Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Bridgeline Digital First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce our host for today, Ms. Kim Brown, Director of Investor Relations. Ma'am, please go ahead.

Thank you. Good afternoon, everyone. I am pleased to welcome you to our first 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 Digital with the Securities and Exchange Commission. Also, please note that on the call today, we will discuss some non-GAAP financial measures in talking about the company's financial performance. We report our GAAP results, as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures, in our earnings release. You can obtain a copy of our earnings release by visiting our website. I would also like to remind you that the audio and the transcript of this call will be available for replay. You can find that information on the Investors section of our website. At this time, I would like to turn the call over to Bridgeline Digital's President and CEO, Thomas Massie.

Thank you, Kim. During the first quarter, Bridgeline continued to execute against its long-term strategic plan to grow our iAPPS business model. Before I walk through some of our business accomplishments, I would like to review our first quarter of fiscal 2013 financial results at a high-level. We did generate $6.2 million of revenue, compared to $6.5 million in the first quarter of 2012. However, our iAPPS-related revenue grew a healthy 17% when compared to Q1 of last year, and iAPPS-related revenue is now 69% of our total quarterly revenue compared to 55% in the first quarter of last year. I'm happy to report that in the first quarter, we sold 96 new iAPPS licenses. As of December 31, Bridgeline sold a total of 791 enterprise licenses, and we have deployed 636 of these licenses. As of December 31, we have sold 1,550 iAPPS ds licenses. In addition, licensing revenue in Q1 increased 33%, and recurring revenue increased 20%. Our continued progress of growing our iAPPS-related business is what's going to drive and enhance our shareholder value. The continued adoption of iAPPS is enabling Bridgeline to build a more predictable and profitable business model that offers significant customer traction and recurring revenue and scale. As we mentioned on our last earnings call, we did anticipate that our overall first quarter revenue would be lower, and that the top line would ramp quarter-to-quarter throughout the fiscal year. Multiple factors contributed to the small year-over-year revenue decrease, including: Hurricane Sandy negatively impacted some of our Northeast customers and various billable resources that reside in Bridgeline's Northeast office locations. These unexpected delays of active engagements negatively impacted Q1 revenue by a few hundred thousand dollars. Historically, we've had approximately 50% of our iAPPS license sales booked as SaaS licenses, and approximately 50% as…

Thanks, Thomas, and good afternoon, everyone. I'll review the results of operations for the first quarter ended December 31, 2012. First quarter revenue was $6.2 million, compared to $6.5 million in Q1 of last year. As we anticipated, revenue came in lower than the prior period, as a result of the multiple factors that Thomas just highlighted, including project delays and our focus on the iAPPS ds implementation for the UPS Store. We are fully committed to transitioning our model and growing our iAPPS related business. In the first quarter of 2013, we shed approximately $1 million of non-iAPPS legacy revenue, compared to the first quarter of 2012. We're very pleased with our growth in recurring revenue and our iAPPS related business. So our recurring revenue, which again consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, increased 20% in the first quarter of 2013 to $1.2 million, as we continue to see an increased demand for our iAPPS Product Suite and the benefit of our first iAPPS ds customer. I would also like to highlight that our deferred revenue on the balance sheet grew 150% year-over-year to just under $3 million, representing a significant increase and is indicative of our growth in iAPPS recurring revenue. Of that, majority of this deferred revenue is high-margin that will be recognized over the next 12 months. Our iAPPS-related revenue increased 17% to $4.2 million in the first quarter of 2013, and that's compared to $3.6 million in the first quarter of 2012. iAPPS-related revenue was 69% of our total revenue in the first quarter of 2013, and that's compared to 55% in the year-ago quarter. As you can see, the increase in iAPPS-related revenue is significant, as almost all of our new business development opportunities are focused on iAPPS engagements.…

[Operator Instructions] Our first question comes from the line of Howard Halpern from Taglich Brothers.

Mike, if you could, could you walk me through the process of the actual SaaS sales model, and how it breaks out between -- say, you have now a higher level of engagement at $250,000, how does that break out to, I guess, the revenue recognition that gets split between the income statement and the deferred revenue?

