Bridgeline Digital, Inc. (NASDAQ:BLIN) Q2 2016 Earnings Conference Call May 12, 2016 4:30 PM ET
Michael Prinn - Chief Financial Officer
Ari Kahn - President and Chief Executive Officer
Good day, ladies and gentlemen and welcome to the Bridgeline Incorporated Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Michael Prinn, Chief Financial Officer. You may begin.
Thank you and good afternoon everyone. I am pleased to welcome you to our second 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 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 based 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’ll discuss some non-GAAP financial measures in talking with 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.
Alright. So, before I turn the call over to Ari, I just like to highlight one significant change that we announced in the press release earlier this morning. Ari has been appointed by Bridgeline Board of Directors the role of President and Chief Executive Officer. As you know, Ari joined Bridgeline in September as the Chief Operating Officer and recently has been serving as the Interim Chief Executive Officer. Ari is an industry veteran who knows our space extremely well. He is very passionate about our ability to succeed and become a long-term leader in digital experience management space. So, I would like to congratulate Ari and let everybody know how excited I am for him to be moving into this new role and for the future success of Bridgeline Digital.
I will now turn the call over to Ari.
Thank you, Mike and good afternoon everyone. Our SaaS software companies with solid financials often drive strong shareholder value. I am happy to report that we have delivered our third consecutive quarter of positive adjusted EBITDA and we are committed to continued focus on stronger financials. We are building long-term value and know that long-term success requires near-term fiscal strength. Bridgeline is financially a very different company today compared to fiscal 2015. Adjusted EBITDA improved from negative $1.2 million in Q2 2015 to positive 25k this quarter. Our high-margin license revenue increased 12% over Q2 2015 and license and hosting revenue are now 44% of total revenue compared to 36% in the second quarter of fiscal 2015.
Bridgeline has made an important financial announcement recently as a result of our continued fiscal improvement and paves the way to future success. Bridgeline’s shareholders have approved the issuance of common stock to convert up to $6 million of outstanding debt to equity and approved raising up to $2 million in working capital. This reduces our interest expense and provides capital that will enable us to further invest in business development to drive stronger revenues and grow market share. It also signals the confidence as financial partners have in Bridgeline’s long-term prospects. When Mike goes over the financial highlights, he will give you more detail around this.
I read an analyst analysis on TechCrunch this week that shows a 10-year average valuation for SaaS software companies of 5x revenue. Our stock is nowhere near that multiple. But again, Bridgeline is financially a very different company today compared to 2015 and I see this as an opportunity. With our stronger financials, conversion of debt and additional working capital and the expansion of our customer base, we can have a much stronger multiple and can expand our revenue on which that multiple is based. Web content management is a $3 billion market with strong year-over-year growth. Marketing automation is a $1.3 billion market with even stronger growth. These two markets depend upon each other and we have innovated in both technologies for years. Large mission-critical companies rely on us everyday and we deliver. The competition in our market is scattered. There is no market leader and opportunity for us to expand our presence is there.
We will be investing in business development this quarter and in fact have recently hired several business development executives in Boston and New York and we will continue to grow. Bridgeline’s quick-to-market solutions are now officially released as the Bridgeline Pro series. Pro series expands on our addressable market substantially and capitalizes on existing inbound demand. We expect Pro series to help drive revenue, reduce our cost to customer acquisition and create stronger margins.
Pro series not only opens Bridgeline to a larger market, it also reduces implementation costs for our enterprise customers, so they can focus their budgets on the unique requirements of their business while having standard best practices out of the box as building blocks to expedite implementation of their solution. Together, our Pro series and building blocks initiatives are expected to further increase our license to services ratio, which in turn shows even greater margins for the company, while driving greater value to our customers. This quarter, we added a major retailer to our customer list who will implement a new commerce site on top of iAPPS leveraging Marketier to automate customer communication product promotion. We also expanded our iAPPS franchise customer base with the retail franchise and home improvement industry.
I am excited about Bridgeline’s future as we are well positioned to take advantage of great market opportunity. With great products, strengthening financials, tremendous top line growth potential and our long-term commitment from financial partners, I am excited about our prospects to continue to drive stronger shareholder value by establishing a much larger market share.
At this time, I would like to turn the call over to our Chief Financial Officer, Mike Prinn, who will provide more details on the financial results of our first quarter 2016.
