Bridgeline Digital Inc (BLIN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bridgeline Digital third-quarter 2012 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Kim Brown, Director of Investor Relations. Ma'am, you may begin.

Thank you and good afternoon, everyone. I'm pleased to welcome you to our third-quarter conference call.

Before we begin, I would like to remind listeners that, during this conference call, comments that we make regarding the 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 and results. These statements are made pursuant to the Safe Harbor provision 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 may today. For more detailed information about these factors and other risks that may impact your business, please review the reports and documents filed from time to time with Bridgeline Digital -- excuse me, 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 financial measures to our GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting our website. I would also like to remind you that the audio and the transcript of this call will be available for replay. You can find that information on the Investors Section of our website.

At this time, I would like to turn the call over to Bridgeline Digital's President and CEO, Thomas Massie.

Thank you, Kim, and good afternoon, everybody. Thank you for joining us for today's call.

Bridgeline had an extremely productive third quarter as we continue to strengthen our business foundation and we continue to build long-term shareholder value. In the third quarter, we sold a record amount of iAPPS licenses. We posted strong bookings and we recorded strong iAPPS revenue growth. We announced our strategic partnership with UPS Logistics and we acquired Texas-based MarketNet.

In addition, earlier today, we announced iAPPS ds or distributed subscription. We believe iAPPS ds has the potential to significantly accelerate Bridgeline's recurring revenue and enhance profitability.

Before I talk about the details of iAPPS ds, UPS Logistics partnership, or our recent acquisition, let me review the third quarter high-level results. In Q3, we generated $6.4 million of revenue. While this is slightly lower than our year-over-year numbers, our iAPPS-related revenue grew organically 35% year-over-year. iAPPS-related revenue growth is now at -- I'm sorry, iAPPS-related revenue is now 66% of our total revenue for the quarter compared to 47% a year ago.

As I've stated on previous cause, fiscal 2011 and fiscal 2012 represent a period of transformation for our business model. We are 100% focused on signing and servicing iAPPS-related customers and, as anticipated, we have intentionally shed some lower-margin non-iAPPS-related business.

Bridgeline is committed to building a stronger, more predictable, more profitable business model that offers significant customer traction, outstanding customer retention, recurring software revenue, recurring services revenue, and scale. We fully expect our business model to begin to financially reap the benefits of iAPPS in fiscal 2013.

In the third quarter, we were particularly pleased with our new bookings of $6.8 million, representing our strongest quarter in 2012 and in line with the record bookings quarter we posted a year ago. Given the qualified pipeline we currently have in place, we also anticipate a strong bookings quarter in Q4 to finish the year and the entire -- and as we enter fiscal 2013.

I'm very pleased to report that we sold a record 158 new iAPPS licenses during the third quarter. Our year-to-date total iAPPS licenses sold has been 231, and as of June 30, Bridgeline has sold a total of 659 licenses and has deployed 526.

In the third quarter, Bridgeline won a dozen new engagements, including [Connectsus] Credit Union, Goddard Systems, Monster Cable Products, and OK International, which is a division of Dover Corporation. Monster Products is a global leader in the development and manufacturing of high-performance headphones and other advanced connectivity solutions. They have selected iAPPS to completely overhaul their e-commerce site and significantly expand their global footprint. IAPPS was chosen since we were the only company that really offered a truly deeply integrated Web solution that included e-commerce functionality, Web content management, e-marketing and analytics capabilities to effectively run the global e-commerce storefront on one unified, highly scalable platform.

Now, I'd like to spend some time talking about our strategic partnership with UPS Logistics, which we believe is going to be a catalyst for Bridgeline for years to come. In early June, together with UPS, we announced that UPS Supply Chain Services and Bridgeline Digital had signed a multi-year agreement and partnered to develop and sell an integrated, all-inclusive B2C, B2B e-commerce solution for the mid-market and large-market organizations. Both UPS and Bridgeline have continuously heard from their respective customers asking for a simplified, end-to-end Web store and fulfillment model. As a result, UPS conducted a search for a high-quality e-commerce solution and an e-commerce partner, and they ultimately selected iAPPS and Bridgeline Digital as their partner of choice. We were chosen because we are the only technology platform, once again, that deeply integrates all four categories of e-commerce, Web content management, e-marketing and analytics on to one single, unified platform.

