Bridgeline Digital, Inc. (NASDAQ:BLIN) Q2 2019 Earnings Conference Call May 15, 2019 4:30 PM ET
Ari Kahn - CEO
Carole Tyner - CFO
Conference Call Participants
Howard Halpern - Taglich Brothers
Good day, ladies and gentlemen, and welcome to the Bridgeline Digital Incorporated Second Quarter 2019 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 introduce your host for today's conference, Mr. Ari Kahn, Chief Executive Officer and Ms. Carole Tyner, Chief Financial Officer. Carole, you may begin.
Thank you and good afternoon, everyone. My name is Carole Tyner, and I'm the Chief Financial Officer for Bridgeline Digital. I am pleased to welcome you to our fiscal 2019 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 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 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 financial measures in our earnings release. You can obtain a copy of our earnings release by visiting our website.
I'd like to turn the call over now to Mr. Ari Kahn, our CEO and President.
Thank you Carol and good afternoon everyone. On our last call, we discussed Bridgeline’s 2019 strategy to reduce customer acquisition costs and improve our bottom line by taking advantage of the crowded marketing technology space, also known as martech. There are over 5000 martech companies, many of which are too small to operate efficiently, but have excellent customer bases and technologies. Combining with the right business can enable cross-sell opportunities, stronger gross profit, faster sales cycles and differentiation in the breadth of our product suite.
In our latest quarter, Bridgeline executed two acquisitions and a financing to enable additional acquisitions in the future. Bridgeline entered into an asset purchase agreement with SeeVolution Inc, that included its Celebros search product line and more than 80 e commerce customers across the Americas and Europe. The Celebros acquisition brought Bridgeline additional SaaS subscription contracts of approximately 1,300,000 in recurring revenue and strong gross margins.
Based on historical contract renewal rate, Celebros provides a backlog estimated to be $3,800,000 in SaaS revenue over the next three years. This acquisition was made for $400,000 in cash, 40,000 shares of common stock and $100,000 over the first 10 months after the acquisition. Celebros is an e-commerce search platform with artificial intelligence, natural language processing and machine learning that helps companies increase revenues by allowing products to be better found on their website. Celebros’ technology is based on the same Microsoft platform that Bridgeline has built its unbound product suite upon.
This creates synergies and our delivery of our combined product suite and opportunities for even greater gross margin. The sales cycle for Celebros is much shorter than Bridgeline’s and we have closed multiple new sales since the acquisition. Each of the Celebros’ customers is a candidate for Bridgeline software, and most of Bridgeline’s customers are candidates to buy Celebros software.
Shortly after acquiring Celebros, Bridgeline entered into an asset purchase agreement with Stantive Inc that included its OrchestraCMS product in 40 customers across the Americas and Europe. The OrchestraCMS acquisition brought Bridgeline additional SaaS subscription contracts for approximately $3,500,000 in recurring revenue with 85% gross margins plus an estimated 1,700,000 in annual professional services. This also included a contractual backlog of over $4,500,000 in SaaS revenue, estimated to become $10 million after typical contractual renewals in the next three years.
This acquisition was made for $5,200,000 in cash. OrchestraCMS is unique in that it is 100% native salesforce.com content management system. OrchestraCMS has had a long partnership with salesforce.com, which Bridgeline has continued. We're excited to work with salesforce.com to identify and close new customer opportunities going forward. The OrchestraCMS customer base includes large enterprises and pharmaceuticals, retail and finance. OrchestraCMS SaaS contracts have a strong renewal history.
And in recent months, more than 35% of the annual recurring revenue contracted by OrchestraCMS has renewed with three year subscriptions rather than the industry's typical one year renewal term. These renewals allow Bridgeline to further grow with contractual backlog and lock in the value of the OrchestraCMS acquisition.
With OrchestraCMS and Celebros, Bridgeline now has over 200 customers compared to just 85 prior to the acquisitions and over $11 million in contractually committed backlog. And based on historical contract renewal rates, we expect over $25 million in recurring revenue over the next three years.