Thanks, Ari. So, I will review the results of operations for the second quarter ending March 31, 2016. So revenue, second quarter revenue was $4.2 million compared to $4.8 million in the second quarter of last year. So, although this revenue number is lower than last year, as we mentioned in our previous call, we have been doing some rebuilding and we focused on higher margin revenue and on aligning our cost structure to our revenue forecast. So even though, our revenue was about $550,000 less in Q2 of this year compared to Q2 of last year, we generated over $1 million more of gross profit.
So, I will get back to revenue now and I will visit gross profit, gross margin in a couple of minutes. I just want to make sure to highlight that significant improvement. You have also seen improvement to our bottom line, which I will talk about in more detail. So let me give some additional color around the various components of revenue. Our subscription and perpetual license revenue for the second quarter of fiscal 2016 increased 12% to $1.5 million compared to the second quarter of fiscal 2015. Our licensing and our hosting revenue combined for the second quarter now make up about 44% of our total revenue and that’s compared to about 36% of the total revenue in the second quarter of last year. This continued increase in our license and hosting revenue aligned with our improved cost structure, have enabled us to significantly improve our bottom line.
As we have mentioned, our focus on quicker-to-market solutions to complement our existing enterprise business is what we believe will continue to drive a higher mix of license to service ratio and help transform Bridgeline to an improved SaaS business model in the future. Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual license and hosting increased 13% to $1.8 million in the second quarter compared to $1.6 million in the second quarter of last year. Our service revenue decreased by approximately $670,000 from the second quarter of last year and as we have discussed previously, we have made some changes in the last few quarters to align our delivery team with our revenue projections. We will continue to focus on our billable utilization and our resource planning to make sure we have the right team to continue to drive the forecasted service revenue. We believe that with our focus on increasing the sales team investments and our Pro series products, we can continue to drive service revenue back towards $3 million per quarter.
We have made further progress in the second quarter in terms of expanding the sales team and increasing our spending on lead generation. We expect to see the results of these investments pay off in the upcoming quarters. I think it’s real important too to point out that although our service revenue decreased $670,000, the cost of providing that service revenue decreased by almost $1.1 million, so a larger number. So again, we generated more gross profit even though the service revenue was $670,000 less in the second quarter of last year.
As we mentioned in our last couple of our earnings calls, we initiated some expense reductions that started in the second quarter of last year and it continued really throughout this fiscal year. Our goal is to align our cost structure with our revenue forecast and be in a position to drive positive adjusted EBITDA. We are very pleased that we are able to do that in the fourth quarter of last year and again for the first two quarters of our fiscal 2016, so really three consecutive quarters of positive adjusted EBITDA. Now, our focus has to be on keeping our cost structure intact remaining fiscally responsible while executing on our strategy and ultimately growing our top line.
We are pleased to report that our gross profit improved from $1.7 million in the second quarter of last year to $2.2 million in the second quarter this year. We are pleased to report that our gross margin for the second quarter was 53% compared to 36% in the second quarter of last year, a significant improvement. We really saw in the second quarter the benefit of all the infrastructure improvements that we have made throughout the last two to three quarters. We are seeing a delivery team that has a much higher billable utilization and ultimately as we continue to sell more license engagements, we believe that we can drive an even higher gross margin in the future quarters.
Our operating expenses, excluding a small restructuring charge, were $2.7 million for the second quarter of 2016, down from $3.6 million in the second quarter of last year. That’s a 24% reduction in operating expenses. We have made every effort to reduce our operating expenses to be in line with our current revenue and we have initiatives that we will continue to focus on in 2016 and beyond. We have continued to make changes in our office footprint and these changes alone account for significant savings compared to prior years. We will continue to look for opportunities to reduce our operating expenses while not impacting the planned growth of our sales team and our marketing spend.
Now, a little bit on our adjusted EBITDA and other non-GAAP financial metrics. So, as we talked about before, we are very pleased to report positive adjusted EBITDA for the second quarter of 2016 and for our third consecutive quarter. We took significant action in the earlier part of fiscal 2015 to align our cost structure to drive an improved bottom line. And in the second quarter, we generated $25,000 in adjusted EBITDA.
In the second quarter of last year, we reported a loss of $1.2 million, so this is an improvement from last year in adjusted EBITDA by over $1.2 million. While we are focused on generating positive adjusted EBITDA and have done this now for three consecutive quarters, we still have investments that we need to make in sales and marketing. We will continue to be fiscally responsible. However, our Q3 adjusted EBITDA projection will again be fairly close to breakeven like the last two to three quarters. And if we decide to make the couple of strategic investments, it may even be negative, but we are still focused on our longer term goal of getting to a point where we are generating cash.
