Featured Report - Bridgeline Digital

Research Report – Update
Investors should consider this report as only a single factor in making their investment decision.
Bridgeline Digital, Inc.
Rating: Speculative Buy
Howard Halpern
February 25, 2013
BLIN $1.42 — (NasdaqCM)
2010 A
$23.6
($0.03)
Fiscal year net sales (in millions)
Earnings per share
2011 A
$26.3
($0.06)
2012 A
$26.3
($0.07)
2013 E
$27.5
($0.07)
2014 E
$32.9
$0.10
52-Week range
$3.24 - $0.86 Fiscal year ends:
September
Shares outstanding a/o 2/11/13
15.3 Million Revenue/shares (ttm)
$1.52
Approximate float
13.1 Million Price/Sales (ttm)
1.0X
Market Capitalization
$22 million Price/Sales (2014) E
0.7X
Tangible Book value/shr
($0.08) Price/Earnings (ttm)
NM
Price/Book
NM Price/Earnings (2014) E
14.2X
Bridgeline Digital Inc., headquartered in Burlington, Massachusetts is a software technology, tools, and service developer to enable
an organization(s) optimize their online business processes.
Key Investment Considerations:
Maintaining Speculative Buy. We are lowering our (12-month) price target to $2.05 per share from $2.35 due
to delay in our forecast of achieving profitability.
Growth could be substantial as Bridgeline’s iAPPS® Web-engagement enterprise platform gains acceptance.
High margin iAPPS revenue increased from $2.3 million in FY08 to $16.5 million in FY12. BLIN aims to
increase iAPPS revenue to $21 million in FY13 and we project 40% growth to $29 million in FY14.
Bridgeline’s Total e-Commerce™ solution has won two significant contracts – GE Healthcare and Triumph
Motorcycles. 2H13 results should reflect revenue from these two customers.
BLIN introduced a monthly fee based digital subscription iAPPS platform. The platform empowers franchise
and dealer networks to corporate branding oversight through a web management tool. So far BLIN sold 1,550
subscriptions to its first franchise customer. We project 2,450 additional subscriptions to be sold in FY13.
In 1Q13 (reported 2/14/13) iAPPS sales grew 17% to $4.2 million. Total sales fell 4.6% to $6.2 million, due to an
8.6% decline in development service stemming from a two-week billing hiatus after super-storm Sandy. In
both 1Q13 and 1Q12 lost ($0.04) per share. We projected 1Q13 sales of $6.1 million and a loss of ($0.02).
We reduced our FY13 EPS and revenue projections by $0.09 per share and $1.5 million to a loss of ($0.07) per
share and $27.5 million, respectively. Our reduction reflects 1Q13 results and unanticipated recognition of $2
million in cash sales that must be classified as deferred revenue.
For FY14, we maintained our EPS projection of $0.10 per share, on a $1.4 million decrease in sales to $34.4
million. Restraining our 40% iAPPS sales growth projection is a $1.5 million increase in deferred revenue and
elimination of $1.5 million in non-iAPPS business. Our EPS forecast reflects expanding gross margins to
57.7% from 54.3% in FY13, and operating expense margin improving to 50.2%, down from 56.2%.
Please view our Disclosures pages 14 - 16
790 New York Ave, Huntington, New York, N.Y. 11743
(800) 383-8464 • Fax (631) 757-1333
Bridgeline Digital, Inc.
Appreciation Potential
Maintaining Speculative Buy based on
anticipated software technology engagements
through a multi-year alliance with UPS Logistics
(North America), launch of a digital subscription
iAPPS offering, and an estimated doubling in size
of new engagements to at least $200,000. The
near-term drawback to larger engagements is the
longer revenue recognition cycle.
iAPPS is BLIN’s enterprise software platform
assists customers in running their mission critical
Websites (those that enable workflow, data
collection, and ability to manage content), online
stores, Intranets, Extranets, and web portals. Our
research indicates that the potential market consists of over 230 million active global Websites, of which nearly 60
million are considered mission critical/online.
