Earnings Call Transcript - BLIN Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Bridgeline Digital's Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now hand the conference over to Mark Downey, Chief Financial Officer of Bridgeline Digital. Please go ahead, sir.

Mark Downey, CFO

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 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 expressly disclaim any 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 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 R.E Kahn, our President and CEO.

R.E Kahn, 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 a repeat of our bottom-line performance with positive operating income and positive adjusted EBITDA again. Q3 closed more sales than we had in our previous two 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 prior 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 healthcare industry with hospitals enhancing their websites to incorporate virtual events as well as implementing messaging systems in response to the COVID-19 pandemic. Recently, two top regional healthcare 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've recently won an eyeglasses manufacturer with operations in Europe and 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 three continents and across several verticals, including healthcare, pharmaceuticals, 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 multi-year terms, including both a Fortune 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 a slower professional services segment 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 the delayed service priorities. We saw no significant impact from COVID on licenses. Our customers continue to buy our software, and in fact, sales even picked up. Just as importantly, our customer base continues to invest in Bridgeline products, and we see both cost sales as well as expansions 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, leading to more sales and faster sales cycles, driving subscription revenue and delivering stronger gross margins, which increased 29% in that same quarter. Revenue 360 is not only a sales strategy; it also guides our research and development. With Revenue 360, we're expanding our technologies to help customers grow their online revenue. And to do so with out-of-the-box tools that drive all three components of e-commerce. We increase site traffic, we increase shopper conversion rates, and we increase the average order value. Our software has grown each of these three revenue components for hundreds of customers over the years. Our focus now is to package all 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 help franchises increase their online and in-store traffic with out-of-the-box store locator pages. Unbound Pages makes it easy for users to share locator maps, store hours, and contact information with 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 email marketing and online commerce capabilities that were easily included because of our broader unbound product suite. We will be making more announcements this year as we 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 revenues 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 stock. 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, a 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 show you even more successes on our Q4 call. At this time, I'd like to turn the call over to our Chief Financial Officer, Mark Downey.

Mark Downey, CFO

Thanks, R.E. 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 to 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 continued 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. Falling on 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 more renewals across the diverse portfolio of customers, including retail, healthcare, 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 with 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 time and material engagements while they reassessed the next steps 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 licensed revenue with some of our newer products, such as the Celebros product line, which requires little or no services to implement. This focus, along with the company through partnerships and customers’ ability for self-service, is expected to further increase our license to services ratio over time. Total revenues from two 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 in overall efficiencies of the previously announced reduction of our U.S. and Canada operations. By eliminating redundancies and combining certain responsibilities in the 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 our prior earnings calls, we had concluded on March 12, 2019, the sale of 10,227.5 units of senior 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 non-cash 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 are comprised of preferred stock and warrants. Due to fair value derivative accounting rules, the derivative warrants are independently assessed on a quarterly basis. For the quarter ended June 30, 2020, this re-valuation—which takes into account the overall increase in our market share price from the previous quarter—resulted in a $1.8 million non-cash loss to the change in fair value of warrant liabilities, as compared to a $10.1 million non-cash 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 net cash of $1,165,000 and accounts receivable net of $799,000 as compared to September 30, 2019, when 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 the 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 exceptionally strong customer relationships and consistent conversion of accounts receivable into cash. In February 2016, the FASB issued an ASC 842 Leases, which outlined 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 those leases. As a result of adopting the new standard as of October 1, 2019, the company recognized as of June 30, 2020, operating lease assets and liabilities of approximately $325,000. On December 31, 2019, the company followed the first amended and restated certificate of designations for 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 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 260 shares into 310 shares issued and outstanding, plus 19,767 of paid-in 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 have converted 20% or 84 shares issued and outstanding of Series C convertible preferred into 9,555 shares of common stock. We anticipate being able to convert all remaining Series C convertible preferred shares in the fourth quarter of 2020. On April 17, 2020, the company entered into a loan with BNB Bank as a lender in an aggregate principal amount of $1 million 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 six months of interest deferred, has an initial term of two years which is subsequently increased to five 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 conversions, common stock, we have 4,419,614 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 continued 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 the call up to Q&A.

Operator, Operator

Thank you. [Operator Instructions] First question is from Howard Halpern with Taglit Brothers. Please go ahead.

Howard Halpern, Analyst

So, year-to-date, how many new customers have you gotten there? Are most of them in the Celebros product category?