Additionally, the iAPPS commerce suite is the only platform whose architecture is flexible enough to deliver the end product via a cloud SaaS model or via a traditional dedicated server model, once again expanding customer options. The selection by UPS and the existing alliance we have in place provides enormous validation of our product in the marketplace. We are extremely excited with UPS's selection of iAPPS commerce suite, the market validation of iAPPS and the outstanding opportunity the UPS Logistics partnership represents for Bridgeline Digital.

As we have stated in the past, the iAPPS sales cycle is a six-month sales cycle, and our delivery cycles range between four to six months. Due to these leadtimes, we do not believe we are going to see meaningful financial impact of our newly formed UPS logistic alliance until fiscal 2013 and beyond. Our pipeline with UPS is healthy, it's growing, and we look forward to sharing wins with you in the coming quarters.

Another significant accomplishment during the quarter was the acquisition of Texas-based MarketNet. MarketNet was founded in 1994 and is an award-winning interactive technology company and a Microsoft Gold certified development partner. Their trailing 12 months revenues prior to the acquisition were approximately $2.7 million, and they serviced a .net customer base that includes Dell, Kennedy Space Center, USO, Dallas-Fort Worth Airport, and the Delaware North Group.

Bridgeline acquired MarketNet for $1.2 million. It was in a combination of cash, common stock and an earn-out consideration that is based on certain future financial performance. We are very excited to have the MarketNet team on board, and the integration of the merger is being executed as planned.

As you know, an important part of our iAPPS distribution strategy has been to expand our footprint into that Texas central southern region. We estimate that the total addressable market in that region and its surrounding states includes over 2500 companies that are headquartered in the territory that have annual revenues greater than $25 million. These companies are potential iAPPS targets.

Finally, I am very excited to talk to you about our new SaaS platform offering, iAPPS ds. IAPPS ds has been specifically developed for large franchise networks and multiple dealer organizations who need to provide superior website tools to their numerous franchisees and dealers. IAPPS ds leverages the intellectual property investments that we've made of our award-winning iAPPS product suite and it enables corporate franchises to provide a centralized digital marketing structure for their franchisees and dealers. The benefits are primarily twofold. Corporate franchises will have superior oversight and consistency of branding and the ability to push broad targeted content to their franchise owners and dealers. In addition, franchise owners and dealers that are on the platform will have access to state-of-the-art Web tools to easily manage a personalized local mini website in which they can edit and change their own content, execute local marketing campaigns through their mini site and analyze the mini site website activity. They can also drive e-commerce initiatives and, of course, they can connect with their local communities.

IAPPS ds is a cloud-based, multi-tenant SaaS solution. Therefore, customers rely on Bridgeline's co-managed tier one hosting facility. Whether they are supporting 100 franchises or 10,000 franchises, iAPPS ds is a highly scalable solution.

So how does this work and why is the extension of our iAPPS intellectual property a game changer for Bridgeline's recurring revenue streams and future profitability? This subscription-based model would require each franchise owner or dealer to pay a monthly subscription fee of $55 to $75 per month, depending on the total volume of the franchise organization itself. For this, each franchise would receive a self-service, pre-templated mini website that includes iAPPS content management, analytics, and marketing modules. If our e-commerce module is to be included, then each franchisee will pay an additional $25 to $50 per month.

IAPPS ds has a unique advantage in the franchise market, which is currently -- where there is currently a void of providing franchisees and local dealers with access to robust Web engagement tools at a relatively low monthly cost. We have the opportunity to aggressively fill this void while dramatically increasing our subscription-based recurring revenue.

We are extremely pleased to announce that we have recently signed our first iAPPS ds customer. This is a multi-year, multi-million dollar engagement which we estimate will contribute approximately 50% margin to our future operating income. We are actively deploying this platform with our first iAPPS ds customer that has more than 4000 franchises throughout North America, and we expect to release more details of this engagement in fiscal 2013.

The opportunity for iAPPS ds is significant and Bridgeline is currently making the appropriate infrastructure investments to capitalize on this exciting vertical market opportunity. So, needless to say, there's a lot of very exciting things happening at Bridgeline Digital. The opportunity we have with UPS Logistics partnership, iAPPS ds are significant as well as our transformation of becoming a more profitable and predictable business model. We expect these initiatives will begin to yield results in 2013 and beyond.