BLIN’s digital subscription (ds) cloud-based software-as-a-service platform (iAPPSds) provides the company with
recurring monthly revenue from franchisee or dealer network customers. Increased subscription sales will cause
deferred revenue to increase as customers prepaid a year in advance but can only be recognized monthly.
We forecast annual iAPPS signed license agreements of 1,200 by the end of FY14 (see chart above). In FY14,
iAPPS software and services should account for 90% of total revenue. In FY12, the company had revenue
generating iAPPS deployments of 551, which grew to 636 in 1Q13. We forecast 730 deployments in FY13.
In November 2012, research firm Gartner forecasts worldwide 2013 enterprise information technology spending
growth of 2.5% to $2.7 trillion from $2.6 trillion in 2012.
We are lowering our 12-month price target to $2.05 per share from $2.35. As revenue, cash flow, and profits
emerge in 4Q13, we expect Bridgline Digitals’ P/E multiple to expand closer to the peer group’s multiple. BLIN’s
P/E multiple has expanded to 14.2 from 10.9 in August 2012. We applied a P/E of 21.5X to our FY14 (ending
September 30, 2014) EPS forecast of $0.10 per share, discounted by 5% to obtain a year-ahead value of $2.05 per
share, implying potential appreciation in excess of 40%.
Source: Taglich Brothers estimates and Yahoo Finance
Due to risks of a global economic recession, we believe Bridgeline’s shares are suitable primarily for investors
seeking exposure to a potentially high growth microcap company.
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Bridgeline Digital, Inc.
Overview
Bridgeline Digital Inc., headquartered in
Burlington, Massachusetts is a developer of
software technology, tools, and services that
enable organizations to optimize their online
business processes. The company’s iAPPS
technology aims to unify web content
management, analytics, e-commerce, and emarketing capabilities that enhance both web
and customer experience management
capabilities.
Bridgeline delivers its software platforms
(iAPPS and iAPPSds) through cloud-based
software as a service (SaaS) and traditional enterprise perpetual licensing models. Its SaaS service provides
architecture flexibility, state of the art deployment technology, remote maintenance, daily technical operations and
support at Bridgeline’s co-managed hosting facility. A perpetual license will normally reside on a dedicated server at
the customer’s facility.
The company’s Web-hosting facility is co-managed with Savvis and Internap Network Services. The facility
provides customers fully managed services, including dedicated in-house production and development servers, and a
dedicated 24-hour monitored co-location facility for customers’ mission critical (sites that enable workflow, data
collection, and ability to manage content) web-based applications.
The company’s services operation is based on its team of 65+ Microsoft® gold certified developers that specialize in
end-to-end interactive technology solutions.
Incorporated in August 2000, Bridgeline raised capital of $13.8 million in an initial public offering. On May 31,
2012, the company raised $2.3 million in net proceeds through the issuance of 2,173,913 common shares at $1.15 per
share. Taglich Brothers, Inc. acted as the exclusive placement agent for the transaction.
iAPPS Enterprise and Digital Subscription Platforms
The enterprise platform of a content and commerce
manager with additional modules – marketier and
analytic, that can be activated after a trial period (see
chart right for the process and module names).
iAPPS content manager – allows non-technical
users to create, edit, and publish content via a
browser-based interface and enables customers to
keep content and promotions fresh for the Internet or
company intranet.
Administrators can configure a simple or advanced
workflow, accommodating the complexity of larger
companies with strict regulatory policies.
Source: company reports
iAPPS commerce – enables customers to maximize and manage all aspects of their domestic and international
commerce initiatives through customizable dashboards by providing a real-time overview of the performance of
customers’ online stores. The overview includes sales trends, demographics, profit margins, inventory levels,
inventory alerts, fulfillment deficiencies, average check out times, potential production issues, and delivery times.