Sure. So I'll just use some round numbers. So if we sign a SaaS engagement and it's $200,000 in services and $50,000 in license revenue, the $200,000 is obviously recognized on a percent complete basis, and that will, traditionally, be over a 6-month period. And then for the SaaS engagement, it is a monthly -- from a revenue perspective, it's recognized monthly as the services are provided. And then in terms of what's on the balance sheet, that's really the difference between what they paid and what's been recognized. So typically, if someone signs a 2- or 3-year SaaS subscription and pays for 1 year, you'll have a year on the balance sheet, and that will go down over time. And some customers choose to pay for 1-year or 2-year, whatever sort of they prefer.

So, really, I should look at iAPPS sales, even though it would be more of a non-GAAP measure, is really some deferred revenue along with the revenue we see on the top line, which would bring it closer, I guess, to your prior estimate that you gave in the fourth quarter towards that 40% area. Am I correct in that assumption?

Sorry, Howard. Can you walk me through that again?

In your prior call, you had estimated iAPPS rep sales of 40% year-over-year for '13. So now, down somewhat, but is that difference, really, the money or the dollars that are going into the deferred revenue?

Oh sure. Yes. So the iAPPS revenue -- we gave guidance that it'd be $21 million. Obviously, we are increasing the deferred revenue, which is really all-iAPPS revenue. And really based on timing and rev rec, you'll see that deferred revenue increase, and we'll take that, really, over the next 12 months.

Okay. And how many ds deployments are you on schedule to complete, I guess, in Q2?

So we -- as of December, we had 1,550. We are progressing in Q2. I don't think, right now, we want to give guidance to how many stores we'll ramp up onto the platform. But this one customer we said has over 4,000 stores, and we're actively working to sign up as many as we can for the remainder of the year.

Okay. And how would you say the experience is going with your workforce and was it all accelerated? And how much easier is it going to be to do the, I guess, the next round and then the next customer?

I think that exponentially gets easier to scale, Howard. We -- frankly, we're not prepared to -- our original plan was to deploy a couple thousand of these iAPPS ds customers through the UPS Store between October 1 and June. And of course, that has accelerated dramatically. And I think the good news is, iAPPS scaled very nicely, and everything worked just fine. And it's meeting, if not exceeding, all the performance metrics that we had for it. So we know we can scale it and end up -- our goals to end up having 20,000, 30,000, 40,000 franchises put on iAPPS ds over time. So we know it can scale and scale with quality through all these stores. So it's just going to get easier as we add more customers.

Okay. And do you have franchises that are actively testing it or kicking new tires on it?

We have multiple franchise opportunities in our qualified pipeline right now. I think the real thing that -- you picked up Howard, which is true, he's really taking a hard look at how that deferred revenue number is growing and what that means for the future quarters, because that will be recognized over the next 12 months.

Yes. And that should -- actually that -- one more question. That deferred revenue should continue to grow as time goes on?

That's correct.

As long as -- you're seeing the customers at generally more interested now in the SaaS model than the perpetual license model?

Well, 2 things. One, on our enterprise engagements, which is iAPPS that we developed, complete websites or web stores around the iAPPS platform, as you know, in the last 3 years, we have seen a 50-50 split between SaaS and perpetual, and that's been consistent every quarter for the last 3 years. In Q4, 80% of those enterprise licenses were SaaS. Now we don't have enough data. We'll see what happens at this quarter to see if it starts to become a trend. But last quarter, 80% of those enterprise licenses were SaaS versus perpetual. Then the second part to that answer to your question is iAPPS ds is 100% SaaS only. There's not a perpetual offering for ds, so that alone is going to start pushing more and more of our deferred revenue up, as well as our licensing sales would be more skewed towards SaaS than perpetual because of ds.

And as the deferred revenue becomes recognized that will drive up -- should drive up gross margin, obviously?

That's correct. That -- all the $3 million of deferred revenue is, for the most part, very tight [ph] software margin

And our next question comes from the line of Mark Stafford from MGS [ph].

Did I catch at the end of the remarks, you're delaying hiring people? Was that what was said?

That's correct.

Okay. And that's just to offset until these other revenues come in?