At this time, I'd like to turn the call over to Mike Prinn, or Chief Accounting Officer, who will provide you more details of our Q3 financial results. Michael?

Thank you, Thomas. Good afternoon, everyone. I'm going to review the results of our operations for the quarter ended June 30, 2012.

Revenue for the quarter was $6.4 million compared to $6.5 million in the third quarter of last year. While revenue was down slightly year-over-year, we continued to see a significant increase in iAPPS-related revenues. Our iAPPS-related revenue increased 35% to $4.2 million compared to $3.1 million in the third quarter of 2011. IAPPS-related revenue was 66% of our total revenue in the third quarter compared to 47% a year ago.

IAPPS-related service revenue increased 36% year-over-year to $3.4 million. This increase is a result of our continued focused investments in marketing and selling iAPPS-related engagements.

I'd also like to point out that 56% of our iAPPS-related services came from existing iAPPS customers. This is important because it substantiates our model that, on average, our existing iAPPS customers come back to us every year for an additional $65,000 in iAPPS-related services.

Revenue from subscription and perpetual licenses increased 27% to $686,000 compared to $540,000 from the same quarter a year ago. This increase is related to an increase in both SaaS and perpetual licensing as we continue to see an increase in demand for our iAPPS product suite. As Thomas mentioned previously, we sold a record 158 licenses in the third quarter. A little more than a third of the licenses were a bulk license deal to one large existing iAPPS customer.

Revenue from managed service hosting increased 23% to $631,000 compared to $510,000 from the same quarter a year ago. This increase is primarily related to an increase in hosting demand from iAPPS dedicated server customers as well as incremental managed service revenue from the Tampa and Dallas acquisitions.

Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, increased 18% to $1 million compared to $880,000 for the same quarter a year ago as we continue to see an increased demand for our iAPPS product suite.

Our non-iAPPS-related service revenue decreased $1.3 million from the third quarter of last year. As we discussed on the last couple of earnings calls, we have discontinued servicing our lower-margin, non-iAPPS-related engagements. This $1.3 million decrease represents a 44% decrease in non-iAPPS-related service revenue from the third quarter of last year. This decrease in non-iAPPS-related service revenue is the primary reason for the decrease year-over-year in our consolidated revenue. And again, I would like to point out that the increase in our iAPPS-related revenue was 35% compared to the third quarter of last year.

Our gross profit for the quarter improved to 56% from 51%. We are very pleased to report the significant increase year-over-year, which is a combination of an improvement, really, in our service, license, and hosting margins. Our service margins have increased as we continue to focus on iAPPS engagements. Our hosting and licensing margins have also increased as our iAPPS-related revenue continues to grow and our costs decrease. Collectively, we are very pleased with this increase from 51% to 56% and we believe we will continue to see gross margin improvement in 2012 and beyond.

Bridgeline generated $429,000 of adjusted EBITDA, an increase of 25% compared with $342,000 for the same quarter last year. Our non-GAAP adjusted net income was $8000 or breakeven on a per-share basis compared with $37,000 or breakeven on a per-share basis in the third quarter of 2011.

Our GAAP net loss was $277,000 compared with $246,000 for the same quarter of the prior year.

Next, I will walk through Bridgeline's balance sheet. At June 30, 2012, the Company had total assets of $34.4 million. We had cash of $1.9 million and receivables of $4.8 million. As we previously announced in May, we completed a private placement offering for gross proceeds of $2.5 million. We are using the proceeds of the offering for general working capital and selected infrastructure investments.

In Q3 of 2012, Bridgeline's DSO was 62 days. Our DSO increased slightly from our normal 52 to 55 days, really due to timing on a couple of large customer payments. The Company had approximately $4.2 million outstanding under its credit line at June 30.

In terms of guidance and our fiscal 2012 outlook, we expect fiscal 2012 revenues to be approximately $26.5 million. Our revenue strategy will continue to focus on higher gross margin iAPPS-driven opportunities while discontinuing relationships with lower margin based customers. This strategy reflects a reduction of approximately $3.5 million of revenue generated in fiscal 2011 from lower-margin non-iAPPS-related customers. In addition, we expect to continue to generate positive non-GAAP income and positive adjusted EBITDA for the remainder of fiscal 2012.