The application has backend access to payment and shipping gateways.
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iAPPS marketier – a lifecycle management solution includes customer transaction analysis, email management,
surveys, polls, event registration, and issue of tracking to measure campaign ROI and client satisfaction.
iAPPS analytics – enables management, measurement, and optimization of Website properties by recording detailed
events and data mine (for statistical analysis) the results within the web application.
Enterprise services – provides development and integration services, including data warehouse, legacy integration,
inventory management, order fulfillment, and order tracking. Digital service offerings assist customers in
maximizing the effectiveness of their online marketing activities. Bridgeline’s web application development services
are focused on web design and development, usability engineering, information architecture, rich media
development, and search engine optimization.
Digital Subscription – is a cloud-based software-as-a-service version of iAPPS that eliminates the need for franchise
or dealer network organizations to maintain their own information technology infrastructure. The target market for
iAPPSds is large franchise networks and multiple dealer networks. Bridgeline charges a monthly licensing fee of
$50 to $100 per month per dealer or franchisee depending on services provided, with an additional fee of $25 to $50
per month if customers utilize BLIN’s hosting services.
Franchises and dealer networks deploying iAPPSds can control the distributed websites of their franchisees or local
dealers by ensuring local content publishing is managed through a workflow approval process for marketing and
brand messaging.
Growth Strategy
The alliance with UPS provides an active partner
seeking to improve their operations through a unified
software technology (iAPPS) between its customers
and logistics operations.
Bridgeline and UPS
successfully collaborated on integrating the warehouse
management system of UPS into the iAPPS
eCommerce platform, which simplifies technology
integration and decreases deployment times. The
chart on the right shows how a complete fulfillment
circuit is created.
Source:
iAPPScommerce.com
The Bridgeline UPS alliance created a platform that delivers a unified business-to-business (B2B) or business-toconsumer (B2C) eCommerce solution that integrates the logistics, supply chain, and fulfillment expertise of UPS. GE
Health Care, the first significant customer, choose the B2B e-commerce platform in order to service its growing
demand from their healthcare and government customers enabling them to transact business and order online.
Triumph Motorcycles, its second customer needed a B2C channel as an addition to their brick-and-mortar
dealerships.
BLIN markets its digital subscription platform to the 500,000 franchised businesses, and 500,000 independent
dealerships in the US. The company aims is to have deployed iAPPSds to 25,000 franchise locations in the US by
2016. By the end of FY14 we estimate at least 7,000 deployments.
Distribution of iAPPS through channel partnerships should drive international growth. Over the next 18 months, the
company aims to have 100 channel partners in place globally. The company currently has 14 channel partner
relationships in the US, two in the United Kingdom and emerging markets, and one in Asia and Canada.
Retention of existing customers is a key objective. Use of digital marketing techniques such as webinars enhance
customer support and learning for its iAPPS suite. Bridgeline uses social media platforms such as Twitter, LinkedIn,
YouTube and Facebook to market its webinars and customer support services.
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End Users
Targets
The company targets organizations that operate mission critical Websites or online stores with annual revenues of at
least $25 million. Companies that have mission critical websites, intranets, extranets, and portals are prospects for
iAPPS content manager. iAPPS commerce and content manager are marketed to online stores. The iAPPS suite
contains personal modules (see chart on page 4) – marketier and analytics, which can be activated at any time.
Market Potential
The company has operating units in 10 states including its recently established presence in San Diego, CA. Using
the Manta.com online community database (a small business social network site), we found over 74,800
organizations that generate annual revenue in a range of $25 million to $500 million. The addressable market for
iAPPS should be at least 49,800 in those nine states. A principal goal is to gain 180 new customers each year, which
should be attained given the pool of organizations that operate mission critical Websites or online stores.
