Bridgeline Digital Inc (BLIN) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Bridgeline Digital Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I will now hand the conference over to Mark Downey, Chief Financial Officer of Bridgeline Digital. Please go ahead, sir.

Thank you, and good afternoon, everyone. My name is Mark Downey, and I am the Chief Financial Officer for Bridgeline Digital. I am pleased to welcome you to our fiscal 2020 third quarter conference call.

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 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and are subject to risks and uncertainties that could cause such statements to differ 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 expressly disclaim and assume 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 such as the impact of the COVID-19 pandemic and related public health measures could cause Bridgeline's actual results to differ 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 when discussing the company's financial performance. We provide a reconciliation of these non-GAAP measures to our GAAP financials in our earnings release. You can obtain a copy of our earnings release by visiting our website.

I would now like to turn the call over to Ari Kahn, our President and CEO.

Thank you, Mark, and good afternoon, everyone.

Bridgeline delivered 22% growth in recurring revenue, positive operating income and positive adjusted EBITDA in our third quarter. In Q4, we expect continued growth in recurring revenue and to repeat our bottom line performance with positive operating income and positive adjusted EBITDA again. Q3 closed more sales than we had in our previous 2 quarters combined. Q4 is off to a great start. And so far, we've closed more sales in the first half of our Q4 than we did in our entire third quarter.

Many of our new customers are online retailers in the United States and Europe. We recently launched a newly designed e-commerce site for a global consumer electronics manufacturer that enables them to sell direct-to-consumer while also continuing to support their traditional B2B channel of dealers and distributors. We've seen significant investments from the health care industry with hospitals enhancing their websites to incorporate virtual events as well as implementing messaging systems in response to the COVID-19 pandemic.

Recently, 2 top regional health care networks extended their professional services retainers for ongoing enhancements to their websites. We've also had several online pharmacies who sell protective personal equipment acquire Celebros licenses to improve search and conversion for their e-commerce sites. We even had a veterinary pharmacy buy licenses just this month to further improve its online sales.

We recently won an eyeglasses manufacturer with operations in Europe and in the United States. We also won a sale with a sporting goods retailer in Asia with more than 2,300 retail stores. In our third quarter, we had sales in 3 continents and across several verticals, including health care, pharmaceutical, education, franchise and manufacturing. The value we deliver to our customers is more relevant than ever. Several of our customers renewed their subscription agreements for multiyear terms, including both a Fortune 10 multinational oil and gas company, and one of the world's largest pharmacy chains. We have also seen several license expansions within our customer base, where customers have grown to higher tiers of our software as their usage has increased.

Bridgeline experienced very few business delays due to COVID. In April, we saw slower professional services when some customers paused work to reset their remote office policies and reassess their budgets. This had a small impact on our services revenue which we expect to recoup as these customers return to their delayed service priorities. We saw no significant impact from COVID on licenses. Our customers continue to buy our software, and in fact, sales have even picked up. Just as importantly, our customers -- our customer base continues to invest in Bridgeline products, and we see both cross-sales as well as expansions from our online -- from our long-time customers.

Before the COVID outbreak, Bridgeline launched an initiative to leverage the Unbound platform, along with the momentum in Celebros sales to deliver even greater out-of-the-box value to customers. We call this initiative, revenue 360. Revenue 360 pivots towards telephonic sales and partnerships in online marketplaces. This has allowed us to streamline our sales and marketing budget, win more sales and faster sales cycles, grow subscription revenue and deliver stronger gross margins, which increased 29% in our third quarter.

Revenue 360 is not only a sales strategy, it also guides our research and development. With revenue 360, we are expanding our technologies to help customers grow their online revenue and to do so with out-of-the-box tools that drive all 3 components of e-commerce: we increase site traffic, we increase shopper conversion rate, and we increase the average order value. Our software has grown each of these 3 revenue components for hundreds of customers over the years, and our focus now is to package all of our solutions into discrete out-of-the-box applications that are compatible with any platform and bring this value to market faster and to an even wider audience.

