Bridgeline Digital Inc (BLIN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Bridgeline Digital first-quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Michael Prinn, Chief Accounting Officer. Please go ahead.

Thank you, and good afternoon, everyone. This is Mike Prinn. I'm the Chief Accounting Officer of Bridgeline Digital. Before we begin, I would like to remind listeners that during this conference call, comments we make regarding Bridgeline Digital that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The internal projections and beliefs upon which we base our expectations today may change over time, and we undertake no obligation to inform you if they do. Results that we report today should not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory, and other factors could cause Bridgeline's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by Bridgeline Digital with the Securities and Exchange Commission.

Also, please note that on the call today, we will discuss some non-GAAP financial measures in talking about the Company's financial performance. We report our GAAP results as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting our website. At this time, I'd like to turn the call over to Bridgeline Digital's President and CEO, Thomas Massie.

Thank you, Mike, and good afternoon, everybody. Thanks for joining us today. Bridgeline had a very busy first quarter, as we continued to integrate the operationally integrate the eMagination acquisition, record new strong bookings, record dozens of new iAPPS licenses sold in the first quarter. We made some enhancements to our executive management team. Most notably, our new Chief Accounting Officer, Mike Prinn. Welcome to the team, Mike.

As we move into the balance of fiscal 2011, demand for iAPPS continues to look very strong and we believe we'll have a very good year. We continue to focus on driving both profitability and growth, while investing and delivering increased value to our customers and shareholders. In our first quarter, Bridgeline's year-over-year revenue increased 19% from Q1, 2010, to $6.5 million. And the cumulative total number of iAPPS licenses that have been sold, to a total of 274 at December 31, 2010, an increase of 132% over the same period a year ago. Q1 revenue from iAPPS licenses increased 40% to $519,000, and the Company continues to generate recurring services revenue that's iAPPS-related. Bridgeline had very strong new bookings in Q1 of approximately $6.6 million, and we launched our expansion efforts into Europe and the Asia-Pacific region.

During the first quarter, iAPPS licenses were sold to companies such as one of the largest automotive manufacturers in North America, a prominent Mid-Atlantic university, a global flooring manufacturer, a major consumer product company, and a large US insurance company, and well-known US business magazines. In the first quarter, Bridgeline generated $485,000 of EBITDA, and $167,000 of non-GAAP income. Year-over-year, both of these metrics have declined. Mike Prinn will address these details of the declines in a few minutes. But, with that said, we believe both of these areas will improve as we begin to realize enhanced synergies from the TMX and the eMagination acquisitions in these coming quarters.

For fiscal 2011, we anticipate Bridgeline's revenues to range somewhere between $26.5 million and $28 million for the entire year. In addition, the Company expects to continue to generate positive non-GAAP net income and positive EBITDA during the remainder of the fiscal year. To summarize, we remain laser-focused on continuing the organic growth of iAPPS. iAPPS provides Bridgeline with strong customer traction and excellent revenue visibility. We have initiatives in place to improve our gross profit margins in Bridgeline Philadelphia, which is formerly TMX, and Bridgeline Baltimore, which is formerly eMagination. We have a strong pipeline, and will continue to focus on our customer base and selling existing customers various iAPPS modules from the iAPPS Power Suite. We believe our business model has very strong operating leverage, as we grow, and we are very excited about the opportunities and the outlook for 2011.

Mike Prinn has joined Bridgeline's executive team as our Chief Accounting Officer. Mike has over 15 years of public company financial management experience. For the past four years, Mike has been controller and a member of the corporate finance team at Sapient, an $800 million publicly-held technology consulting firm. Prior to Sapient, Mike spent over five years at a high-technology practice at Arthur Andersen. We're very excited to have Mike on board. At this time, I'm going to turn the call over to Mike to discuss the numbers in greater detail. Mike?

Thank you, Thomas, and good afternoon, everyone. I would like to review the results of operations for the quarter ended December 31, 2010. As Thomas mentioned, revenue for the quarter increased 19% to $6.5 million, compared with $5.5 million for the same quarter prior year. The quarterly revenue includes a 20% increase in revenue from web application development services, to $5.5 million from $4.6 million. This increase is primarily related to our two acquisitions in the second half of last year, as well as increased iAPPS-related revenue.