Customers
Most of the leading iAPPS customers (see table on page 3) offer further licensing opportunities. Companies such as
Honeywell and General Electric have many divisions, each having their own mission critical intra/extra-nets and
internal portals. Up selling iAPPS to new divisions within existing customers should facilitate sales growth, as
evidenced by the 3Q12 bulk sale and implementation of approximately 140 licenses to an existing customer.
Franchise Organizations
2010 data from the US Census Bureau survey of 295 industries indicated that 453,326 establishments, out of a total
of 4.3 million, were either franchisee or franchisor-owned businesses. Franchise businesses accounted for $1.3
trillion of the $7.7 trillion in total sales for the 295 industries.
Growth Dynamics – Enterprise and Digital Subscription Platforms
iAPPS engagements (defined as signed license agreements) lead to deployments, which in turn drives revenue
growth. The first 45 iAPPS agreements were signed in FY08, in FY11, 383 additional agreements were signed, with
267 signed in FY12 for a cumulative total of 695, of which 551 have been implemented. In 1Q13 96 enterprise
agreements were signed (at least 50% were bulk license sales) for a cumulative total of 791, of which 636 have been
implemented and generating revenue. The implementation rate stood at 81% at December 31, 2012.
At December 31, 2012, the number of iAPPS deployments outstanding was 152, up from 144 three months earlier. If
the US economy weakens in future quarters, signed agreements could drop but implementations would allow
deferred revenue to be recognized. Also, the alliance with UPS could lessen the impact of slow economic conditions
as existing UPS customers sign engagements in FY13 and FY14, which would add to sales growth.
Signed iAPPS license agreements to date represent minimal but increasing market penetration. In FY11, Bridgeline
had eight US business units that generated $26 million in sales. By 2017, BLIN aims to have each of its 10 business
units sell 40 iAPPS licenses annually, which implies $100 million in total sales, or $10 million per business unit.
The company is focused on selling its higher gross margin iAPPS and iAPPSds products and discontinuing
relationships with lower margin customers. BLIN first digital subscription offering has 4,300 potential franchisees,
to which 1,550 digital subscription were sold in 1Q13. We project a total of 4,000 will be sold by September 30,
2013, contributing $2 million to FY14 revenue.
In FY12, sales of lower margin service offerings were $7.8 million, down from $12.3 million in FY11. We
anticipate sales of lower margin service offerings will decrease to approximately $4.3 million and $2.8 million in
FY13 and FY14, respectively. The removal of lower gross margin customers should drive FY13 gross profit up by
$404,000 to $14.9 million and $4 million to $18.9 million.
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A sales mix change may have started in 1Q13. Historically subscription based enterprise iAPPS license sales and
perpetual license fees have been split 50%-50%. Revenue recognition for perpetual licenses is recorded faster than
subscription licenses. In 1Q13 approximately 80% of enterprise iAPPS licenses were recorded on a subscription
basis. If that trend continues it will improve Bridgeline's backlog and increase deferred revenue, but delayed revenue
recognition on the income statement.
Projections
Economic Factors Influencing Forecast
Economic growth was moderate in 3Q12 with US GDP growing at an annual rate of 3.1%, but 4Q12 GDP contracted
by 0.1% according to the January 30, 2013 estimate released by the Bureau of Economic Analysis. The contraction
in 4Q12 reflects decreased inventory investments due to a reduction in business activity, especially from military
contractors due to mandatory spending cuts by the US government, and tax increases before the end of 2012. The
4Q12 GDP estimate is based on preliminary data and could be revised upward. 1Q13 economic growth should
exceed 4Q12 as Congress resolved tax related issues early in 2013. However, economic uncertainty is likely to
persist, as Congress must act by the spring of 2013 to cut spending, raise the debt ceiling, and continue to fund the
US government.