Because OrchestraCMS and Celebros customers often make advanced payments of up to one year for their subscriptions, the transaction accounting will recognize a portion of revenue from the newly acquired SaaS agreements initially and SaaS revenue from these customers will increase over the next 12 months, as they renew their subscription agreements. Because of synergies and SaaS hosting and our partnership with salesforce.com, we expect to report increasing gross margins over the same period.
Most importantly, we're excited to explore new ways to add value to our 200 customers with the expanded product line and to increase revenues with lower customer acquisition costs is resolved. We also expect our partnership with salesforce.com to attract new business and further reduce customer acquisition costs.
This quarter, Bridgeline executed a private placement of approximately $10 million. The proceeds from the private placement were used to acquire OrchestraCMS, retire all of our debt and fund future operations. The private placement included over $20 million in warrant coverage, which is expected to result in additional cash proceeds for the company. In fact, over $400,000 of warrants have been exercised since the private placement.
Bridgeline’s strategy and growth through acquisition is intended to continue through 2020 and the proceeds – the cash proceeds from this capital raise and the warrant exercise is expected to be helpful, confined future strategic opportunities. Thanks to recent acquisitions, Bridgeline now has several multibillion dollar pharmaceutical customers. One pharmaceutical, OrchestraCMS customer recently renewed their SaaS contract for a three year term valued at nearly $700,000. And Bridgeline now has over $650,000 in annual recurring SaaS revenue in the healthcare sector, including three top tier pharmaceutical customers in five major hospitals. Bridgeline won a new customer in the healthcare sector just this month with one of our products from the acquisition.
Another important recent win that resulted from our acquisition is from one of the world's largest convenient store chains who increased their licensing contractual and contracted additional services, with the contract valued at over $300,000. Franchise’s brand networks and chains have long been a differentiating strength for Bridgeline and Bridgeline expects over $1 million in annual recurring revenue in this sector for the combined businesses.
Bridgeline has added over $1 million in recurring revenue in the finance sector as a result of the acquisitions. This is in addition to the several finance and banking customers who have been longtime customers of Bridgeline and the company now has over $1,500,000 in contracted annual recurring revenue in this sector with most of the revenue contractually committed through 2021.
Due to transition accounting of deferred revenue and the acquired SaaS contracts, Bridgeline will be reporting increasing amounts of revenue from the new SaaS contracts each month the first 12 months after the acquisition as contracts are renewed. Very little revenue from the acquisition is recognized in our second quarter and more will be included as Bridgeline each quarter until the end of the 12th month, at which time all SaaS contracted revenue will be recognized as Bridgeline revenue.
We expect to reach approximately $10 million in annual recurring revenue for the current customer base and over 15 million in total revenue. Bridgeline will continue to evaluate contracting opportunities like Celebros, OrchestraCMS and we believe there are many great values in the $3 million to $10 million range that would be great fits for Bridgeline.
And at this time, I'd like to turn the call back to our Chief Financial Officer, Carole Tyner who will provide more details of the financial results of the second quarter.
Thanks, Ari. So today, I'll review the financial results for the quarter ended March 31, 2019. First, I'd like to talk about revenue. Total revenue for the second quarter of fiscal 2019 was 2.2 million compared to 3.7 million in the second quarter of last year. The following are some details of the various components of this revenue.
Total license revenue comprised of subscription based licenses or SaaS licenses, and perpetual licenses, was [indiscernible] for the second quarter of fiscal 2019 compared to 1.5 million in the second quarter of fiscal 2018. The decrease in revenue was primarily from a decline in SaaS revenue due to a large customer choosing not to renew one of its SaaS subscriptions, which we explained in our previous earnings calls. Also contributing to this decline was a price reduction for another larger customer’s contract to a change in their business model.