Revenue from managed service hosting decreased by $28,000 for the quarter, compared to the same quarter a year ago. This decrease is attributable to our efforts in engaging with customers that are aligned with our core competencies, and we proactively ended engagements with a number of smaller hosting customers that are not a strategic fit to our business model going forward, that we obtained through previous acquisitions. Subscription and perpetual license revenue increased by 40% to $519,000 for the quarter, compared to $372,000 from the same quarter a year ago. This is due to an increased demand for our iAPPS Product Suite.

Our gross profit for the quarter increased 5% to $3.2 million from $3.0 million. Our gross margin for the quarter, however, decreased to 49% from 55% for the first quarter of last year. This decrease is attributable to the impact of lower gross profit margin from the two acquisitions that were made towards the end of 2010. Both companies have low gross margins in the web application development services they provide. Our Philadelphia acquisition had gross margins in the high 40% range, while our Baltimore acquisition had margins in the low 30% range. Bridgeline has historically increased gross margins on previously-acquired companies to over 50% within a year after the acquired companies engage in Bridgeline processes and begin selling and deploying iAPPS-related engagements.

We generated $485,000 of adjusted EBITDA for the quarter, compared with $688,000 for the same quarter of last year. Adjusted EBITDA on a diluted basis was $0.04 per share, compared to $0.06 per share for the same quarter of the prior year. Our non-GAAP adjusted net income was $167,000, compared with $416,000 for the same quarter of the prior year. Adjusted net income on a diluted basis was $0.01 per share for the quarter compared to $0.04 per share for the same period of the prior year. The primary reason for this reduction was in Q1 of 2011, Bridgeline did not capitalize any iAPPS development investment. In the first quarter of 2010, we capitalized $170,000 of iAPPS development investments.

Our loss from operations was $84,000 for the quarter, compared with income from operations of $242,000 for the same quarter of the prior year. Once again, the primary reason for this reduction in Q1 2011 was that Bridgeline did not capitalize iAPPS development investment, whereas the first quarter of 2010 we capitalized $170,000 of iAPPS development investment. In addition, the decrease is due to lower gross margin contribution and increased sales expense from our two recent acquisitions. Our net loss for the quarter was $156,000, compared with net income of $220,000 for the same quarter of the prior year. No capitalized R&D software was the primary cause of the decrease in net income, as well as lower gross margin contribution and increased sales expense from our two recent acquisitions.

Next, I would like to discuss Bridgeline's balance sheet. At December 31, the Company had total assets of $32.1 million with cash of $3 million and receivables of $4 million. Our days sales outstanding for our accounts receivable was 56 days. The Company had $4.8 million outstanding under its credit line at December 31, of which $2 million was repaid subsequent to quarter-end. Approximately $2.7 million of the existing balance was used in connection with the eMagination acquisition.

In compliance with FAS 141(R), the balance sheet now includes total earn-out obligations in the amount of $1.7 million, related primarily to the two acquisitions completed during fiscal 2010 year, which are payable through 2014. These earn outs are payable subject to the acquired companies hitting certain revenue and operating income targets for their respective business units. For acquisitions prior to 2010, earn outs are recorded when they are earned. At this time, I would like to open up the call for questions and comments.

Thank you. (Operator Instructions).One moment, please. Thank you. Our first question comes from Peter Abrahamson, a private investor.

Yes, good afternoon. Thanks for taking questions. I had, I guess, a revenue question. If the range of revenue is $26.5 million to $28 million for fiscal year 2011, if I read the press release correctly, I guess I was trying to understand what is occurring in the business. If I look at the 10-K, I guess the pro forma revenue for fiscal year 2010, including the acquisitions was $28.9 million, or just under $29 million. So those, did what, $5 million in revenue? So I guess there's some revenue churn. Can you provide some color as to what's going on in the revenue book?

I think if you -- I'm not sure what you're looking at in the 10-K, Peter, but if you look at the Q4 results, and if you were to multiply the Q4 number times four, you would receive approximately $27.5 million in revenue. And if you then take a look at Q1 and multiply that times four, you get something a little bit less. So there is the -- I guess the essence of the guidance, right. I'm not sure exactly what number you're pegging at, that gets you to the $29 million. But if you look, like I said, once again, Q4 run rate is about $27.5 million. If that stayed constant, and then Q1 run rate would put you a tad under that.