In January 2013, the International Monetary Fund trimmed its estimate of US 2013 GDP growth to 2% from its
October 2012 forecast of 2.1%, but raised its 2014 forecast to 3% from 2.9%. The IMF reduced its 2013 and 2014
global GDP forecasts to 3.5% and 4.1%, respectively, from 3.6% and 4.2% in October 2012, as well as its 2013 and
2014 Euro Zone GDP forecasts to -0.2% and 1%, respectively, from 0.1% and 1.1% in October 2012. While the IMF
projects global growth in 2013, it will be more gradual than previously anticipated.
Basis of Forecast
Our projected sales forecast consists of web application development services, managed service hosting, and
subscription and perpetual licenses. iAAPS software technology accounted for 11% of total revenue in FY08. It
grew to 63% by FY12 and should reach 90% in FY14.
In FY14, we project 36.5% growth in cumulative deployments to 996 from our estimate of 730 deployed at the end
of FY13. Due to the holiday season and deployment disruptions due to hurricane Sandy, 1Q13 revenue decreased
5% to $6.2 million. While the growth of cumulative deployments is unchanged, we have adjusted our sales mix
forecast to subscriptions accounting for 65% of iAPPS sales, up from 50%, which will increase deferred revenue and
the company’s backlog but reduced revenue recognition in FY13. A portion of the increase in deferred revenue in
FY13 should drive growth in FY14 due to revenue recognition rules.
The 4Q12 release of BLIN’s iAPPSds offering was accompanied by a contract with a franchise network of 4,300
franchisees, of which 1,550 were deployed in 1Q13. We anticipate 2,000 deployments by 3Q13, with the reminder
in 4Q13. Sales from this deployment should add $1.1 million and $2 million in FY13 and FY14, respectively to total
revenue. In FY14, we project 2,800 deployments from a second contract, contributing $690,000 to sales.
The cost to an existing customer to switch to a new software suite is likely to be significant. Therefore the flexibility
designed into iAPPS to meet customers’ changing needs should enable the company to maintain its current retention
rates for maintenance and hosting services of 95% and 70%, respectively.
Licensing this platform should drive revenue growth. On average, deployment of the Total eCommerce solution
should garner revenue in the range of $150,000 to $500,000 per customer engagement. UPS indicated that if the
services (iAPPS and logistics and fulfillment) were purchased separately the cost would start at $150,000 but could
reach as high as $1 million, depending on order volume and shipping commitments.
We anticipate the company’s operating expenses to be well leveraged in FY14. We forecast non-iAPPS sales to
decrease to 24% and 10% of total sales in FY13 and FY14, respectively. We forecast sales growth of 4.6% and
19.5%, respectively in FY13 and FY14, to $27.5 million and $32.9 million. In FY11 and FY12, sales were flat at
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$26 million. Operating expense margin should decrease to 56.2% in FY13 and 50.2% in FY14 from 56.5% in FY12
(excluding an $281,000 impairment charge in FY12) as sales growth outpaces increases in operating expenses.
Operations
We project a FY13 loss of $1 million or ($0.07) per share, on total revenue of $27.5 million, down from previously
projected revenue of $29 million and EPS of $0.01 per share. In FY12, the net loss was $946,000, or ($0.07) per
share, on revenue of $26.3 million. The majority of FY13 revenue will be from web application and development
services.
Our reduced sales forecast reflects lackluster 1H13 results stemming from an increased ratio of
subscription sales that shifts a portion of sales to the balance sheet as deferred revenue. This sale shift lengthens the
time frame over which revenue is recognized. The elimination of $3.5 million of non-iAPPS projects will be partly
offset by the deployment of 4,000 digital subscriptions.
We forecast gross profit to increase by 2.8% to $14.9 million, with total gross margin contracting to 54.3% from
55.2%, due to 1Q13 results. iAPPS volume growth should drive subscription/licensing and services gross margins to
81.9%, and 45.2%, respectively, down from 82.1% and 48.5%, respectively, last year.
