Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Bridgeline Digital Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It's now my pleasure to turn the floor over to Chief Financial Officer, Michael Prinn. Sir, the floor is yours.

Thank you, and good afternoon, everyone. I'm pleased to welcome you to our third quarter conference call. Before we begin, I'd 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. At this time, I'd like to turn the call over to Bridgeline Digital's President and CEO, Thomas Massie.

Thank you, Mike. During the third quarter, Bridgeline continued to execute against its long-term strategic plan, to strengthen and grow its iAPPS business model. Today, I'm going to put into perspective our third quarter results and how it relates to our overall business thesis. Although we experienced volatility in our third quarter revenue, our business fundamentals remain steadfast. The revenue shortfall in Q3 was caused by a few specific events, which I will detail momentarily, but the longer-term opportunities Bridgeline and iAPPS represent have not wavered one bit. Our backlog is strong, exceeding $14 million and our qualified pipeline of iAPPS opportunities has soared to over $40 million. This is up from $22 million just 1 year ago. We continue to win 70% of the proposals we submit, and recently, customers such as Teradyne, Qualcomm, WebMD, LeSportsac and MainGate have selected iAPPS for their mission-critical websites or web stores. A year ago, our historical average of an iAPPS enterprise engagement was about $120,000. In the last few quarters, it has been consistently over $300,000. Over the long term, this is exciting for Bridgeline as our customer base continues to improve from both a quality and engagement value perspective. Mike will be discussing Q3 financial details and results in much greater detail. But in summary, Q3 revenues were only $5.6 million. The major elements of the revenue shortfall were related specifically to a 44% decline of legacy non-iAPPS related revenue and some of our larger iAPPS engagements experienced unwanted delays on the customer side. Taking a closer look at Q3, you will see increases in both recurring revenue and licensing revenue. Recurring revenue increased 10% and licensing revenue increased an impressive 33%. Our iAPPS revenue grew 4% when compared to Q3 last year, and iAPPS-related revenue of -- in the quarter…

Thank you, Thomas, and good afternoon, everyone. I'd like to review the results of operations for the third quarter ended June 30, 2013. Third quarter revenue was $5.6 million compared to $6.4 million in Q3 of last year. The decrease in overall revenue is primarily a result of a 44% decrease in our non-iAPPS legacy revenue. Our non-iAPPS revenue decreased approximately $1 million year-over-year. We remain committed to transitioning our model and growing our iAPPS business and it's important to note that in our third quarter, 78% of our total revenue was iAPPS-related compared to 66% in the year ago quarter. Our subscription and perpetual license revenue increased 33% compared to the third quarter of last year. Our recurring revenue, which consists of SaaS licenses, annual maintenance on perpetual licenses and hosting, increased 10% in the third 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. We expect to see a more significant increase in our recurring revenue number in future quarters as we integrate our second iAPPS ds customer, as well as the incremental revenue from our recent acquisition of ElementsLocal. I'd also like to highlight that our deferred revenue on the balance sheet grew 123% year-over-year to just under $2.6 million, representing a significant increase and it's indicative of our growth in iAPPS-recurring revenue and specifically, iAPPS ds. The vast majority of this deferred revenue is high-margin that will be recognized over the next 12 months. Our iAPPS-related revenue increased 4% to $4.4 million in the third quarter of 2013, compared to $4.2 million in the third quarter of 2012. This 4% is lower than the last couple of quarters and is primarily a result of a couple of…

[Operator Instructions] Our first question will come from Howard Halpern with Taglich Brothers.

First question regarding the cost savings and the realignment. Does that include the 15 employees that were picked up in the acquisition?

No, it does not.

Okay. And what kind of bump up from those 15 employees do you expect? Would it be an offset to that 250 number per quarter?

Approximately.

Yes, Howard. It's -- it will offset it, but it's a little less than 250 per quarter.

Okay, okay. And you talked about, in the opening remarks, how many enterprise customers have sort of, I guess, placed you on -- you're ready to go, but they're on hold. Do you have a number on how many there are that you're ready to go, but they're not quite ready to go?