We recently announced a new product called Unbound Pages. Unbound Pages helps franchises increase their online and in-store traffic with out-of-the-box store locator pages. Unbound Pages makes it easy for share -- to share locator map, store hours and contact information with your customers in a way that is both desktop and mobile-friendly and has outstanding search engine ranking. Unlike other locator pages, Unbound Pages are unique in that they include e-mail marketing and online commerce, 2 capabilities that we were able to easily include because of our broader Unbound product suite. We will be making more announcements this year to expand our revenue 360 strategy with additional products.

We also intend to continue evaluating strategic growth opportunities through M&A with revenue 360 guiding our focus. We continue to evaluate SaaS companies whose products help their customers grow online revenue and have efficient sales cycles themselves.

We finished our third quarter with a strong cash position, which we expect to remain strong. Furthermore, the company no longer needs to allocate cash for dividends to preferred stockholders as 100% of our investors who held dividend-producing preferred stock have converted that preferred stock into common.

Finally, the company received a $1 million PPP loan that we expect to be forgiven. In short, we are well positioned to execute on any strategic opportunities that arise and are well situated to wait for just the right ones. We have sales momentum, happy customers, positive bottom line and strong cash. This is the foundation for an exciting software company. And our revenue 360 strategy has proven to win new customers while delivering even greater value to our customer base. I'm excited to share with you even more success on our Q4 call.

At this time, I'd like to turn the call over to our Chief Financial Officer, Mark Downey. Mark?

Thanks, Ari. Today, I will review our financial results for the third quarter of fiscal 2020 ended June 30, 2020.

As I mentioned on our previous earnings call in March 2020, the World Health Organization declared COVID-19 as a pandemic. And while we anticipated our operations in all locations could be affected, we were not adversely impacted. In fact, our productivity increased, and our robust business continuity plan was tested in real time, even as the virus continues to spread. We have adjusted certain aspects of our operations to protect employees and customers while still meeting customer needs for mission-critical technology, including quick responses to address customer needs in light of COVID-19. We continue to monitor the ever-fluid situation closely, and it's possible that we may implement further measures to address the needs of our staff and customers.

Total revenue for the quarter ended June 30, 2020, which is comprised of license and services revenue, was $2.6 million for the quarter ended June 30, 2020, as compared to $2.7 million for the same period in 2019. The following are the various components of revenue. Subscription and license revenue, which is comprised of SaaS licenses, maintenance and hosting revenue and perpetual license revenue, increased 22% for the quarter ended June 30, 2020, to $1.9 million from $1.6 million for the same period in 2019. This increase is attributed to multiple renewals across the diverse portfolio of customers, including retail, health care, financial services, franchise, education, manufacturing and multiyear license renewals from Fortune 500 pharmaceutical, industrial manufacturing and global energy companies.

As mentioned in prior earnings calls, deferred revenue accounting rules associated from our 2019 acquisitions dictated that full contracts are not recognized upon acquisition, but only a portion of those revenues associated with OrchestraCMS can be reflected. We are now able, as of March 1, the first annual license payment after acquisition, to recognize the full 100% value of these acquired contracts.

Recurring revenue, which is comprised of SaaS licenses, maintenance and hosting revenue, increased 22% to $1.9 million for the quarter ended June 30, 2020, from $1.6 million for the same period in 2019. As a percentage of total revenue, recurring revenue increased 14% to 73% of total revenue for the quarter ended June 30, 2020, compared to 59% for the same period in 2019.

Services revenue decreased $405,000 to $713,000 for the quarter ended June 30, 2020, as compared to $1.1 million for the same period in 2019. As a percentage of total revenue, services revenue accounts for 27% of total revenue for the quarter ended June 30, 2020, compared to 41% of total revenue for the same period in 2019.

As a result of the COVID-19 pandemic, many clients put a hold on budget previously planned for timely material occasions while they reassessed the next step for their businesses. While average billable hovered around 52% in April and 51% in May, respectively, Bridgeline's reaction to the real-world events stimulated additional quick win engagements, leading to an average billable utilization of almost 72% in June.

Finally, Bridgeline's overall focus is on increasing license revenue with some of our newer products, such as the Celebros product line, which require little or no services to implement. This focus, along with the company's new partnerships and customers' ability for self-service, are expected to further increase our license-to-services ratio over time.