In FY13, we project operating expenses will increase by 4.1% to $15.5 million due to higher SG&A expenses
stemming from the hiring of additional personnel and program initiatives to drive iAPPS customer growth. We
project R&D expense to decrease by 49% to $742,000 as investments made in iAPPSds are recorded as a capitalized
expense. Depreciation expense should be flat at $1.7 million.
We project an operating loss of $530,000 vs. a loss of $602,000 in FY12, as operating expense margin falls in FY13
to 56.2% from 56.7% excluding and impairment charge ($281,000) last year. Our forecast includes the non-cash
recognition of income tax at a 25% rate and interest expense of $301,000, up from $276,000. The company has
operating loss carryforwards of $6 million at December 31, 2012.
For FY14, we project revenue growth of 19.5% to $32.9 million (prior was $34.4 million), reflecting a 40% increase
in iAPPS/iAPPSds sales to approximately $29 million. Our projection includes a decrease in non-iAPPS sales of
$1.5 million and $1.2 million of subscription sales that will be recorded on the balance sheet as deferred revenue.
We project gross margin improvement to 57.7% from 54.3%. The recurring nature of the iAPPS revenue and
recognition of $2 million from deferred revenue should improve leverage of operating expenses. We project total
operating expense margin of 50.2%, down from 56.2% projected for FY13. We project operating expenses to
increase by 6.8% to $16.5 million due to an 8% rise in SG&A expenses to support iAPPS deployment growth. The
FY14 decrease in total operating expense margin is due to the UPS alliance and sales of iAPPS enterprise and digital
subscription licenses enabling the company to better leverage its operating costs.
For FY14, we project a profit $1.4 million, or $0.10 per share. We forecast a tax rate of 34% and interest expense of
$280,000, down from $301,000 in FY13.
Finances
For 2013, we project cash earnings of $1.3 million and a decrease in working capital of $2.2 million due to increases
in deferred revenue, payables and accruals, partly offset by higher receivables and prepaid expenses. Cash from
operations of $3.5 million will cover capital expenditures, capital lease payments, and repayment of debt, increasing
cash by $1.9 million to $4 million at September 30, 2013.
For FY14, we project cash earnings of $3.9 million with an decrease in working capital of $99,000, due to increases
in deferred revenue and payables, partly offset by a reduction in accruals and increases in receivables and prepaid
expenses. Cash from operations of $4 million should cover capital expenditures, capital lease payments, and
repayment of debt obligations, increasing cash by $1.7 million to $5.7 million at the end of FY14.
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1Q13 Results
In 1Q13, revenue decreased by 5% to $6.2 million slightly above our forecast of $6.1 million. The sales decline was
due to 10% decline in hosting services to $556,000, a 37% decrease in non-iAPPS application development services
to $1.4 million, application of revenue recognition rules that prevented $200,000 of subscription licensing from being
recognized as sales, and reduction of billable hours to Northeast customers of at least $100,000 due to super-storm
Sandy.
Offsetting the revenue decline was a 17% increase in iAPPS sales to $4.2 million and a 33% rise in subscription and
perpetual licenses fees to $787,000. The increase in iAPPS, subscriptions and perpetual licenses was due to sales of
the new iAPPS digital subscription offering, higher sales of enterprise iAPPS licenses sold using software-as-aservice (SaaS) model, incremental non-iAPPS SaaS licenses from the acquisition of MarketNet, and purchase of
maintenance contracts as the customer base grows.
Gross profit decreased 6.9% to $3.2 million due to contraction of gross margin to 51.7% from 52.7% due to acquired
non-iAPPS SaaS license costs, which carry lower margins than iAPPS licenses.
