In fiscal 2010, our annual revenue of $23.5 million was basically flat when you compare it to fiscal 2009. However year-over-year revenue from our SaaS and perpetual licenses increased 24% to $1.8 million. The number of iAPPS licenses sold increased 145% to a total of 235 licenses at the end of September 2010 when compared to a total of 100 iAPPS licenses that were sold at September 30, 2009. Our revenue is derived from hundreds of US based mid-market customers and a few dozen very large brand name organizations.

In fiscal 2010, not including one-time expenses of $522,000, Bridgeline generated $1.2 million of non-GAAP income, including one-time expenses of $522,000, Bridgeline generated $1.9 million of adjusted EBITDA. And Bridgeline generated $1.5 million of cash from operating activities. 20% of our 2010 revenue was derived from customers in the financial services vertical market, 19% was from customers in the associations and foundations vertical market, 13% was derived from customers in life sciences and healthcare, and 9% was derived from customers in manufacturing vertical markets. As you can see we have a very diversified customer base.

In terms of average deal size, we are seeing a total of 2.3 iAPPS modules being licensed per customer engagement. This provides Bridgeline with approximately $66,000 in licensing value. This is up from 1.4 iAPPS modules sold per customer engagement in 2009. We are also averaging $120,000 in initial web development services per iAPPS engagement. In addition, we are seeing our iAPPS customers invest an average of an additional $65,000 in related interactive technology services after their initial iAPPS driven application is completed and launched. This number is dramatically up from just $15,000 in 2009.

Please keep in mind that Bridgeline recently released iAPPS Commerce and iAPPS Marketier in 2010. With the recent release of these two important modules, we believe over time, the total iAPPS modules sold per engagement will approach approximately three iAPPS modules per engagement. This increase would have a positive impact on the size of our average engagements and an increase in the licensing value of each engagement.

Ars Logica, recently published an independent technical evaluation of the iAPPS product suite in its latest Compass Guide to Web Content Management. The Compass Guide is a comprehensive set of product evaluations of 35 leading solution vendors. According to Ars Logica Senior Analyst Tony White, Bridgeline Digital is one of the best overall platforms for sub-$1 billion companies in synergistic integration of a robust web content management, analytics and eCommerce functions. He also says that iAPPS is if not the market leader in both functionality to price ratio and ease-of-use. A complete copy of the Ars Logica Technology research report can be obtained from Bridgeline Digital's website.

Recently, editors of Knowledge Management Magazine selected iAPPS as the trendsetting product of 2010. In fiscal 2010, iAPPS Content Manager was announced the winner of the esteemed CODiE Award for the best content Management Solution globally, and B2B Interactive selected Bridgeline Digital as one of the top interactive technology companies in America.

From a sales operations standpoint, we've closed the year with 18 quota carrying business development executives. While we have plans of increasing our Business Development team in fiscal 2011, we believe we currently have sufficient capacity to support our new booking goals for 2011. In Q4 2010, Bridgeline launched its iAPPS channel partner program that is being very well received. We are currently focused on establishing quality channel partners in the United States. However, in mid-fiscal 2011, we plan to expand our channel partner program internationally.

In May of 2010, Bridgeline acquired the selected assets of TMX Interactive, expanding our presence into the Philadelphia marketplace and in July of 2010, we acquired the selected assets of eMagination, expanding our presence into the Baltimore, Washington DC, and the federal government marketplace. We are pleased with the integration of these two acquisitions. Although we still have a lot of work ahead of us, the strategic reasons we consummated these two acquisitions have been confirmed. We are steadily introducing the iAPPS product suite to our newly acquired customer base and we have trained our teams on Bridgeline's processes, and we have outlined goals for gross profit improvement initiatives.

Bridgeline's Management has a solid track record of growing revenue through organic means and through strategic acquisitions. We believe the expansion in revenue, profitability and positive cash flow contribution from the results of the TMX and eMagination acquisitions will enhance shareholder value over the next 12 to 18 months. To help enhance our shareholder value, we are pleased we have engaged with Investor Relations firm, Genesis Select.

The Genesis Select team are experts in the Nano cap space and we look forward to working with them as we educate investors with Bridgeline Digital's future and what we believe to be a significant valuation disparity between Bridgeline and comparable companies in the public market sector. At this time I'm going to turn the call over to Ron Levenson who will give you more details of our fourth quarter and our fiscal 2009 financials. Ron?