We have about a half a dozen of them.

Okay, okay. So that would be significant revenue once they give you the green light to go.

Howard, it's a combination of -- like you said, waiting to go, so we signed the engagement. Out of those 6, there's probably a couple of those that they have delays on their side [indiscernible] will sort of stop midstream.

Okay, okay. Yes, that's what I sort of meant that they are the ones that are -- but also in terms of the UPS relationship, how many customers have been brought in, and how many do you think have been brought in to the pipeline based on your UPS relationship?

We have -- we've already -- we've announced 6 engagements since we've announced our relationship. So in the last year we've announced 6 engagements that have been closed because of the partnership with UPS. And the pipeline, as I said earlier, it's multimillion, but we're not going to give much more specifics around that. We anticipate to continue to close and launch multiple engagements per quarter, per year with the relationship that we have with UPS.

Okay. And in terms of, I guess, the -- the ds, I guess I have a couple of questions there. It seems like the -- just based on the number, that 2,160 number is primarily the UPS Stores, correct?

Correct.

And any sort of guidance on when you might be able to deploy, in other words [ph], at least another 1,000 or 2,000 of that potential?

Well, the other customer that we just -- that we closed in Q3, they have 400 locations. So those will be deployed over the next 12 months and that's a multi-year agreement. And our pipeline is large, it's grown from a couple million dollars to $20 million in the last 9 months. And we have partnerships in there that range anywheres from -- the potential opportunities that range anywheres from somebody with 200 or 300 locations to as many as 10,000 locations. So I think that we're very confident that there'll be another few thousand locations -- another few thousand licenses added over the next 12 months. And I also believe that once we migrate beyond the ElementsLocal customers as well, which is our goal to have that completed by the end of 2014, by December 2014, that'll add another 3,200 of customers to our platform.

Okay. And I was going to ask if, I mean, I don't know whether you have this number available. But as you talk about that it will be -- they'll be migrated as contracts expire. Is there a quarter in which a large majority of their customers expire? Or is it just sort of pretty even through the different quarters?

Unlike Bridgeline's approach where we sign multi-year agreements with our customers, most of -- the vast majority of ElementsLocal customers were on month-to-month agreements with no long-term contractual commitments. However, they're wedded to the platform, that's why the retention has been 95% over the last 4 years because that's our -- the model is a very sticky model. So we're in a really good position to approach the customer base, show them the value proposition. iAPPS ds is a far superior product and a far superior platform, and the customers we've already -- some of the bigger ones that we've already shared with the customers are very excited about what ds can do for their business.

[Operator Instructions] Our next question will come from Mark Stafford with [indiscernible] Investment.

I'm looking at your cash as of June 30, and then you subtract what you paid for the acquisition in this quarter, so are you sitting at just a little over $1 million or under $1 million in cash?

Well, we don't report interim...

No, I know that. But I'm just saying is that you did make this acquisition and I'm looking at...

Mark, the acquisition only used 400K cash, right?

Right. But -- and I'm saying that minus where you're at with operating expenses and stuff. I just don't want to see you have to raise cash again this quarter because last quarter or last conference call, you said you really would need to go out and raise, do a dilution and you did. And I'm just -- I don't want to see this happening quarter after quarter.

The $2 million placement that was completed last quarter, the capital that -- a lot of that -- the capital that we raised provided the operating capital that we needed because of the loss in the quarter, as well as the $1 million of CapEx investments that we've made into the knock [ph]. So that cash that you're looking at, the cash burn has already been -- it was covered by the $2 million that was already raised.

[Operator Instructions] Our next question in queue comes from Jason Revland with Blueprint Capital.

I have a question about the ds pipeline, you said it was about $20 million. That's a pretty substantial uptick in recent quarters and you alluded to some elephants in there as well. Is it safe to say that more than half of that pipeline relates to one big elephant or maybe 2 big elephants? Or is it pretty diverse? I'm trying to get a sense of the diversity of the ds pipeline.

Three [ph] make up 6. Right?

Yes, I would say probably 3 opportunities make up maybe 1/3 and the remainder is -- it's diversified. Like Tom said, anywhere from a 100 couple units to a couple thousand.