In 1Q13, operating expenses increased by 6% to $3.7 million from $3.5 million after excluding impairment charge of
$281,000 in 1Q12). The increase reflects a 7% rise in sales and marketing expenses to $1.8 million, a 35% increase
in G&A to $1.4 million, and a $9,000 increase in depreciation and amortization. R&D expenses decreased by 67% to
$132,000 due to designating $276,000 of iAPPSds developmental costs as a capitalized expense. In 1Q13, G&A
expense included one-time fee of approximately $150,000, indicating a quarterly run rate of approximately $1.2
million. Net operating expense margin increased to 57.5% from 54.2% (impairment charge excluded) as gross profit
decreased by 6.9% and expense growth increased by 6% in 1Q13.
Other expense of $76,000 consisting of interest expense less interest income, was up from $64,000 due to a larger
outstanding debt balance. 1Q13 loss was $642,000 or ($0.04) per share compared to a loss of $462,000 or ($0.04)
per share. We projected a loss of $285,000 or ($0.02) per share.
Finances
In 1Q13, cash burn totaled $47,000. Working capital decreased by $433,000 due to an increase in deferred revenue,
partly offset by reductions in payables and accruals and increases in receivables and prepaid expenses. Cash from
operations of $386,000, borrowings and exercise of stock options totaling $613,000 covered capital expenditures and
repayment of capital lease obligations, increasing cash by $269,000 to $2.4 million at December 31, 2012.
Competition
Content management is a highly competitive and fragmented segment of the information technology industry.
Bridgeline provides more than content management, as it integrated additional components into its iAAPS
technology. Large existing companies that add components use acquisitions as their primary tool, so integration of a
particular component tends to lack unity with its existing technology. In addition, Bridgeline targeted market of
organizations generating sales of $25 million to $250 million tends to be underserved by the larger technology
companies, which can only offer one or two aspects of what iAPPS can provide.
An industry standard of software delivery is typically in either a cloud/SaaS environment or in a dedicated server
environment. Brideline developed and designed the iAPPS architecture to be flexible, enabling deployment in either
a cloud/SaaS or dedicated server environment.
Large public competitors in content management include Adobe, International Business Machines Corporation, EMC
Corporation, Autonomy plc, Oracle, Microsoft, Symantec, and Hewlett-Packard. There are a significant number of
smaller software vendors competing within individual software product areas. Competition also is from systems
integrators that configure hardware and software into customized systems. The most significant attributes in the
industry include platform availability, scalability, integration with other enterprise applications, and support services.
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Risks
In our view, these are the principal risks underlying the stock:
Economy
Slowing economic growth could reduce customer demand and confidence in technology investments.
Integration
The company’s business strategy includes acquisitions and/or mergers that could raise integration issues such as the
acquisition of MarketNet on May 31, 2012. The terms of the company’s credit facility could limit the number of
acquisitions BLIN can make.
Competition
Content management, web stores, analytics are a highly competitive and fragmented segment of the information
technology industry. Bridgeline’s iAPPS platform solution has unified into one offering those individual segments.
Software Renewal Rate
Subscription licenses are renewed annually. If the renewal rate were to fall substantially, revenue could decrease.
Infringement
Claims of infringement are becoming commonplace within the software industry. While the company does not
believe it infringes on the rights of third parties, a third party may assert Bridgeline’s technology violates their
intellectual property rights.
Shareholder Control
The CEO, executives, and directors collectively owned 11.4% of the outstanding voting stock (as of the SEC filings
in January 2013). This group could potentially greatly influence the outcome of matters requiring stockholder
approval. These decisions may or may not be in the best interests of the other shareholders.
Legal Proceedings
Bridgeline initiated a lawsuit against e.Magination network, LLC and its principal owner in the Federal District Court
of Massachusetts, seeking damages for accounts receivable allegedly collected and used to pay obligations that
should have by contract belonged to Bridgeline. A countersuit asserts that Bridgeline breached e.Magination’s
principal owner’s employment agreement by improper termination. The lawsuit is unresolved at the end of 1Q13.
Miscellaneous Risk
The company’s financial results and equity values are subject to other risks and uncertainties, including competition,
operations, financial markets, regulatory risk, and/or other events. These risks may cause actual results to differ from
expected results.
