Bridgeline Digital, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2011; fiscal year-end is September 30, 2011. The interim financial statements are unaudited and presented under U.S. GAAP. Bridgeline develops the iAPPS web experience management suite and provides web application development, hosting, SaaS, and perpetual-license services.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Total revenue | $6.532 million, up 13% | $19.674 million, up 18% |
| Gross profit | $3.299 million | $9.843 million |
| Gross margin | 50.5%, versus 53.9% | 50.0%, versus 53.7% |
| Operating income (loss) | $(171) thousand, versus $72 thousand | $(502) thousand, versus $344 thousand |
| Net income (loss) | $(246) thousand, versus $35 thousand | $(731) thousand, versus $275 thousand |
| Adjusted EBITDA | $342 thousand, versus $598 thousand | $1.083 million, versus $1.814 million |
| Net income (loss) per share | $(0.02), versus $0.00 | $(0.06), versus $0.02 |
Revenue mix for the nine-month period was approximately $16.408 million from web application development, $1.476 million from managed hosting, and $1.790 million from subscription and perpetual licenses. No customer accounted for 10% or more of revenue.
Cash Flow, Liquidity, and Capitalization
- Cash and cash equivalents were $1.167 million at June 30, 2011, down from $3.045 million at September 30, 2010.
- Operating activities generated $509 thousand during the first nine months, compared with $1.719 million in the prior-year period.
- Investing activities used $874 thousand, including $321 thousand for equipment and improvements and $510 thousand of contingent acquisition payments.
- Financing activities used $1.495 million. The company received $857 thousand net from an October 2010 private placement and repaid more under its bank line than it borrowed.
- Total debt was $3.192 million, consisting of $2.776 million of line-of-credit borrowings and a $416 thousand subordinated promissory note. Capital lease obligations totaled $488 thousand.
- The May 2011 amendment extended the Silicon Valley Bank credit-line maturity to March 31, 2013, revised covenants, and converted $2 million of out-of-formula borrowings into a term loan. The credit line balance was $2.8 million at June 30, 2011, bearing interest at 3.25%.
- Management stated that expected operating cash flow and bank-line borrowings should fund working capital and capital expenditures for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue increased, primarily from web application development associated with the TMX and e.Magination acquisitions completed in fiscal 2010, as well as iAPPS-related engagements.
- License revenue was flat in the quarter but increased 42% for the nine-month period, reflecting higher perpetual-license revenue, subscription revenue, and maintenance renewals.
- Gross margin declined because web application development costs grew faster than related revenue; development-services cost as a percentage of related revenue increased to 54% from 50% for the quarter and to 55% from 49% for the nine-month period.
- Sales and marketing expense increased 14% for the quarter and 31% for the nine-month period, while research and development expense increased 73% and 123%, respectively.
- General and administrative expense decreased 8% for the nine-month period due to staffing and corporate-cost efficiencies.
- Lower software-development capitalization increased reported research and development expense. Capitalized software costs were $43 thousand in the nine-month 2011 period versus $496 thousand in the prior-year period.
- The customer base declined to approximately 536 customers from 617, a 13% decrease, as the company terminated smaller or less strategically aligned engagements. Approximately 383 customers, or 72%, paid monthly subscription or managed-hosting fees.
- Common shares outstanding increased to 12,306,207 at June 30, 2011 from 11,188,208 at September 30, 2010, principally reflecting the private placement and option exercises.
Outlook, Commentary, Risks, and Unusual Items
- No specific quantitative revenue or earnings guidance was provided. Management expects operating cash flow and available credit to support near-term requirements.
- Management plans continued investment in enhancements to the iAPPS product suite and in the hosting environment serving its core customer base.
- Accrued contingent earnout liabilities totaled $1.5 million at June 30, 2011 and are scheduled to be paid through fiscal 2014 if specified revenue and earnings targets are met. An additional potential $1.3 million of acquisition payments was not accrued because the applicable targets had not been achieved.
- Goodwill was $20.039 million, representing a substantial portion of total assets. The company reported no goodwill impairment through the period, but impairment could result from declining stock price, weaker operating results, adverse projections, or negative industry and economic trends.
- A customer promissory note had an outstanding balance of $395 thousand, including accrued interest, at June 30, 2011. Management believed it would be collected in full.
- Forward-looking risks include economic weakness, difficulty managing profitable growth, revenue and renewal-rate fluctuations, competition, technology changes, software security and protection, dependence on key personnel, internal-control risks, and government-contract risks.
- As of August 12, 2011, the common stock bid price was $0.93, below Nasdaq's $1.00 minimum bid-price requirement. Failure to regain compliance could lead to delisting and reduced trading liquidity.
- The company reported no material current legal proceedings, no material off-balance-sheet arrangements other than operating leases and contingent acquisition payments, and no material subsequent events requiring adjustment or disclosure.
Important Facts for Investors to Verify
- Whether revenue growth can continue after the decline in customer count and the discontinuation of smaller customer engagements.
- Whether development-services utilization and staffing can improve gross margins, which declined materially year over year.
- Cash generation, borrowing-base availability, credit-line covenants, and the timing of required debt and capital-lease payments.
- The achievement-based timing and ultimate amount of accrued and potential acquisition earnouts.
- Goodwill impairment sensitivity, particularly given the $20.039 million goodwill balance and the company’s reliance on market capitalization in its valuation analysis.
- Progress toward Nasdaq minimum bid-price compliance and the potential effect of any delisting.
- The comparability and limitations of Adjusted EBITDA, a non-GAAP measure that declined to $1.083 million for the nine-month period.