Until we start recognizing more of the deferred revenues. I think we're an organization, as our core values, as Mike said, we believe in positive EBITDA and generating positive cash flow from operations. So we're always going to stay true to that core value, which could -- we get a lot of questions a lot of times, a lot of investors say, "Jeez, why don't you just raise more money and then hire a bunch of salespeople and really try to push the top line?" We believe in managing the business prudently and fiscally responsibly to still drive growth, and we're doing that, we're driving -- we're outstripping the industry growth by almost double and -- if not, some quarters triple on the iAPPS side. And so I think that's our statement to respond to valued shareholders. I think we should potentially drive the company into a negative cash situation and try to push for faster top line growth.

And Mark, let me just add onto that, too. We obviously -- based on our margin and utilization, right now, we have the people that can drive the higher revenue number. And we'll get there first, and then focus our efforts on higher earnings.

I think, Mike -- Mike, that's a great point. So we're now -- our capacity with our current staffing, Mark, is we can drive over $7 million a quarter of revenue with our current team. So until we reach that point, I think that's a really good statement that Mike just made. So we're going to get to that $7 million quarter first before we start adding more people.

Okay. And then along with that, I take it, you're not looking at any more acquisitions like you have in the last couple of years?

We always keep our ears open for strategic opportunities. But currently, we do not. We're not looking at any acquisitions right now.

And our next question comes from the line of Jason Revland from Blueprints Capital.

Just a question about the small reduction in revenue guidance. Is it fair to categorize that as being entirely about deferred revenues? In other words, so that revenue will eventually be recognized, it might just get pushed into 2014. Or is there any sort of industry softness that we should be concerned about?

No industry softness as evident of our 2 most recent bookings -- record bookings quarters, right? So we've had 2 $8 million back-to-back new bookings quarters, as well as we ended both the last 2 quarters with record qualified pipeline levels as well. I think you're absolutely right. It's a combination of 2 things, Jason. It's not only the deferred revenue number growing dramatically, which does push it out, but also because of the -- of what happened in Q1. There were several hundred thousand dollars of, I think, anticipated revenues on our end that we anticipated for Q1 that did not materialize for the various reasons that we spoke about earlier on the call. So you take a combination of that $700,000 of revenue that, for the most part, did get pushed. But when you have a service capacity to it, you -- that's your inventory, and that inventory can't get -- you can't make that up once time passes. So that combination of that $700,000 of revenue slippage in Q1 along with the dramatic increase in deferred revenue, is where that realigning guidance a bit comes into play.

If I may ask a follow-up on iAPPS ds. It's great to hear that you've made progress there, and that they're happy with how that has both played out and how it's functioning. Do you think that's just -- we'll get any kind of news flow on the iAPPS ds side over the next quarter or 2, as you close maybe 1 other larger deal? We could expect that?

We do. And I think to put an exclamation point on how iAPPS ds is working it. It not only is working it, it is really performing phenomenally. It's beyond our expectations to be able to scale and launch close to a couple of thousand sites within 3 months was a real big step for us. And we're -- it's definitely a great product that's going to provide a lot of value to the company.

And our next question comes from the line of Brian Swift from Security Research.

You stated in the last 2 quarters, your bookings have been $8 million. And can you give a little idea about how the revenue recognition would be on those bookings going forward? How much has already been recognized? And how much is in that deferred revenue number? And how much might be just in neither place?

Michael, why don't you take that?

Yes, sure. So Brian, so we don't typically break out all the pieces. But I think what I can say, at a high-level the last 2 quarters of $8 million, we are seeing more subscription-based revenue, which goes out over 12 to 24 months. And we're seeing, as you mentioned, expanded deals in both size and scope. So even services that instead of recognized over a 4- to 6-month period, we're seeing larger projects that are more of 9 to 12 months. So at a high-level, we're seeing a much larger piece of that $8 million be layered into our backlog and come in, in months 6 through 12, where historically, our bookings number mostly used to be recognized sort of in the first 6 months.

And our next question comes from the line of Walter Ramsley from Walrus Partners.

A couple of follow-ups here. The -- talk about Brian's question a little further. The bookings, out of that $8 million, can you tell us, more or less, what the UPS and the ds components were? And how much those new product lines, the $8 million -- of the $8 million they represented?