That's great. And as far as time it would take to figure out whether those are a green light or no, is that a 3-month, 6-month sort of outlook?

Well, it's a 12-month selling cycle, but we've been at it with ds since October. And as we built the pipeline as well since October. So some of those are approaching that 12-month point, right? So like we just closed the large -- the 400 units for the sales assistant organization now -- that beat our 12-month selling cycle. But we do have some that we believe are about to close that -- anywhere from -- to some that have 200, 300 units and there's also some that have -- there's one that has as many as 4,000 units, that is very close in our opinion. And I think while we're talking about the model, too, on ds, I think it's important that -- we believe once we get ElementsLocal customers migrated, the average price that ElementsLocal was charging is far lower than -- is lower than what Bridgeline charges. So we believe that we will see an increase in revenue and margin just by migrating those customers onto our platform.

Didn't you just quote, Tom, how many they were there? I might have missed that, the ElementsLocal?

Yes. They have 3,200 franchises on their platform.

They have 3,200?

3,200, yes.

Okay. So the goal is to become...

So within 1 year from now or even within 6 months from now, between the, say you have -- I'll say, 2,500 to 2,600 UPS Stores are already on the platform. And by the end of 2014, we have all 3,000 ElementsLocal customers on the platform, that takes us up closer to -- maybe closer to 6,000 full units plus new business that we're closing. We realistically could be looking at over 10,000 units on the platform by December 2014.

10,000 ds licenses, active?

10,000 ds licenses. That's correct.

That's the key growth driver in our opinion, so I will look forward to that.

Well, you're absolutely correct. To Mike's point -- to Michael's point, for every iAPPS ds dollar of revenue, it generates about 40% operating income, so it does have tremendous leverage.

[Operator Instructions] Our next questioner in queue comes from George Melas with MKH Management.

I have a question on the recurring revenue. It is up year-over-year, but it's down sequentially. Can you sort of parse it into its different components and tell us sort of what went up and what went down?

Yes. I think, I mean, at a very high level, the iAPPS business is up. I think some of the decrease is in -- we talked about our non-iAPPS legacy customers, we've been shedding some low-dollar, high-volume hosting customers, and that pretty much accounts for the sequential decrease.

Okay. So if we look at the numbers, if we look at the recurring revenue, the hosting revenue, which was 400 -- roughly $400,000 this quarter, that's included in the recurring revenue?

Correct.

Okay. But it is a declining element of the business?

Correct. But it's non-iAPPS so I think it's the...

So non-iAPPS?

Yes. And, I mean, similar message to what we say about just the iAPPS, non-iAPPS in general, that we'll probably have just a little bit more of the hosting stuff that we may shed over the next couple of quarters but you'll see that hosting line grow as we continue to sell iAPPS engagements with a hosting component.

Okay, great. And then, I understand there were some delays on the iAPPS sort of the enterprise licenses, but the number of licenses that closed this quarter seems exceptionally low. Is there some explanation beyond sort of just a few delays?

Timing. Our pipeline, as I mentioned, that's why I highlighted the pipeline that it's growing exponentially, but it was timing. You'll see our fourth quarter -- you will see the numbers will be higher because of the timing of when they closed at quarter end.

And have you already closed some of that business or is that business to be closed between now and September?

No, we have closed it. We have closed a lot at that business.

Okay. And then just one final question for me. So you've significantly increased your national sales force. Can you tell us a little bit more about it? I mean, you increased it 40%, I imagine that's year-over-year, to 22 people. Are they assigned to different verticals? How does it work? How does it operate?

Well, we have 2 areas -- we have 3 areas of sales that we focus on. One is the iAPPS enterprise business, and that's the sale force that's focusing on selling iAPPS in commission-critical websites and web stores. Those are the larger $200,000, $300,000, $400,000 engagements that have iAPPS in the middle of these websites or these web stores. And then, we have the iAPPS ds team, which is focused exclusively on franchises and large dealer networks, and then we have the Channel Partner team, which focuses on building our Channel Partner Program which sells -- which has web development companies and eCommerce development companies developing websites for their customers but using iAPPS. So reselling iAPPS and then we give them a 30% margin discount because they're integrating iAPPS into their customer solutions. So, 3 different categories: enterprise sales team, iAPPS ds sales team and the Channel Partner team.