R.E Kahn, President and CEO

Most of them are in Celebros in terms of quantity. Celebros is really selling quickly, and it's the model that we're going to be using to sell all of our software. Last quarter alone, we had eight licensed sales, and six of them were Celebros. I don't know – I don’t remember what the previous two quarters were, but I think they ended up to seven. And I missed Revenue 360. Revenue 360 is, it's not a marketing term, although I like the term and we might start using it in marketing. It really describes our strategy where we're taking Unbound and we're taking Orchestra, which is a platform that traditionally would require a bunch of professional services to customize in order to implement some of the 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 extensive professional services, and making them compatible with all of our competitor platforms like Magento and Shopify and so forth. This has been enabling us to expand our prospective customer base to anyone, regardless of what they've got, a competitive platform to Unbound or not, should have our sales be fully telephonic and ultimately completely touchless where you would just be able to buy our software through our website for faster sales cycles and lower cash outlay. It's really off to a great start.

Howard Halpern, Analyst

If I come in with an initial product license, whether it's one of the offerings, how do you guys perhaps yourselves interact with technical support to offer different essentially products to sell to your new client base as they become established?

R.E Kahn, President and CEO

What we're doing is there are hundreds of implementations on our platform that each have dozens of unique ways that they 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-sell opportunities where we're now going into our customer base and saying, 'Hey, here's something that we did for another customer.' We've got it bundled up; you can just buy it directly without a big complicated and expensive implementation process. We're selling it throughout our own customer base, and then of course, also to the rest of the world. We believe that what's called marketplaces, where platforms like Magento allow other companies to sell their Magento-compatible products on these marketplaces, will be a significant distribution point for us. And we've already got sales from the Hybris marketplace, the Magento marketplace, and the Shopify marketplace.

Howard Halpern, Analyst

Any type of feedback received, I guess, from new Celebros customers, especially in terms of the machine AI technologies that are in that offering?

R.E Kahn, President and CEO

Right. 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. It captures which patterns turn into actual purchases. 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. These capabilities include the ability to do recommendations, such as 'people who bought this also bought that', even to be able to register products as individual one-click purchase pages that are registered with Google.

Operator, Operator

Thank you. And our next question is from Ben Crissy. Please go ahead.

Unidentified Analyst, Analyst

Hey, R.E, this is Ben. I've spoken to you before. So, I wanted to pivot a little bit from the financial side to the technical side. And as you know, I think you mentioned Shopify as 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, 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 dotnet shop. Is that kind of where you see yourself investing heavily continuously?

R.E Kahn, President and CEO

Right. Those are great questions. There have 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. The gist of both of these systems is that you can have components that are running in different languages and different servers and quickly communicate enough to be able to pass information back and forth with reasonable standards to act like they're on a single system. This is really allowing us to be successful with our current system. We communicate with Unbound platforms, Magento platforms, various ERPs, and Amazon personalization engines continuously and provide a single seamless output that is all running on one server. We've been doing this now for a little over a year. It's working really well, and I think it’s the standard that's getting better every day and 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 quickly.

Unidentified Analyst, Analyst

Okay. Cool. And then, in terms of doubling down on dotnet, are you switching one team to dotnet, 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's kind of specific stuff, you've got PHP. Does that end up reducing your velocity? And I think also like, test coverage, are you able to keep the bugs down as you guys are rolling out lots of features now? So, are you able to focus and make sure that you don't ship regressions and hurt your net retention ratio?

R.E Kahn, President and CEO

Sure. On the language side, most of our technology is built in dotnet, and our engineers generally will also have a lot of experience with some of the usual suspects with PHP, Ruby, and Java. 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 regression and QA, this is something that's near and dear to my heart. We care a lot about that. We are not only building unit tests, automation suites, and integration tests, but whenever we do an implementation for a customer, we create a test suite for each customer, and that goes into our R&D team. Every time they create a patch, they first run it across all of our customers' test suites. A lot of those are built on screen recorders that simulate clicks through a customer's website, for example, we have a staged version of their site running with recording, and we make sure that the click-through analysis works. In other cases with some of our larger customers, we will actually have deeper integration tests that are running our unit tests within their suite. But we run that across all of our customers on every patch. That's how we're approaching that QA issue.

Operator, Operator

[Operator Instructions] Ladies and gentlemen, I'd like to turn the call back to management for their final remarks.

R.E Kahn, President and CEO

Thank you, and thank you all for listening. We appreciate the support and patience of all of you, our shareholders and partners. Our goal is 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, and new products are being released. It's a very exciting time, and I'm really looking forward to sharing our Q4 results with you on our next conference call. Stay healthy and be well.

Operator, Operator

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