We can't. I think, we got to be cautious, Walter, on what we can disclose without, obviously, we don't want to violate any of our agreements with any of our customers. So I think -- I think the last 2 quarters of $8 million in bookings, I think it's safe to say that the UPS Store component of it was not material to the last 2 quarters.

Okay. Okay. So that actually sounds very encouraging. The business must be pretty strong. Talking about that part for a second, can you just kind of update everybody on the competitive situation? Is there anything new developing there with Oracle and IBM and whoever else you're competing with?

Well, we're in a very strong competitive situation, both from a price -- value-add price functionality ratio perspective. We are typically -- as a product, we have a much stronger value proposition as a solution. We're the only company in the world that has all 4 categories integrated into 1 platform. We're the only company in the world that can offer both SaaS and perpetual. And on the ds side, we have a significant advantage over anything that's out there in benefits, features, price and scale. So we're really excited about where ds is positioned competitively. I think the good news is Bridgeline has a very strong selling methodology and very strong selling disciplines. And we consistently win 65% to 70% of the proposals that we submit to our prospective customers. And of the 30% that we lose, a lot of times, the projects are canceled or delayed. But less than 10% of the actual total losses is actually to competitors. A lot of times, they're -- we lose opportunities because budgets get canceled or pushed out completely. So I feel that -- if we look at the data, we're pretty big data hounds, we watch it closely. We're pretty excited about our competitive positioning. I think, you're going to see a lot more social stuff coming out with iAPPS ds. We're excited about where we're going on the social front with iAPPS and iAPPS ds. And I think our competition, like Adobe, is -- they are looking at integrating other categories into their product, but it's not a clean integration. They typically will buy it and then try to bolt it on, which then causes problems with the way the data is used and how clean and elegant and one point of entry the system is. So -- but we're pretty excited about our competitive positioning.

That sounds pretty good, the 65% especially, and the new social media idea sounds like a smart move. The UPS business itself, first of all, in the logistics operations, does UPS use any other eCommerce software besides Bridgeline's? Do they have other companies that they've tried out before and still use or have their own in-house systems?

They have a partnership with SAP on the very, very high end. So for the very large enterprise-class customers that are typically 7-digit type engagements, they have an integration with SAP on that end. But Bridgeline is its only middle market and in small, large market players. So we can handle eCommerce engagements that can range between $100,000 and $0.5 million or more, very rarely do we ever get into the 7-digit level like an SAP does.

Okay. And the UPS Stores, did they ever use like a different kind of software before and found that unacceptable?

They did. They used a competing solution that they found unacceptable and they put out an RFP. They did a complete, very thorough competitive bid and -- which came down to 2 companies, and Bridgeline was selected, iAPPS was selected.

So did you have to kind of root that out? Or is that just gone now? Did they just clean it out for you?

It's gone. We took it all out. And that's one of the reasons why we excelled. We didn't anticipate to take it out so quick, but we did. And the president of the UPS Stores, Tim Davis, wanted to move a lot faster in replacing -- because he sees the benefits that iAPPS ds brings his franchises.

Just one last thing about the software. The SaaS model, are you able to update all the different locations at once? Or do you have to like kind of go one by one and kind of do it individually?

No. They're located, they're all updated at once. It's a true SaaS multi-tenant model.

Good. Okay. And just one last thing for Mike, I guess. The breakeven point now for adjusted EPS, what do you think the -- with a higher software component building in, what do you think the revenue is necessary to get to an adjusted EPS of breakeven?

So Walter, we've always said that when we get to $7.5 million, we think we can be breakeven. I mean, I think, it changes...

Mike, I think Walter's asking non-GAAP.

Yes. No, right. That's correct.

We say we break even at $7.5 million GAAP, right?

True. So probably closer to $7 million. And the software and the ds component will obviously help it. But a lot of that has been layered into when we've been giving our -- sort of our guidance and saying that maybe at $7 million, we would be.

Yes. So, okay. And I mean, this quarter, you basically did $6.5 million minus, I guess you're saying, $700,000 that got pushed out one way or another. So more or less, like on a going forward basis, kind of pushing $7 million now? I mean, it looks like it by your guidance, anyway.