Thank you, Thomas and good afternoon, everyone. I would like to review the results of operations for the quarter and year-ended September 30, 2010. First, let's talk about the quarter ended September 30, 2010. As Thomas mentioned, revenue for the quarter increased 29% to $6.9 million compared with $5.3 million for the same quarter in the prior year. On a sequential basis, revenue increased 19% from $5.8 million in the quarter ended June 30, 2010. The quarterly revenue includes 33% increase in revenue from web application development services to $5.9 million and $4.4 million. A portion of this increase is attributable to revenue from services performed and iAPPS related engagements which increased 22%. This increase results from the Company's focused efforts on iAPPS related opportunities. And revenue per managed service hosting increased 37% for the quarter primarily from hosting revenue from acquired companies.

Our gross profit for the quarter increased 11% to $3.4 million from $3.1 million. Our gross margin for the quarter, however, decreased to 49% from 57% for the fourth quarter of last year. This decrease is attributable to the impact of lower gross profit margin from the TMX and eMagination acquisitions. Both companies have low gross margins in web application development services they provide. Our Philadelphia acquisition had gross margins in the high 40% range, although Baltimore acquisition had margins in the low 30% range. Bridgeline has historically increased low gross margins in previously acquired companies to the 50% plus range within the year after the acquired companies engage in Bridgeline's processes and begin selling iAPPS. This has occurred in the past six acquisitions.

We anticipate the two newly acquired business units will be a drag on our overall gross profit margin (inaudible). Including one-time expenses of $305,000 in professional fees and other acquisition related costs, the costs to integrate our Cleveland office into our Chicago office we generated $45,000 of adjusted EBITDA for the quarter compared with $627,000 for the same quarter last year. Adjusted EBITDA per diluted share was zero compared with $0.05 for the same quarter of the prior year. Our non-GAAP adjusted net income was $3,000 compared with $413,000 for the same quarter in the prior year. Adjusted net income per diluted share was zero for the quarter compared with $0.04 in the same period in the prior year.

Including one-time expenses of $305,000, our loss from operations was $583,000 for the quarter compared with income from operations of $202,000 for the same quarter of the prior year. This decrease is due to lower margin revenue from acquisitions and the one-time costs related to acquisitions and the integration of Cleveland and Chicago. Including one-time expenses of $305,000, our net loss for the quarter was $652,000 compared with net income of $197,000 for the same quarter in the prior year.

Next I would like to review the results of operations for the year-ended September 30, 2010. Total revenue for the year was $23.6 million compared with $23.9 million for the same period of the prior year, a decrease of 1%. Revenue from subscription and perpetual licenses increased 24% to $1.8 million from $1.4 million in the prior year from both higher amount of perpetual license revenue and an increase in iAPPS SaaS deployments. The increase in license revenue was offset by a 2% decrease in the web application development services to $19.9 million from $20.3 million. I want to point out, however, the revenue related to iAPPS development services increased 9%, again from the Company's focused efforts on iAPPS related opportunities.

Our gross margin decreased to 52.4% from 55.9%. There are a few reasons for this decline which I would like to address. Again, this decrease resulted from the impact of lower gross margins contributed to the two completed acquisitions. Also, our focused efforts to engage with customers to align with the Company's growth initiatives to proactively end engagements with a number of smaller hosting customers obtained through previous acquisitions and lower web application development services revenue. Including one-time expenses of $522,000 for the year, we generated $1.9 million of adjusted EBITDA for 2010 compared with $2.9 million for 2009.

Adjusted EBITDA per diluted share was $0.17 compared with $0.25 in the prior year. Our non-GAAP adjusted net income was $1.2 million for 2010 compared with $1.8 million for 2009. Adjusted net income per diluted share was $0.10 for the year compared with $0.16 in the prior year. Including one-time expenses of $522,000, our loss from operations was $239,000 compared with income from operations of $829,000 in the prior year. This decrease in income from operations due to lower margin revenue from the two acquired companies, the proactive ending of the relationships with smaller hosting customers acquired through prior acquisitions, costs related to acquisitions and costs related to the integration of our Cleveland office into our Chicago office, and including one-time expenses of $522,000, our net loss was $377,000 for the year compared with net income of $758,000 in the prior year.

