Bridgeline Digital, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Bridgeline Digital develops and delivers the iAPPS Web Engagement Management platform, including content management, eCommerce, eMarketing, analytics, hosting, and related professional services. The platform is offered through cloud-based SaaS and perpetual-license models. The filing covers the unaudited three months ended December 31, 2012, compared with the three months ended December 31, 2011. Bridgeline reported more than 2,000 customers, with no customer representing 10% or more of quarterly revenue.
Financial Performance and Liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total revenue | $6.193 million | $6.517 million | Down 5% |
| Gross profit | $3.199 million | $3.436 million | Down 7% |
| Gross margin | 52% | 53% | Down 1 percentage point |
| Loss from operations | $545 thousand | $378 thousand | Loss increased $167 thousand |
| Net loss | $642 thousand | $463 thousand | Loss increased $179 thousand |
| Net loss per share | $0.04 | $0.04 | No change |
| Adjusted EBITDA | $50 thousand | $428 thousand | Down $378 thousand |
| Cash from operating activities | $386 thousand | $95 thousand | Increase of $291 thousand |
Revenue from web application development services declined 9% to $4.850 million, primarily because non-iAPPS development revenue fell 37% to $1.437 million. iAPPS development revenue increased 13% to $3.413 million. Managed service hosting revenue decreased 10% to $556 thousand. Subscription and perpetual-license revenue increased 33% to $787 thousand, driven by iAPPS ds, higher SaaS license sales, MarketNet-related licenses, and maintenance revenue.
Cost of revenue decreased 3% to $2.994 million, but gross margin declined because project delays affected iAPPS services and subscription-license costs increased. Sales and marketing expense increased 7% to $1.834 million, general and administrative expense increased 35% to $1.354 million, and research and development expense decreased 67% to $132 thousand primarily because $276 thousand of software-development costs was capitalized. The company expects quarterly research and development expense to increase to approximately $400 thousand to $425 thousand in the second half of fiscal 2013.
At December 31, 2012, cash and cash equivalents were $2.395 million, compared with $2.126 million at September 30, 2012. Total current assets were $7.560 million and total current liabilities were $6.742 million. Accounts receivable and unbilled receivables, net, were $4.488 million, while deferred revenue was $2.852 million.
Total debt was $4.654 million, consisting of $2.771 million of line-of-credit borrowings, $1.601 million of bank term debt, and $282 thousand of subordinated promissory notes. Current debt was $1.383 million and long-term debt was $3.271 million. Capital lease obligations totaled $388 thousand. The company generated $386 thousand from operations, used $438 thousand in investing activities, and received $282 thousand from financing activities, resulting in a $269 thousand increase in cash during the quarter.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 5%, reflecting lower non-iAPPS development services and project delays attributed in part to Hurricane Sandy.
- The revenue mix shifted toward subscriptions and licenses, which rose to 13% of revenue from 9%, while web application development declined to 78% from 81%.
- Gross margin decreased to 52% from 53%.
- Operating loss and net loss widened despite lower total operating expenses, primarily because of lower revenue and higher sales and marketing and general and administrative costs.
- Adjusted EBITDA declined substantially to $50 thousand from $428 thousand.
- Operating cash flow improved principally because annual iAPPS ds subscriptions increased deferred revenue by $1.689 million.
- The prior-year quarter included a $281 thousand intangible-asset impairment charge; no comparable impairment charge was recorded in the current quarter.
- Capital spending shifted toward software development, with $272 thousand of software-development costs capitalized in the current quarter compared with no such capitalization in the prior-year quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that operating cash flow and the bank line of credit are expected to be sufficient to fund working-capital and capital-expenditure needs for the foreseeable future. This is management’s liquidity assessment rather than formal revenue or earnings guidance.
In February 2013, the company amended its Silicon Valley Bank loan arrangement, extending the line-of-credit maturity to March 31, 2015 and revising financial covenants. Management disclosed that the company would not have complied with one prior covenant for the quarter ended December 31, 2012 without the amendment.
Accrued contingent acquisition earnouts totaled $1.344 million at December 31, 2012 and are scheduled to be paid through fiscal 2015 if specified revenue and operating-income targets are achieved. MarketNet and Magnetic had achieved their applicable quarterly targets through the reporting date. MarketNet may also earn up to 200,000 additional shares if specified annual revenue thresholds are met.
The company carries substantial goodwill of $21.724 million and net intangible assets of $1.375 million. Goodwill was not impaired in fiscal 2012, but future impairment charges remain possible if operating performance, projections, stock price, or industry conditions deteriorate.
An unresolved lawsuit involving e.Magination network, LLC and its principal remains pending. The company also identifies risks related to economic weakness, customer renewals, competition, technology changes, software security, personnel retention, quarterly revenue volatility, margins, liquidity, and internal controls.
The company concluded that its disclosure controls and procedures were effective as of December 31, 2012 and reported no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the shift toward iAPPS subscriptions and licenses can offset declines in non-iAPPS professional-services revenue.
- Whether delayed iAPPS projects were completed and whether project delays continue to pressure margins and Adjusted EBITDA.
- The borrowing-base availability, covenant requirements, and revised terms under the February 2013 Silicon Valley Bank amendment.
- Whether operating cash flow remains positive after considering increased accounts receivable, software capitalization, debt service, and contingent earnout payments.
- The collectability of the $4.488 million of net accounts receivable and unbilled receivables.
- The timing and ultimate amount of the $1.344 million of accrued acquisition earnouts and any additional contingent equity obligations.
- The recoverability of $21.724 million of goodwill and other intangible assets.
- The potential financial and operational effect of the unresolved e.Magination litigation.
- The dilution implications of outstanding options, warrants, and contingent acquisition shares; 1.520 million options and 1.055 million contingent shares were excluded from diluted loss-per-share calculations because they were anti-dilutive.