Total revenues from our 2 acquired businesses comprised approximately 41% of the total revenues for the quarter ended June 30, 2020. Gross profit increased 29% or $351,000 to $1.6 million for the quarter ended June 30, 2020, as compared to $1.2 million for the same period in 2019. Cost of revenue decreased 28% or $412,000 to $1.1 million for the quarter ended June 30, 2020, compared to $1.5 million for the same period in 2019. Gross profit margin increased 14% to 59% for the quarter ended June 30, 2020, compared to 45% for the same period in 2019.

Operating expenses decreased 65% or $2.6 million to $1.4 million for the quarter ended June 30, 2020, from $4 million for the same period in 2019. Included within the quarterly totals as of June 30, 2020, are the net benefits and overall efficiencies of the previously announced reduction of our U.S. and Canada operations by eliminating redundancies and combining certain responsibilities and functions. Included within the quarter ended June 2019 results are acquisition charges of $938,000 related to the acquisition of Stantive and Celebros, [respectively].

As we have stated on prior earnings calls, we had concluded on March 12, 2019, the sale of 10,227.5 units of Series C preferred stock and associated warrants with a market value of $21.5 million less the gross proceeds received of $10.2 million, which resulted in a noncash charge to warrant liability expenses of $11.3 million. The net proceeds for this transaction were allocated to each of the freestanding financial instruments based on their fair values, which were comprised of preferred stock and warrants.

Due to fair value derivative accounting rules, the derivative warrants are independently revalued on a quarterly basis. For the quarter ended June 30, 2020, this revaluation, which takes into account the overall increase in our market share price from the previous quarter, resulted in a $1.8 million noncash loss to change in fair value of warrant liabilities as compared to a $10.1 million noncash gain for the same period in 2019, respectively.

Operating income for the quarter ended June 30, 2020, is $150,000 as compared to an operating loss of $2.8 million for the same period in 2019. Net loss applicable to common shareholders for the fiscal quarter ended June 30, 2020, is $1.7 million compared to net income of $7.2 million for the same period in 2019. Adjusted EBITDA for the quarter ended June 30, 2020, is a gain of $428,000 or $0.11 per diluted share compared to a net loss of $1.6 million or $0.77 per diluted share for the same period in 2019. Our non-GAAP adjusted net loss for the quarter ended June 30, 2020, is $1.4 million or $0.37 per diluted share compared to an adjusted net income of $8.6 million or $4.21 per diluted share for the same period in 2019.

At June 30, 2020, the company had cash of $1,165,000 and accounts receivable net of $799,000 as compared to September 30, 2019, where the company had cash of $296,000 and accounts receivable net of $979,000. As of July 31, 2020, our cash balance is consistent with our June results. Total days sales outstanding for the quarter ended June 30, 2020, is 42.1 days, an improvement from a beginning of the year high of 48.8 days. Total days sales outstanding for the quarter ended June 30, 2019, was 60.3 days. The primary reason for these improvements can be attributed to our exceptional strong customer relationships and consistent conversion of accounts receivable into cash.

In February 2016, the FASB issued ASC 842 leases, which outline principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. This new standard requires lessees to recognize most leases on the balance sheet for the rights and obligations created by these -- by those leases. As a result of adopting the new standard as of October 1, 2019, the company has recognized as of June 30, 2020, operating lease assets and liabilities of approximately $325,000.

On December 31, 2019, the company filed a first amended and restated certificate of designations for the Series A convertible preferred stock, which amended and restated the Series A preferred stock conversion price, mandatory conversion, redemption option and dividends. The company has 264,000 of authorized shares of Series A convertible preferred stock, which may be converted into shares of common stock. As of June 30, 2020, Series A preferred shareholders have converted 100% or 262,310 shares of issued and outstanding, plus 19,767 of paid in time shares of Series A convertible preferred into 1,611,584 shares of common stock. Additionally, as of June 30, 2020, the Series C preferred shareholders having converted 20% or 84 shares of issued and outstanding Series C convertible preferred into 9,555 shares of common stock. We anticipate being able to convert all remaining Series C convertible preferred shares during the fourth quarter 2020.