We generated $1.5 million of cash growth from operating activities in 2010 compared with $3 million in 2009. This decrease in cash from operations is primarily attributable to lower net income which includes a lower margin revenue and one-time cost. At September 30, 2010, the Company had $31.7 million of total assets with cash of $3 million and receivables of $4 million. Our days outstanding per accounts receivable was 57 days. The Company had $5 million outstanding under its credit line in September 30 of which $2.2 million was repaid subsequent to year-end. Approximately $2.7 million was used in connection with the eMagination acquisition.

In compliance with FASB 141R, the balance sheet now includes total earnout obligations in the amount of $2 million related primarily to the two acquisitions completed during fiscal 2010 which are payable through 2014. These earnouts are subject to the acquired companies hitting certain revenue and operating income taxes for the respective business units. Prior to this year, such earnouts were recorded when they were earned. At this time we would like to ask if there are any questions and turn it back over to our moderator, Peter. Peter?

Thank you. (Operator Instructions) Let's first go to Kennedy Capital, Tim Hasara.

Yes, just a couple questions. With respect to your Associations & Foundations business, if you could describe what that business is exactly?

Hi, Tim. We have quite a few customers that are associations like American Academy of Pediatrics, American Academy of Dental, Academy of Surgeons, the American Medical Association so those type of customers we put into the vertical market of associations and foundations, plus we have the Truman Fund and [PACCAR] Foundation and other customers that fall into that category.

What general apps are they doing or what are they doing with the iAPPS exactly?

Well, they are creating these mission critical websites and e-Learning and e-Training websites so obviously they are doing funding and they are actually getting grants and funding through their initiatives through these websites as well as doing a lot of training through -- you take a lot of the medical foundations or I'm sorry, the medical associations will deploy these training modules through iAPPS and be deployed through iAPPS Content Manager, allowing the flexibility to deploy them on their own. That helps keep all of the regulatory credits of their association members current, and then there's analytics that helps them track all of that data and who's actually visiting the site and taking various tests and of course, then there's commerce that can be deployed for donations and things like that.

Okay, great. And then just curious, can you give any color on your pipeline on iAPPS and in addition to that, how long does it take to close the pipeline and then book a pipeline to revenue once something is tested or sold?

Our pipeline is strong and our iAPPS pipeline has doubled from this time last year, so it's up 100%. Our sales cycles are anywhere from 60 to 180 days from the time it reaches our qualified pipeline, so we have very strict processes around what it takes to actually get into our qualified pipeline. It has to be -- you have to be dealing with the decision makers, there has to be an approved budget in place and obviously, identify the customer [theme] that is equal to the solution benefits that the iAPPS product suite would help solve. So that takes from the time it goes into our pipeline to closure, it takes anywhere from 60 to 180 days on average. Once the engagement is closed and I have the signed contract, once it's closed, it then takes another on average three to six months to get fully deployed.

And then I guess once it's fully deployed is that when you book the revenue or do you book it once you sign the contract?

I'll talk a stab at this and if Ron waves me off, I'll throw the floor over to him.

Don't look at him. You can answer it.

Well, our revenue recognition policy is based on the services that's based on percentage of completion. So every single month you look at the engagement and you look at it and say, okay here is what percentage of the total engagement is completed and that is the portion of the revenue on the services that's recognized. And on the software side, the actual SaaS license is recognized monthly after the entire engagement is deployed, so there's no SaaS revenue recognized at all until 100% often engagement is deployed. On the perpetual software side, the software has to be fully installed into the customer server and the license key then has to be activated for the customer to be able to utilize the software in order to recognize that revenue, but typically, the actual software on a perpetual will be recognized as well as a percentage of completion as the services are provided. How did I do, Ron?

Very good.

Great. Okay, thanks a lot. Appreciate it.

Thank you.

Thank you. A question now from Walter Ramsley with Walrus Partners.

Thanks, congratulations Tom and Ron. Another good quarter. I've got a couple of questions. In the presentation you mentioned that $2.2 million of the I guess short-term debt was repaid subsequent to the year-end. Is that -- did I hear that right?

That's correct.

And did you pay that just by going into the cash or was that paid for with operating cash flow?

It was just operating cash flow.

Okay. So that sounds pretty positive. Do you have anything else you can tell us about how well the first quarter has gone so far anyway?

Well, Walter, you've been a supportive shareholder now for over a year. Actually, it's been a year almost to the date, but as you know, we don't give forward-looking projections as a Company but we're very excited about 2011. I think we said that and we also -- we do believe 2011 is going to be a break out year for us because we have very good momentum with iAPPS.