Yes, we're going to -- you're going to see -- the future core [ph] is, Walter, it's going to get incremental growth from Q1. And we all know, all of us are very focused on us achieving and exceeding that $7 million quarter mark. So we're definitely pushing for that this fiscal year.

And Sandy business, I mean, is that all in the rearview mirror now? Or you still have to deal with some of that?

No, it's all in rearview mirror. It pretty much shut down New York completely, Bridgeline New York and all our New York-based customers for almost 2 weeks. And a little bit of Boston impact, a little bit of Bridgeline Baltimore impact. But that's all behind us.

And our next question comes from the line of Eric Duncan from Moloney Securities.

I apologize, but I missed the first 30 seconds or so of the call, and it sounded like you discussed some of the reasons for the revenue in this quarter, I gather from the last caller, obviously, some of it had to do with Hurricane Sandy, which you intimated to us on the fourth quarter. Some of it had to do with an increase in the deferred revenues, which is certainly understandable. Was there something else I missed in there? Or did I just cover that? Is that mainly it, the $700K that you're talking about here?

Well, a couple hundred thousand came from -- a couple hundred thousand dollars of revenue, close to it, was -- we estimated was because of Sandy. We also talked about how we had an anomaly. We don't know if it's an anomaly, we hope it continues, actually. In Q1, our average engagement size doubled, compared to what it's been for the last 3 years.

Which was really, yes, I'm glad to learn that.

And -- but while that's good news, it builds our backlog, but it also extends our implementation and our revenue recognition timeframes, right? So that pushed out and we believe that caused another -- close to another $200,000 of revenue push. And then when the UPS Stores called to really dramatically accelerate the launch of their platform, that probably cost us a little more than $100K impact, because we had to pull qualified, billable resources away to handle that ramp and that demand. So it's another thing that pushed us in the quarter. And also, I think, we talked about -- I don't know if it was because Sandy or what happened in November, we right at the end of -- we had a backloaded bookings quarter. Even though we had an $8 million bookings quarter and we're ecstatic to have 2 of those put together, and we see strong bookings going forward, 50% of our backlog came in the month of December. So we -- that impacts revenue capabilities in November and in the first half of December. In fact, I think, a lot of that came in the last 10 days of December, which was -- obviously, we had a great December, but it -- the first couple of weeks of December, we're a little panicked.

Sure. Fair enough. And on the backlog, I believe in the last quarter, last conference call, it was $14 million. Did you give that number here or...

It's a little bit north of that.

Okay. And can you help me understand your difference in your terminology and relative to bookings versus backlog, and how you view that? Obviously, we've discussed bookings a little bit here on this call, but...

Well, bookings is a complete, contractual order. So it's a completely signed contractual signed in the house. Backlog is what is our qualified pipeline. It's not a funnel. It is a qualified pipeline, which means we're talking to the decision-maker, the pain and need that the customer has or the prospect has is a great match for the solutions that Bridgeline Digital provides.

Got it. Okay. Good to understand that. What was the last question here? So the push out on your engagement size getting larger, is that -- am I right in thinking that, that increases your deferred revenue line item?

Yes, it does. Absolutely. As the engagement size gets bigger and they put down customer deposits depending on payments, obviously, that helps push up the deferred revenue as well.

Okay. And then on the new licenses, which certainly seem attractive, even on the enterprise licenses, 96 new licenses in the quarter. What was that number last quarter or last year? What's in perspective on the...

Well, we have put in perspective -- it's a great question. We sold a total of, I think, just around 270 total enterprise licenses all of last year.

Okay. Good. And when you talk about your average engagement, I'm assuming that's on this enterprise license, is that correct?

That's correct.

And I see no additional questions at this time.

Okay. Thank you very much, Karen. We appreciate all the support that our valued shareholders give to Bridgeline. If you have any additional questions or if you want to discuss the Bridgeline business model more in detail, please feel free to give myself or Mike a call at any time. We can walk you through maybe some more detailed questions or the model that you may have. Thanks again for tuning in on the call today, and have a great week. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.