On April 17, 2020, the company entered into a loan with BNB Bank as the lender in an aggregate principal amount of $1,047,500 pursuant to the Paycheck Protection Program under the CARES Act. The PPP loan is evidenced by a promissory note. Subject to the terms of the note, the PPP loan bears interest at a fixed rate of 1% per annum, with the first 6 months of interest deferred, had an initial term of 2 years and subsequently increased to 5 years and is unsecured and guaranteed by the Small Business Administration.

The company will apply to the lender for forgiveness of the PPP loan with the amount which may be forgiven equal to the sum of payroll costs, covered rent obligations and utility payments incurred by the company during the 24-week period beginning on April 21, 2020, calculated in accordance with the terms of the CARES Act. As of June 30, 2020, we have calculated our forgiveness based on the SBA requirements to be $554,000 or 53% of the applicable PPP loan drawdown.

Our total assets are $11.3 million and total liabilities of $8 million. As a result of our Series A and Series C convertible preferred shares conversion to common stock, we have 4,419,640 issued and outstanding shares of common stock as of June 30, 2020, as compared to 2,798,475 issued and outstanding shares of common stock as of September 30, 2019.

I want to wrap up with some financial outlook. We expect to continue growth within our recurring revenue and to generate positive operating income and adjusted EBITDA for the fourth quarter of fiscal 2020.

Thank you all for listening. And at this time, we would like to open up -- open the call up to Q&A.

(Operator Instructions) Our first question is from Howard Halpern with Taglich Brothers.

Congratulations, Ari and guys. Congratulations on achieving operational profitability. That's a big deal, big deal. So year-to-date, how many new customers have you gotten? And are most of them in the Celebros product category?

Most of them are in Celebros in terms of quantity. Celebros is really the -- it's selling quick and it's the model that we're going to be using to sell all of our software. Last quarter alone, we had 8 license sales and 6 of them were Celebros. I don't know -- I don't remember what the previous 2 quarters were, but I think they added up to 7, sort of like 3 and 4.

And I missed revenue 360. Revenue 360 is -- it's not a marketing term, although I like the term, and we might start to use it in marketing. But it really describes our strategy where we're taking Unbound and we're taking Orchestra, which are platforms that traditionally would require a bunch of professional services to customize in order to implement someone's online store and pulling the components out of those that directly impact revenue, wrapping them up so that they can be sold just like Celebros without requiring a bunch of professional services and making them compatible with all of our competitor platforms like Magento and Shopify and so forth.

And this is enabling us to expand our prospective customer base to anyone regardless of if they've got a competitive platform to Unbound or not to have our sales be fully telephonic and ultimately completely touchless, where you'd just be able to buy our software through our website for much faster sales cycle, lower CAC. It's really off to a great start.

And talking a little bit about how you envision the revenue 360. If a customer come in, initial product license, whether (inaudible)or one of the other offerings, how do you guys [have] yourselves interacting with (inaudible) helping client Phase 2 off different (inaudible) sell to your existing new client base as they become (inaudible) initial purchase?

Right. So what we're doing is there are hundreds of implementations on our platforms that have each one dozens of unique ways to, say, implement revenue enhancements. They might send out coupons. They might have special artificial intelligence systems that recognize the most important keywords and register them with Google. They might have recommendation engines. And we're taking those best practices from all those different customers and bundling them up.

This gives us cross-sale opportunities where we're now going into our own customer base and saying, "Hey, here's something that we did for another customer. We've got it bundled up, so you can just buy it directly without a big complicated and expensive implementation process", and selling it throughout our own customer base. And then, of course, also selling it out to the rest of the world.

And we believe that the, what's called marketplaces, where platforms like Magento, for instance, allow other companies to sell their Magento-compatible products that these marketplaces will be a significant distribution point for us. And we've already got sales from the Hybris marketplace, the Magento marketplace, the Shopify marketplace and [others].

(inaudible) what type of stack have you received? I guess, new [sale] customers, especially in terms of the machine AI technologies that are in that offering?