SaaS revenue was 940,000 in the second quarter of fiscal 2019 compared to 1.3 million in the second quarter of fiscal 2018. Our hosting revenue decreased from 293,000 in the second quarter of 2018 to 241,000 in the second quarter of this year. Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, decreased to 1.3 million in the second quarter of fiscal 2019 compared to 1.7 million in the second quarter of last year. This decrease was driven by the decline in SaaS revenue as previously mentioned.
Our annualized recurring revenue or ARR at the second quarter was approximately 8.9 million. Our new engagements are typically three year contracts with one year auto renewals, except for our new acquisition with Stantive, which we're seeing have three year renewals. Our services revenue was 911,000 in the second quarter fiscal 2019 compared to 1.9 million in the second quarter of last year. As a longer term project started to wind down, the decrease in new engagements impacts overall services revenues. The percentage of revenue associated with staff licenses relative to services is expected to continue to increase.
Total revenues from acquired businesses comprise approximately 13% of total revenues. Please note this is not represent a full normalized quarter, for the first reason is that it was acquired in the middle of March and Celebros was the middle of February as well as the accounting transaction for deferred revenue, as I already explained earlier in the call.
Our gross margin for the second quarter was 35.9% compared to 49.1% in the second quarter of last year. The decline in the margin is due to the decline in license revenue as well as a decline in services margin. Thanks to recent acquisitions, we expect gross margin for SaaS licenses to increase.
Moving on to operating expenses, excluding restructuring and acquisition related expenses, operating expenses increased to 2.5 million for the second quarter of fiscal 2019 compared to 2.3 million for the second quarter of fiscal 2018. Driving some of this increase is the added headcount from the two acquisitions as well as increasing our sales infrastructure.
Interest and other expenses was impacted this quarter as well. In March, we concluded the sale of [indiscernible] units of Series C preferred stock and associated warrants for growth proceeds of 10.2 million. The net proceeds of that single transaction were allocated to each of the financial instruments based on their fair values, which will comprise of the preferred stock and the warrants. Due to accounting rules, the allocation of the purchase price was allocated to the warrants first with any residual proceeds allocated to the preferred stock.
The original valuation of the warrant was 21.5 million and the proceeds were 10.2 million, which resulted in a non-cash charge to operations of 10.3 million. The warrants will be revalued at each balance sheet date with a change in fair value recorded as non-cash income or expense depending on the valuation fluctuations quarter-to-quarter.
Moving to the bottom line, our net loss was 12.5 million in the second quarter of fiscal 2019 compared to 680,000 in the second quarter of fiscal 2018. As mentioned, this 12.5 million includes restructuring and acquisition related expenses of 304,000, a write-off of unamortized debt and cost of discharge to loans that we now have zero debt in the amount of 221,000 as well as the warrant expense for the Series C preferred of 10.3 million that I explained earlier, also non cash.
Excluding all these charges, net loss for the quarter was 1.7 million. Our non-GAAP adjusted net loss was 1.8 million or a loss of $0.06 per diluted share in the second quarter compared to a non-GAAP adjusted net loss of 306,000 or a loss of 3.62 per diluted share in the second quarter of last year. Our adjusted EBITDA for the second quarter 2019 was a loss of 1.5 million compared to a loss of 185,000 in the second quarter of fiscal 2018.
I now want to talk a little bit about our balance sheet. At March 31, the company had cash and accounts receivable of 4.2 million. This is significantly greater than we've had in the past few quarters, mainly attributable to the rates that we had in March. Our total assets were 16.1 million and our total liabilities were24 million. There is no debt on the balance sheet as of March 31, 2019. During the quarter ended March 31, we raised an 8.9 million, which we used to acquire businesses, pay down our line of credit to zero and pay off our loan to Montage Capital.
As I discussed earlier, the company recorded a liability to 25.5 million for the warrants issued in a series C preferred. These are adjusted at each balance sheet date and the value for March 31 of these warrants was a net 20.5 million.
Thank you all for listening. At this time, I'd like to open the call up to questions and answers.
Our first question comes from Howard Halpern with Taglich Brothers.