No, I understand. It just sounded -- I mean it was a pretty interesting data point about repaying the debt, so --

Well, what we do is we have, like anybody your cash flow is going to go through peaks and valleys and when the cash flow is strong, we lean on the line -- we don't lean on the line and when the cash flow requires us to lean on the line, it's there. That's what we use the line for.

Yes, okay, well in any event, the license revenues, they were up 24%. I guess that was for the entire year. I mean, is that more or less the trend that you're looking towards or do you think that's just warming up, might go higher than that?

I think that's a really good question. I think one of the things you can think about, I've said we shared with the investors historically that 70% of our iAPPS sales are SaaS sales and then 30% are perpetual licenses. What happens with SaaS, obviously we have over 250 now iAPPS licenses sold, but clearly those are not deployed. It takes -- Tim asked the question, it takes anywhere from three to six months on average to deploy the engagement so what happens is over time, you're building up this annuity and so theoretically, that number is going to continue to grow.

Okay, and as far as the acquisitions are concerned, you indicated that you plan to increase their gross margins back to the Company average. How long do you think that process is going to take?

(inaudible) it's taking us two to four quarters. We have to go through their existing engagements that they have in their systems prior to the acquisition so it does take two to four quarters to get them to our standards.

Okay, and as far as the license trends are concerned, I mean it's still 70/30 or is it shifting at all between the SaaS and the perpetuals?

No, we're seeing still the same. We're seeing 70% of our customers do the SaaS solution and 30% choose the perpetual.

Okay, and are there any changes in the competitive environment?

Still ongoing consolidation which we love because that creates chaos and opportunity.

Okay, well anyway, thanks a lot. Appreciate the chance to talk to you and looks like things are definitely ramping up.

Thanks, Walter. Have a Happy New Year.

A question from Larry [Lowrance].

Good evening. I was interested to tell you we have been investing with you for a year now while some of us have been here for five years and were involved in the original IPO at $5 and maybe even bridge loans before that. I was a little concerned that this last year, there was an offering of selling stock at a $1 a share and some of us did not get a chance to participate in that. Is there anything you can do for us long time investors that has been with you since day one but not given this opportunity?

Well, Larry, I apologize that you were not part of that offering and we do appreciate your support. I think that we do not have any plans for any additional capital raises in the near future and I think the best thing we can do is try to get you to understand the fundamentals of the Company as much as possible. So you can make a decision on what to do with your investment of Bridgeline which is one of those decision is to average down so you have more of an upside in the future because I do understand that you did purchase that at the IPO rate. I think, of course your bridge -- if you were part of the Bridgeline prior to the IPO, I think you're in really good shape with those warrants and everything but I understand you're definitely underwater from the IPO standpoint but maybe I suggest that maybe some time after the first of the year, you give me a call. And I'd like to really make sure you understand our business model so you can make an intelligent decision on what to do going forward.

Well I'll do that and the reason I've hung on for five years is because the broker I work with in this particular case has spoke so highly of you personally and as a business person and your staff that several times when we talked about selling and cutting our losses we've hung on and not sold one share based on that. So I look forward to talking to you at the end of the year or start of next year.

Larry, please do reach out to me because I think we have a great future here and I'd like you to understand it and I'd also like you to understand exactly why the stock was pushed down shortly after the IPO. There was some technical reasons and why that happened that and unfortunately those IPO investors I think were hurt by that but I could walk you through that so have a Happy New Year and I look forward to hearing from you soon.

Thank you.

Thank you.

Thank you. A question now from Peter Abrahamson.

Yes, thank you. Thanks for holding a conference call, relatively new to the (inaudible). I've got, I guess a business strategy question as well as some financial questions. On the business strategy question, I guess from some earlier comments it appears -- I had originally thought maybe you're focusing on selling a product or the software, subscription and the license and de-emphasizing web application services but it appears like you go to market with both like hand and glove. Is that correct?

That's correct. Very similar to like Oracle or SAP, right? You buy Oracle license for $1 million and you have to spend another $2 million for services, so it's of a smaller scale for sure, but what happens is when you're buying the software and then you're investing with the implementation services you build a very strong traction model not only for ongoing recurring software revenue but you build a traction model for ongoing recurring services revenue as well.

Okay, great. And then I've got a question here. I guess the revenues from the licenses increased 24% from a financial perspective but it mentioned that the number of licenses sold was up by 145%. Is that -- are the ASPs, the average selling price declining or what's happening in that revenue discussion?