So a lot of our AI technology came from the Celebros product line. And this artificial intelligence is able to understand the patterns in which people behave on your website, which ones of those patterns turn into actual purchases. And we're leveraging that capability with some other newer AI that we've developed to be able to put the right product in front of the right person at the right time when they visit an online store. This includes the ability to do recommendation, people who bought this also buy that. Even to be able to register products as individual one-click purchase pages that are registered with Google.

Okay. Well, keep up the good [work]. Just keep on growing.

Thank you, Howard. Well, we're very excited to have a positive operating income and adjusted EBITDA, and we'll continue working hard for you and all the other investors. Thanks.

And our next question is from [Ben Cressy].

This is Ben. I've spoken to you before. So I wanted to [shift] the topic a little bit from the financial side to the technical side. And as you know, like I think you mentioned Shopify is a competitor, and technology changes really fast, right? And a lot of your competitors are heavily invested in technology. They're building new -- they're doing a lot of R&D, new programming languages, all that kind of thing. And I was wondering, you have these acquisitions and how is the integration going? And are you able to sort of build out modular systems so that you can help out on one side with another platform? And I think based on your career site, it's kind of like a .Net shop. Is that kind of where you see yourself investing heavily, continuously forever?

Right. Well, Ben, those are great questions. And there's been huge advances in system integrations over the last 10 years with what are called RESTful APIs and also what's often called headless CMS. And the gist of both of these systems is that you can have components that are running in different languages, on different servers and communicate quickly enough to be able to pass information back and forth with some reasonable standards to act like they're on a single system. And this is really what's allowing us to be successful with our current system.

So we communicate with the Unbound platform, with the Magento platform, with an SAP, ERP, an Amazon personalization engine continuously and provide a single seamless output as though it was all running on one server. We've been doing this now for a little bit over a year. It's working really well. And I think it's a standard that's getting better every day and is maturing. So that problem that you just pointed out, which has plagued computer scientists forever, and it's a tough one, is one that in our particular industry is pretty mature, and we're leveraging that to move quick.

Okay. Cool. And then like in terms of like doubling down in like .Net, are you like switching one team to .Net? Or it sounds like you guys have a lot of different languages that you have to work with. You've got to work on Lightning. You got to work on Magento, kind of specific stuff. You've got PHP. Does that end up reducing velocity? And I think also like, test coverage, are you able to keep the bugs down as you guys are kind of scrolling out into a lot of features now? So are you able to focus in and make sure that you don't ship regressions and hurt your net retention ratio?

Sure. Sure, right. So on the language side, most of our technology is in Lightning and .Net, and our engineers generally will also have a lot of experience with some of the usual suspects, with PHP and Ruby and Java. And as we integrate with more and more systems, I expect some of those languages to become a bigger part of our engineering team. But because most of our integration is happening in RESTful APIs, we don't get too caught up in having to do too many things outside of the standard languages that we're accustomed to because they all have a RESTful interface.

Now on the regressions in QA, this is something that's near and dear to my heart. We hear a lot about that. And what we do is not only are we building unit tests and automation suites, integration tests and all the good stuff on our own software, but whenever we do an implementation for a customer, we create a test suite for each of our customers, and that goes into our R&D team. And every time they create a patch, they first run it across all of our customers' test suites.

A lot of those are built on like essentially, I'm trying to remember which technology we use, I'm blanking right now. But screen recorders that are stimulating click-throughs on their website, for example, and we'll have a stage version of their site running, but before recording on it and make sure the click-through analysis works. In other cases, for some of our bigger customers, we'll actually have deeper integration tests that are running or unit tests that are running inside of their suite. But we run that across all of our customers on every patch. So that's how we're approaching that QA issue.

(Operator Instructions) Ladies and gentlemen, I would like to turn the call back to management for their final remarks.

Thank you, and thank you all for listening. We appreciate the support and patience of all of you, our shareholders and our partners. And it's our goal to continue to build a scalable business model, which in turn will bring shareholder value. We've reached very important milestones just now. We have positive operating income, positive adjusted EBITDA. We've got subscription license growth, new products that are being released. It's a very exciting time. We're really looking forward to sharing our Q4 results with you on our next conference call. Stay healthy and be well.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect. Have a wonderful day.