I have a couple of questions. In terms of restructuring, are we pretty much done for the year in restructuring costs?
There'll be some additional changes to it, especially if we do another acquisition that could happen there, but in terms of the end -- in Q3, most of the restructuring from these two acquisitions has happened [indiscernible] additional restructuring because we basically did the two acquisitions in mid March. And then that'll be up unless we do another acquisition.
And in terms of the two acquisition that you did do, assuming no additional new customers, which of course should happen, what should we look for in the revenue add in the upcoming two quarters?
Right. So the combined recurring revenue, contracted recurring revenue becomes 9.5 million in ARR. However, from a transaction accounting perspective, some of the deferred revenue from the two acquisitions, which totals about 4.8 in ARR is not going to be recognized. So that's going to increase each month. And by the end of 2019, the calendar year, most of the deferred revenue will be written off and we'll be getting credit for all of the revenue that we acquired. But you will see less revenue in Q3 and in Q4 than was represented by what we actually acquired.
Okay. And can you talk a little bit about, I guess, the new acquisition, the larger one is on the salesforce.com platform. How does the cross selling between Bridgeline and that, how will that work and are you seeing any traction in the cross selling?
Right. So we got two different types of new sales channels that exist. One of them is with salesforce.com and one of them is cross sales within our customer base. Salesforce.com has been working with Stantive for more than five years and has brought Stantive then to several very large customers. And we are -- extended that partnership, so now Bridgeline is a partner with Salesforce.com, we’ve inherited all the credit that Stantive had and have deals in our pipeline right now from Salesforce.
In addition to that, we've got cross sell opportunity. So today, essentially none of our customers have more than one third of our products, so those customers don't have any Stantive and Bridgeline products, Bridgeline don't have Stantive and Celebros, so on and so forth. We've already seen some cross sales happen. Some Celebros in to other customers. We've got deals in our pipeline now. The Bridgeline and Stantive sales cycles are much longer. The Celebros sales cycle is relatively short. And we've already started new sales with Celebros and brought them all the way to closure just in the short number of weeks where we've owned that business.
So what I expect to see going forward in addition to cross sales and the salesforce deal is that we'll have a lot of sales activity happening from Celebros sales, and then eventually those new deals also up selling. So that will augment our direct sales channel.
Okay. And from the acquisitions due, can you talk a little bit about your sales team and how you might start to reorganize it, what the size is and what you envision going forward into fiscal 2020?
Right. So there's -- prior to these acquisitions, we essentially had a direct sales organization and that was it, selling direct, generating our leads and selling it. Now, in addition to that, we've added a channel sales team and our previous VP of Sales, Tom McGourty, is running that team. They're partnering with Salesforce.com, but also with Magento, which is now Adobe, and partnering with Microsoft Azure. Those are both partners that had generated a lot of sales for the Celebros products. So they're going to be responsible for bringing in new deals in that way. And then also, we've created a customer success team that's responsible for finding cross sale opportunities, and expanding existing accounts. So we’ve really got three different sales organizations right now. And all in all, we've hired a lot of people there recently in these orgs. Think 1, 2, 3, 4, 9 people in those teams more or less.
Okay, so we can look for the baseline operating expenses that you talked about at around 2.5. That should increase immediately, but it'll increase slightly as sales start to ramp.
It'll increase slightly, sales start to ramp. And then also the revenues, even if we didn't make any sales, you would see increasing revenues quarter-over-quarter for the next two quarters as we wind out some of the deferred revenue that was in the acquisition.
Okay, okay. Well, let's hope all this stuff comes together and you find a couple of more and take this company going forward.
Great. Thank you, Howard.
[Operator Instructions] I'm not showing any further questions at this time. I would now like to turn the call back over to Ari Kahn for any closing remarks.
Thank you. We appreciate the support and patience from all of our shareholders and it's our goal to continue building a scalable business model, which in turn will build shareholder value. Thank you for joining us today and we look forward to speaking again on our Q3 2019 conference call. Bye, everybody.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.