Okay. Yes, I guess I was lacking at the 10-K. I think reported GAAP revenue was like $23.6 million for the year ended September 30 of 2010. And then I know the Company did the eMagination, or some other acquisitions near the end of the fiscal year. Then in the footnotes to the financials --

Part of the $23 million was including -- there was some revenue included from the eMagination and the TMX acquisitions within that $23 million.

Right, although I guess that was part of the year. I guess I'm looking to the footnotes to the financial statement, which basically says that if those deals had been done at the beginning of fiscal year 2010, the Company would have pro forma did $28.9 million in revenue. So the revenue guidance is flat to down kind of on a pro forma basis.

Well, there's definitely, as we talk about the -- especially on the managed services piece, we talked about how we have called and looked at our customer base, and we have very much focused on our customer base and eliminated customers that do not provide synergistic value to our core competencies. We did shed consciously probably a little more than $1 million on an annualized basis by eliminating certain customers. That did not have the synergistic fit with Bridgeline.

Okay. And then on the bookings for Q1, what period of time does bookings go into reported revenues? Is it pretty much within the fiscal year, or within a 12-month period? So of the $6.61 million in Q1 bookings, what would be the revenue time to record?

Sure, Peter. It typically is a three to six-month period for the deployment of our licenses. And for perpetual license, we recognize that on a percentage of completion basis as we perform those services, and for a static license we recognize that once the license has been installed, and the service is completed. We recognize it from that point going forward.

That's a three-year recognition.

On a perpetual, is there like an average license assumption you're using, percentage of completion?

You mean an average license dollar value?

Yes, I guess if you sign a perpetual license for $500,000, you don't book it all up-front, you record it, probably over a period of time. Is that what I just heard?

Yes, percentage of completion, as both the license is installed and deployed.

Okay. I had a detailed question on the sales and marketing line. While G&A was down and sales and marketing was up faster than the revenue rate, is sales and marketing a conscious decision to build that out for sales growth, or over a longer period of time, what type of increases in sales and marketing should we expect?

It is a combination of the increases from the acquisitions have increased that expense on absolute dollar-for-dollar basis from the acquired entity, and there's also been some increased investment for our channel partner activity in that period as well as we build that. I would expect to leave the current level of quarterly investment that's happening in sales and marketing would remain consistent throughout the balance of this fiscal year.

Okay. And then was G&A, was that decrease in G&A -- any commentary around that?

A lot of it is related to the acquisitions. So when you look at G&A year over year there is a decrease, but annually, there's probably about $800,000 $900,000 decrease year-over-year, and it's primarily, $600,000 of that is acquisition-related one-time expenses and some other related consulting expenses. So I think the G&A number that you are seeing in Q1 is another good consistent number that you can benchmark for the balance of the year.

Okay. That's helpful. And then I guess research and development, any MD&A on that?

I think, once again, it's a good number to use for the balance of the year, if not increase it a tad, each quarter going forward.

Okay.

We do not anticipate it because we have launched the -- all the product modules now, FAS 86 requires us to capitalize a percentage of the R&D based on when it reaches technical feasibility. The current iAPPS modules have all been launched. We don't anticipate any more requirement to capitalize any software on them.

Okay. Did you have a bookings number for Q1 2010 to compare this $6.61 million to?

We did not announce that back then. I think with Genesis, our IR firm, we're getting more sophisticated on the type of data we announce, but this time last year, we did not release any bookings numbers.

Okay. I guess my last question. I'll let other people ask some questions. Is there any trends in the average selling price on your iAPPS licenses? Is the selling price the same, going up, or down?

They've been very constant and consistent. I think once again we lead with, if it's a mission-critical website or an extranet or an intranet that needs an iAPPS Content Manager, that typically will have either iAPPS Analytics or Marketeer attached to it, and those prices have been very consistent for the last 24 months, since we launched iAPPS Content Manager, Analytics and Marketeer.

iAPPS Commerce, the other side of the lead-in is iAPPS Commerce. When we lead-in with an online store. We just announced iAPPS Commerce about 10, 11 months ago, so those prices have been very consistent as well. One of the things that we're excited about, we're starting to see a lot of affiliate sites, and micro sites, which is adding to the overall volume of licenses. I think that, from an absolute perspective, can bring your average selling price down, but it's all based on volume purchasing. So apples-to-apples, if you're buying five licenses, there's been no changes in our average selling price. Same thing if you're buying 30 licenses. There's been no changes to our selling prices. But we are seeing a nice trending up in multiple license sales.