Kate, at this point, we would like to open the call up to Q&A.

(Operator instructions). Howard Halpern, Taglich Brothers.

Good afternoon, guys. The first question would be how many deployments did you actually complete during the quarter?

We completed 140 deployments. Part of them were the bulk license deal that I mentioned, so they were a perpetual deal an existing iAPPS customer.

140 licenses got deployed, not 140 deployments.

Correct, 140 licenses were deployed.

Okay. So if I did the math right, you still have like 133 deployments outstanding. Is that correct?

Well, plus whatever we booked in the months of July and August.

Okay, that sounds good. In terms of the legacy -- eliminating the legacy, lower-margin legacy business, of that $3.5 million that you are talking about, how much of that has already been taken out in the first nine months of the year?

Do you have the numbers?

Yes, it's actually -- and you'll see it in our filings. The non-iAPPS service revenue decrease of $3.5 million is nine months to date.

Okay, okay. And you have some sort of estimate based on the $26.5 million forecast. What might be coming out in terms of legacy business next fiscal year?

Well, I think, if I look at it maybe the other way, 66% of our revenue right now was iAPPS this quarter. You are going to have some revenue coming in from our Dallas acquisition that, of course, is non-iAPPS. But I think, by the end of next year, we are probably going to be at or close to 80%.

And I think, Howard, I think another way to look at it, too, is I believe the legacy drop of non-iAPPS business this year was steep because the $3.5 million was made up of primarily three non-iAPPS customers. Right? One was Northrup Grumman, which is government; that was about $1.5 million. And then Budget Truck was another $1 million, $1.1 million, was not iAPPS. And the last one was WebOps, which was that $800,000 customer that lost all their private equity funding. So, we don't have those issues going to fiscal 2013. (multiple speakers).

So it should get off to a really good start, then, compared to -- so, in truth, this really was the end of the transition period, and the dynamics shouldn't really change as we go into the first quarter of fiscal 2013?

There will be a little bit more in Q4, but there won't be any in Q1.

Okay, that's good. And then with the new offering and along with the new customer, if I do the -- I just want to make sure I'm doing the math correctly on a bare-bones price. If all -- or when all 4000 franchisees come on board and are deployed, that would turn to $600,000 in subscription revenue right off the bat, once all of them are deployed?

You calculator is correct.

Okay, I just wanted to propose that, and that's a good number. That's a very good number.

Also, I guess I wanted to talk a little bit about what you are seeing in terms of the qualified pipeline. Can any of that be attributed to the UPS alliance?

Yes.

Would you care to give a percentage number?

Our qualified pipeline right now is eight digits.

Okay.

With UPS e-commerce-related opportunities.

Okay. And what type of deals or potential deals are you seeing come from that Texas acquisition in terms of size and the quality of the customer?

Well, UPS is, as you know, one of the highest quality companies in the world, one of the best governance companies in the world. And the bilk of customers that we have been working with them on is all top shelf. And I want to say probably the range is probably $250 million in size to probably, on average, $2 billion to $3 billion in size.

Okay. Okay, that all sounds great. Once we get past Q4, I look forward to a real healthy 2013. I'll jump back in the queue.

Thanks, Howard. Howard, I think Kim and Mike want to set up a call with you this week to run through the Q.

Okay, that sounds fine.

(Operator instructions). Michael Taglich with Taglich Brothers.

Hello, guys, just want to say good quarter and great progress.

[Peter Abramson], a private investor.

I've got a number of questions here. The new franchise iAPPS customer is very interesting. Is this something like in the restaurant industry where franchisees of a parent company set up their own local websites and do e-commerce or other types of franchise operations like hardware or something?

Theoretically, yes -- thousands of franchises. They all want to have individual personas in their own local markets and own local communities, but yet the franchisor always wants to have brand integrity and wants to be able to control certain content messaging as well. And so, yes, it could vary from food service to flooring goods to recreation vehicles. You can just think of a plethora of franchise vertical markets. Right?

Yes. No, it's very interesting. So presumably you have -- are you going to announce this deal in the near future? Presumably, you are going after lots of other franchise-related business?

That's correct. We will announce the details of this relationship once the deployment is well underway, which will happen in 2013.