Great question. I think the word, the difference in there is sold versus deployed. So we don't recognize revenue of the licenses. There's always a lag of three to six months after the sales of the license, so while we have sold the 245 licenses as of September 30, clearly, there are far less that were actually deployed.

Okay, so now --

So the revenue recognized was less.

Okay, so does that get booked in the deferred revenue then, waiting for deployment? Is that how I should think about that?

Peter, it's Ron Levenson. The services get recognized as we perform the services but the licenses, again if they are SaaS licenses they do not get recognized until they are actually deployed. They aren't in deferred and the perpetual licenses, they get recognized as the services are performed on a percentage of completion so the answer to your question is no, they are not in deferred revenue.

Okay. What is in deferred revenue?

It would typically take a 30% deposit on professional services. We also will -- in some hosting customers, by way of example, if someone wants to pay a year in advance on a SaaS license you can pay a year in advance, we'll give you a 5% discount and there is some advanced licenses in there but we're happy to take the money upfront.

But the majority is all deposits. Right?

The majority is all deposits.

Okay, what would the revenue profile have looked for the quarter I guess organic versus acquisition in terms of a revenue perspective? So we have $6.9 million in Q4 2010 versus $5.3 million Q4 2009. What would it have been absent the acquisitions?

I think just like if you look at Q3, Peter, you'll see Q3 was down 9% year-over-year. I would anticipate -- I would believe Q4 was probably very similar down about 9% year-over-year, but I think the story there is you've got your iAPPS pieces organically growing at over 20% a year which is outpacing the actual market growth rate. And that's to us the important part is that we're going to continue focusing on that organic growth of iAPPS.

Okay, and then is there, what was a yearly revenue from the -- what was the Baltimore acquisition doing from a yearly run rate revenue basis?

Approximately $5 million.

Okay. Because I noticed the debt went up substantially quarter-over-quarter. I guess that's related to the acquisition?

We used $2.7 million of cash related to the Baltimore acquisition. We purchased the Company for I think 0.7 times annual sales and then the cash was $2.7 million of it was used in cash and that was used from Silicon Valley bank debt.

Okay, and I guess my last question, what was the rationale to doing that stock offering at $1 given the Company's free cash flow positive?

Well, we did need a little extra cash to complete the acquisitions. We didn't want to, as you take a look at our balance sheet, we obviously pay very close attention to our current ratios and if we didn't raise a little more cash from that offering it would have made those current ratios pretty tight and didn't want to put -- we got so many great things happening you don't want to put the Company at any risk from a balance sheet perspective, so we wanted to beef it up and put more cash in the balance sheet.

Okay, and I guess that was pre -- or post-September. I guess can you disclose at this point for investors what the current cash and total debt position is as of today or most recent day you've done it?

No. Unfortunately, we don't give forward-looking statements and we don't give inner period results either.

Okay, I was just looking for a balance sheet number but okay, I understand. Well thanks for taking the questions.

Well, Peter, could give you a little guidance here. Just take a look at the balance sheet today, right? And what's on the balance sheet, Ron? A little more than $3 million of cash on hand at quarter end and we said we paid back $2 million of it within a couple weeks after quarter end and it gives you a sense on probably what operating cash is.

Well and you did $1 million, I guess $1 million came in from the offering, right? After the September 30?

Correct.

Okay, so you had $3 million, and then we add one and then you said you paid down how much in debt? $2.2 million. Was that it?

$2.2 million. Correct.

Okay, and then I guess whatever the number is at the end of Q1 which is just a few days will be the operating figure. Okay. Thanks again for hosting the call and taking the questions.

Thank you. Give us a call at any time if you want to talk one on one.

Okay, might do so. Thank you for the invitation.

With that, we have no further questions in the queue at this time. I'd like to turn the conference back over to the Company for any closing remarks.

Okay, Peter, thank you, and thank you very much for joining us today. So listen, just to summarize, we remain laser focused on continuing the organic growth of iAPPS. iAPPS provides Bridgeline with a strong customer traction model with excellent visibility. We have initiatives in place to improve the gross profit margins of Bridgeline Philadelphia, which is formerly TMX, and Bridgeline Baltimore, formerly eMagination. We continue to have a strong pipeline and we will continue to focus on our customer base. We believe we have a strong operating leverage model as well as we grow and we are very positive with our outlook for 2011. We want to wish all of you and your families a happy, healthy and prosperous New Year. Thank you.

And we now conclude today's conference call. Thank you again for your participation.