Okay. And then the growth in the sales force has been primarily in what -- which one of those 3 categories?

We made additional investments in all 3 categories in June. We added several people, so we had like 4 people in ds, we have 3 people in channel and then the balance is in enterprise.

The 4 and the 3, those are not additions. That's the people that you have? So you have 4 in ds, 3 in channel, so you have 15 in enterprise?

15 in enterprise, that's correct. And now that's before the ElementsLocal acquisition, we just added 3 more to ds, with the ElementsLocal acquisition. So we have now a total of 7 in ds.

Okay. And now on the ElementsLocal -- sorry, one more question. Are there some technical features of their solution that you keep? Or is it a wholesale migration to ds and then you just shut down their platform?

The latter.

Okay. So it's a really customer acquisition. You didn't acquire new technology, you just acquired customers and an organization?

That's correct. We acquired some super-smart people that really know this landscape and franchise space and we acquired 35 great customers and 3,200 franchises.

And did you say how much you paid for it?

We paid $2.5 million for the company, of which $1.3 million of that is paid in an earn-out over a 12-quarter period based on financial goals [indiscernible]

Okay. And the other $1.2 million is -- how is that distributed?

Well, approximately $400,000 in cash, $200,000 in debt assumption and the balance of $600,000 in Bridgeline stock issued to the three principals, but it's 144 stock and it's locked up to 1 year.

[Operator Instructions] Next questioner in queue is from the line of Peter Abramson [ph] who is a private investor.

Guys, I was wondering if I could get an update on what the breakeven kind of revenue run rate is? I think it used to be $7 million to $7.5 million a quarter is where would be kind of cash flow breakeven.

Yes, Peter, I think we've said between $7.5 million and $8 million. I think we said $7.5 million, maybe from like an operating income perspective and GAAP profitability, probably the midpoint between $7.5 million and $8 million.

Okay. That's still the range we're kind of targeting?

Yes, that continues to remain the same. Maybe as we get to that $7.5 million and $8 million mark, the more license revenue that's in there, obviously, the more gross profit and we could get there a little quicker.

Okay. And then in terms of the legacy revenue, do you expect that to stabilize or do you think that it will completely burn off in the next year or 2?

No, it's going to burn off. Our bookings for legacy business was down. I want to say quarter-over-quarter it was down almost 80%. Right? Yes, so I think like Q3 of last year, we booked almost $2 million of non-iAPPS business. In Q3 of this year, that we just ended Q3, we only booked $500,000.

Okay, so it will be done within the next year?

[indiscernible]

And then the key transition is to the iAPPS, obviously?

Well, we're excited, Peter. 2014 is -- we're going to be -- we're excited, we'll be at a position where we'll be almost all iAPPS business, and we won't have the legacy overhang and we should be reporting revenue growth -- top line revenue growth year-over-year on all iAPPS. We won't have this issue anymore of trying to manage -- expecting like $2.5 million of legacy fall off and end up being $4.5 million.

Yes. No, I hear you. Did you have any estimate on when you think you will get to kind of that $7.5 million, $8 million revenue? Is that Q4 or Q1, Q2 next year?

We're going to give guidance at the end of Q4, which is our September to September, when we announce the September year-end. But on today's call I said we're excited that we'll be north of $7 million in Q1, which is our December quarter. Kind of gives you a feel of the trajectory.

[Operator Instructions] Presenters, I'm showing no additional phone line questions at this time. I'd like to turn the program over to Chief Executive Officer, Thomas Massie.

Thank you, everybody. We really appreciate the support and the patience of all of our valued shareholders. It is our goal that we're going to continue building a scalable business model, which in turn will build shareholder value. Thank you for joining us today.

Thank you, presenters, and thank you, participants. This does conclude today's call. You may now all disconnect, and have a wonderful day.