Okay. Well, thanks for taking the time to answer my questions, and best of luck in these upcoming quarters.

Thank you, Peter. Very good questions.

Thank you. (Operator Instructions). Our next question comes from Brian Swift with Security Research. Please go ahead.

Hi, Thomas. I've got a couple of questions for you. You talked about the integration of your acquisitions, your 2010 acquisitions. Can you give us a little color on where you are in that process? There was a mention that you typically improve the margins of these companies you acquire over time. Maybe you might give us some targets of the low-30s. What would you like to see that good to? And the one in the low-40s? My second question would be, give us an idea in today's market climate, how's your pipeline for additional acquisitions looking?

Okay. Well, Brian, you've been with us for quite some time, so you know the model and the story well. I think that historically, when we have acquired expansive acquisitions for geography purposes, all of the acquisitions we've acquired historically have had gross margins of 40. We have successfully, over a three to four quarter period he improved their gross profit mar again into the 50s, and that's by just them following our processes and our methodologies combined with them selling iAPPS license engagements, which will improve their margin. So our model is services to be at 50% or greater. The iAPPS licenses themselves are at 70% margins.

So the TMX acquisition, that is basically fully integrated right now. And we believe that the margin for TMX, we're in the low-40s, and we will see that be in the upper-40s, low-50s here in the upcoming quarters. The eMagination acquisition is a larger acquisition. What was very attractive to us, there was a quality .NET delivery team there. They have a really good customer base, combined with, they're also on the GSA schedule, which that alone can take a lot of time and money and resources to get on that GSA schedule.

But their gross margins were very, very poor in the low 30s. We have made improvement in the last quarter with their gross margin, and we anticipate to make more improvement in the upcoming quarters as well. But I think within three to four quarters we should get them somewhere into the mid-40s with an overall gross margin, then hopefully thereafter into the low-50s. But the government space, as you know, with best pricing standards on the GSA schedule, that will tend to still be a tad below our gross margin threshold, but not nearly to where they are when we acquired them at 30%. So from a pipeline perspective -- did that answer your question, Brian?

Yes, what portion of their revenues are government-related? Of eMagination?

Approximately 50%. So they're about $5 million in sales so about $2.5 million was government-related with eMagination. But even the commercial side of their business, their gross margins were poor, even on the commercial side. We're seeing much faster improvement on the gross margins on the commercial side than on the government side. That takes more time. Because there's a lengthier process involved in the government side to get your billing rates up.

But from a pipeline perspective, we are in active conversations. The Company does plan on expanding. We have -- as you know, we have seven locations right now in the United States. We want to expand into California and to Texas but we also want to expand into the UK, where that would be our beachhead for our EMEA marketing initiative.

Oh, UK. What was the other thing I was going to say? I'll come back if I think of something else.

Thanks, Brian.

All right.

Our next question comes from Walter Ramsley with Walrus Partners.

Thank you. Afternoon, Thomas, Michael. Congratulations on a good quarter.

Thank you, Walter.

I have a couple of things. I don't have my notes in front of me. Could you tell us what the total number of licenses sold just in the first quarter were?

That's a good question. It's one that we did not disclose, and I think the reason being, Walter, when you look at the total numbers over the last 12 months, we think that it's lumpy, right. Our license numbers per quarter can be spiky. So one quarter we could sell 25 or 30. The next quarter we could sell 50. But what we've noticed over a one-year period of time is the very strong consistency where we are selling -- 70% of our licenses are SaaS, and 30% are perpetual, so we're seeing that consistency, but I think what's going to be important, as we announce our numbers, I think over time you would be able to back into it and figure it out. But we are going to continue to announce what the 12-month growth in iAPPS licenses sold have been, as well as what the actual year-over-year number is as well.

Okay.

And I think we're going to continue to see the type of strong growth of the numbers that we announced today. We see that trend continuing in the near future.