Okay, I have a couple of financial questions. One, I guess, is -- I don't know; I was a little late to the call. But do you have an estimated quarter or time frame on an inflection date when you think total headline revenue should start growing, which would reflect an iAPPS revenue increasing more than the non-iAPPS revenue is decreasing?

I'm going to let Mike wrap up the Q&A. Everybody, thanks for attending the call. I've got to go catch a plane to Atlanta. I've got to go see some customers. So thanks for attending our call this afternoon. And Mike and Kim are going to wrap it up. Peter, take care.

Okay, thanks.

Peter, so what we mentioned on the beginning of the call is, through the first nine months, we've seen a decrease of about $3.5 million in non-iAPPS service revenue. So, we are through a pretty good chunk. We probably have a little bit in Q4, you know. You can take our nine-month results and our guidance and sort of back into a Q4. And then going into next year, we are through most of that decrease. And you should see positive results.

Okay, so did you put out a 2013 revenue estimate yet? Or --?

No, we haven't. We will do that next quarter.

Okay. But I guess if Q1 of 2012 revenue is about $6.5 million and then you are doing revenue right now of about $6.4 million, if iAPPS kids growing at current rates and you are almost done with the non-iAPPS, then you would expect headline revenue to start moving up in the near future it sounds like.

Yes, and that's what we have been trying to message to everybody the last couple of quarters, because you might see a flat topline. But you are seeing a decrease strategically in the non-iAPPS stuff, but you are seeing this quarter a 35% increase year-over-year in terms of iAPPS revenue. But we have gone through a good chunk, maybe a little bit more in Q4, and then you probably won't see much of a difference in Q1 of our fiscal 2013.

Okay, not much of a difference on the topline?

No, no. I just mean in terms of non-iAPPS business.

Oh, okay. I got it.

So you will see more of just that increase in the iAPPS business.

Okay, because your non-iAPPS business was like $2.3 million this quarter, if I did the math right. Is that correct?

Yes.

$2.2 million, and that's going to kind of flat line for a while?

Yes.

Okay.

And what we said earlier on the call -- I don't know if you caught it, but we will probably be close to 80% by the end of next year and then work our way probably to 90% north at the end of our fiscal 2014.

Yes. No, I got it. Well, you can get there two ways, I guess -- one, growing iAPPS revenue against flat non-iAPPS or having non-iAPPS drop. I was just trying to understand the levers, if the non-iAPPS is going to flatline or whether that's basically amortizing over time down to zero.

The service stuff eventually, and then any hosting -- we may keep that for a while if it's high-margin. But over time -- the focus is clearly exclusively on iAPPS.

Yes. No, I got it. You are doing a nice job there. So next question -- have you established a time frame or could you comment on GAAP profitability? Is that a 2013 goal?

Sure. What we have said in the past, which I'll reiterate, is we believe when we are driving $7.5 million to $8 million on the topline, we will see GAAP profitability.

Okay. And then I think, in the call, the offering was referenced. The share count appears to be like 15.2 million shares today, which is up a fair amount since the beginning of the year. At this point in time, are you done with equity offerings or at least certainly at the current levels, which is somewhat dilutive? If you execute on your business plan, would we expect the share counts to stay kind of stable here at 15 million shares?

Yes. This last offering provides us with some working capital. And like we said, it can help on some infrastructure improvements. But I would certainly say right now we are focused on executing our objectives and getting towards that $7.5 million, $8 million topline, which will drive GAAP profitability and there will be no need for additional financing.

Okay, that's obviously important to existing shareholders. I think that's it. I had a question for Tom, but I've have to catch up with him sometime later, on a later call or something on that one.

Sure. We are available the rest of the week. You can reach out to either one of us separately.

Okay, thanks, appreciate it. Nice job really growing the key core side of the business that you are focusing on.

(Operator instructions). I am not showing any further questions at this time. I'd like to turn the call back over to management for closing remarks.

All right, thank you, everyone, for joining us today.

So just to summarize, we have a lot of exciting things happening at Bridgeline as we transform our business model to 100% iAPPS, thus providing strong customer traction and excellent visibility, our strategic alliance with UPS Logistics and our new iAPPS ds platform for the franchise market. We remain committed to building shareholder value in all areas of our business and have a very positive outlook for Bridgeline in 2013 and beyond.

Thank you, everybody, and enjoy your day.

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