Our non-GAAP adjusted net loss was $643,000 or a loss of $0.12 per diluted share in the second quarter compared to non-GAAP adjusted net loss of $1.8 million or a loss of $0.43 per diluted share in the second quarter of last year. That’s an improvement of $1.2 million or $0.31 per share. Our GAAP net loss was $1 million in the second quarter of fiscal 2016 compared to a loss of $2.1 million in the second quarter of last year. The $1 million GAAP net loss in Q2 of this year, of course, includes a $194,000 restructuring charge. So excluding that restructuring charge, we had $1.3 million improvement in our second quarter compared to last year.
So, now turning to review of our balance sheet, on this quarterly call, I am probably going to spend a little more time than usual on the balance sheet as there are number of subsequent events that are going on in this current quarter, so our Q3, that will significantly improve the balance sheet, improve the financial health of Bridgeline and put us in a much better place to execute and drive success in the upcoming quarters and years. So at March 31, the company had cash and accounts receivables of $2.4 million and our DSO was 48 days. We will continue to manage our cash and operating expenses and remain fiscally responsible as we execute our business plan for the remainder of fiscal 2016 and beyond. Our total assets are just under $18 million and our total liabilities are $13.6 million.
In terms of our debt, just going to a little bit of what Ari mentioned before, we have a total of approximately $8.2 million on the balance sheet. One thing that you notice in this quarter is that we have some debt presented as short-term, which means that the maturity date is less than 12 months. So, I am going to walk through those pieces, what our plan is to restructure or convert some of that debt. That plan has been approved by our shareholders at our April 29 annual meeting and is being executed this current quarter, so our June quarter.
First piece I will talk about is our existing line of credit with our bank. At March 31, that balance is $2.3 million and that’s being presented as short-term in our March 31 balance sheet, because it has a maturity date of March 2017. Since the end of our Q2, we have signed a term sheet with the new bank that will provide a similar type arrangement with a lower interest rate. We are currently going through the legal document review and expect most significant issues and expect to have this agreement signed within the next 30 days. This new agreement of course will be a multiyear agreement. And in our balance sheet for the next quarter, we expect to be able to show any debt outstanding under the line of credit as long-term debt.
So, the next piece I want to cover is $3 million in term notes from three existing noteholders who are also shareholders. In our annual meeting on April 29, our shareholders approved a proposed plan to convert this debt into equity, so common stock shares of the company. The three existing noteholders have already signed a commitment letter to convert this debt into equity and we expect this process to be completed within the next 30 days. So, this $3 million of debt is presented as long-term in our March 31 balance sheet. In the next balance sheet that you see for our June quarter will have this debt eliminated and moved into equity.
The last significant piece of debt on the balance sheet is $3 million of convertible term notes that are currently in short-term debt, because they also have the maturity date of March 2017. Like the other term notes that I mentioned a couple of minutes ago, as shareholders approved a proposed plan to convert this debt into equity. We believe that the terms of the conversion are beneficial to the noteholders and we believe that we will see a substantial amount of these noteholders convert their debt to equity. However, this conversion is not mandatory. And until we go through the administrative process of asking each noteholder if they would like to elect to convert their debt to equity, we are required to present that debt as short-term. Although the maturity date is not until March 2017, you will see that presented as short-term in our balance sheet. So, that covers all the pieces that make up the roughly $8.2 million of debt on the balance sheet. And I guess the message that I want to reiterate on this call is we have a plan to improve the financial health of our balance sheet, that plan has been approved by our shareholders and we are executing against that plan this quarter and our expectation is that our balance sheet will be significantly stronger when we next talk to you in August.
Just one additional piece of the plan that doesn’t show up in the marked balance sheet, but I want to highlight it, because it’s key to executing our operating plan for this fiscal year and beyond. So again, as part of the plan approved by the shareholders in April, we have initiated our plan to raise up $2 million in additional working capital. We believe that this will not only continue to improve and strengthen our balance sheet, but also provide us with the ability to execute on a number of strategic initiatives that we are constantly evaluating.
So before we move to Q&A, I just want to say that both Ari and I believe that the company is well positioned to execute in fiscal 2016. We are both pleased with the recent changes that have been made and are excited about our Pro series, which has the ability to drive a true SaaS business model and accelerate our timeline to profitability. So thank you. And at this time, we would like to open up the call to Q&A.
Very good. Okay. Thank you, Sonya. Well, thank you everyone. We appreciate the support of our shareholders and it’s our goal to continue building a scalable business model, which in turn will build shareholder value. Thank you everyone for joining us today and very happy to have been appointed the CEO of Bridgeline. I look forward to stewarding your investment to great success. Thank you.
Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.
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