Sure. Well, according to the press release, the Company had 274 totally sold at the end of last calendar year. Out of that, can you give us a rough idea of how much were the content management and how much were the newer products? Just basically how the newer products are selling?

Probably about 90% of them are the -- that's actually a good question, and I don't want to shoot from the hip. I would say somewhere from 80% to 90% are Content Management and Analytics, but we've been seeing a very nice surge in the last two, three months of sales happening around Commerce and Marketeer. But we just launched those products, and it takes two to four months to sell these licenses, even into existing customers, it takes four to six to sell them into existing customers.

Sure. That leads me to my next question, whether the Company has begun to modify its overall marketing and sales approach to -- in some way to get the licenses more front and center.

We lead with solutions, we lead with customers' businesses paying, and then they buy out the part of that solution, but once again, the two lead-ins are, content management is always a lead-in, into either mission critical websites, intranets, or extranets, or portals. And then iAPPS Commerce is a lead-in into online stores. We see a much higher attach rate of multiple licenses with Commerce. We'll sell Commerce, Marketeer, Analytics, and Content Manager typically with most Commerce sales, where on the Content Management side, we'll see them buy Content Manager, Analytics, and maybe Marketeer, or Content Manager, Marketeer and maybe Analytics.

We have begun a really big effort now into launching and making more awareness around iAPPS Commerce, and we think the whole commerce space and opportunity, because we absolutely have a much better mousetrap and product than anything that's out there, benefits, features-wise, as well as price points, value-add, than what we see out there, and we think Commerce is going to drive a lot of growth for the future.

And all your sales are through your own direct sales force, or did you open up some additional channels?

No, we have channel partners on board. As you know, we began our development of our channel efforts towards the end of 2010, and that's taking hold very nicely. This quarter we actually have begun our -- or actually last quarter, our international channel efforts into the EMEA markets, and talking to some potential partners in the Pacific Rim, primarily Australia markets. And those are going very well. We have a great product that has a lot of strong features, benefits, and value-add for the price point that it's selling at. We have a very unique product, because it's got all four iAPPS modules integrated into the heart of that website or on-line store, and so we're getting a lot of great reception from that.

So the big picture is still the same. 10 Bridgeline locations in North America for our footprint, and they're in the large metropolitan markets, a location in the EMEA markets, primarily the UK, selling it to the European markets, and then somewhere around 40 to 50 very strong channel partners in North America, and then another 50 international partners. When you look at that model and you get every single one of your Bridgeline locations selling 40 licenses a year minimally, and you get every one of your channel partners, which could be somewhere around 100 channel partners within 24 months, that would sell anywhere around two iAPPS engagements, which could be four licenses a year. You've got to model that to sell somewhere from 800 to 1,000 licenses per year. And we're still marching towards those same initiatives.

So that brings me I guess to the last question, which I think the first guy alluded to the sales right now are relatively flat. Can you go into a little more elaboration as to what and when the breakout will consist of and when that will happen?

I think if you take a look at our bookings, if our new bookings were $6.6 million in sales, and then you have recurring revenues of about $1 million per quarter, and then all of our investors pay attention to that new bookings number, which we will announce every quarter going forward, as well. I think you will see, you could take a look at, and if you know the high-end deployments are typically anywhere from three to six months to deploy these engagements. It's just a point in time, where you start driving quarters that are $7 million to $7.5 million level.

Matter of time meaning this year?

Yes, Walter, this year.

Okay, thank you. All right, Thomas, thanks again.

Thank you.

Our next question is a follow-up from Brian Swift with Security Research.

Well, actually, Walter took care of asking most of the follow-on questions I had, so I'll pass to the next guy.

Good minds think alike, Brian.

Thank you. I'm showing no further questions at this time.

Okay. Well, thanks everybody for joining us today. We're very excited about our prospects for the balance of 2011. We're selling strongly some new iAPPS software licenses, either SaaS or perpetual. We've expanded the number of iAPPS bundles that we're offerings and we've demonstrated the ability to sell up to our customer base, and even to new customers. As we grow our revenue, we believe we're going to be able to improve our operating efficiencies and our operating leverages in our business model. If you have any additional questions or would like to discuss iAPPS or our business model, please feel free to give myself or Mike a call at any time. Our contact information can be found on our website, BridgelineDigital.com. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference. You may now disconnect.