Trading Volume
Based on our calculations, the average daily-volume in 2011 was 14,480 shares traded a day and in calendar 2011,
average daily volume decreased slightly to 66,206. During the last three months to February 22, 2013, average daily
volume decreased to approximately 51,765. The company has a relatively small float of 13.1 million shares on 15.3
million shares outstanding.
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Consolidated Balance Sheets
FY10 – FY14E
(in thousands)
Source:
Company reports and Taglich Brothers estimates
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Annual Income Statement – Ending September 30,
FY10 – FY14E
(in thousands)
Source: Company reports and Taglich Brothers estimates
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Income Statement Model
Quarters FY12A – 2014E
(in thousands)
Source: Company reports and Taglich Brothers estimates
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Cash Flow Statement, Ending September 30,
FY10 – FY14E
(in thousands)
Source: Company reports and Taglich Brothers estimates
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Price Chart
Taglich Brothers Current Ratings Distribution
Investment Banking Services for Companies Covered in the Past 12 Months
Rating
Buy
Hold
Sell
Not Rated
#
%
1
4
1
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Important Disclosures
As of February 22, 2013, Taglich Brothers, Inc. and/or its affiliates, own more than 1% of BLIN
common stock. Michael Taglich, President of Taglich Brothers, Inc., owns or has a controlling interest
in 260,869 restricted common shares of BLIN and 10,000 shares of common stock. Robert Taglich,
Managing Director of Taglich Brothers, Inc., owns or has a controlling interest in 217,319 shares of
restricted common stock. Richard Oh, Managing Director of Taglich Brothers, Inc., owns 25,000
shares of BLIN restricted common stock. Doug Hailey, Director of Investment Banking at Taglich
Brothers, Inc., owns 50,000 shares of BLIN restricted common stock. Taglich Brothers Inc. owns or
has a controlling interest in 217,913 restricted warrants to purchase common shares at a price of $1.40
per share. Other employees at Taglich Brothers, Inc., also own or have a controlling interest in 149,258
shares of BLIN common stock and 58,700 restricted common shares. Taglich Brothers, Inc. has an
Investment Banking relationship with the company mentioned in this report. In May 2012, Taglich
Brothers, Inc. acted as the exclusive placement agent for a common stock offering.
All research issued by Taglich Brothers, Inc. is based on public information. In January 2012, the
company paid Taglich Brothers a monetary fee of $4,500 (USD) representing payment for the creation
and dissemination of research reports for three months. Beginning in June 2012, the company will pay
Taglich Brothers a monthly monetary fee of $1,500 (USD) for the creation and dissemination of
research reports.
General Disclosures
The information and statistical data contained herein have been obtained from sources, which we
believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not
undertake to advise you as to changes in figures or our views. This is not a solicitation of any order to
buy or sell. Taglich Brothers, Inc. is fully disclosed with its clearing firm, Pershing, LLC, is not a
market maker and does not sell to or buy from customers on a principal basis. The above statement is
the opinion of Taglich Brothers, Inc. and is not a guarantee that the target price for the stock will be met
or that predicted business results for the company will occur. There may be instances when
fundamental, technical and quantitative opinions contained in this report are not in concert. We, our
affiliates, any officer, director or stockholder or any member of their families may from time to time
purchase or sell any of the above-mentioned or related securities. Analysts and members of the
Research Department are prohibited from buying or selling securities issued by the companies that
Taglich Brothers, Inc. has a research relationship with, except if ownership of such securities was prior
to the start of such relationship, then an Analyst or member of the Research Department may sell such
securities after obtaining expressed written permission from Compliance.
Analyst Certification
I, Howard Halpern, the research analyst of this report, hereby certify that the views expressed in this
report accurately reflect my personal views about the subject securities and issuers; and that no part of
my compensation was, is, or will be directly or indirectly related to the specific recommendations or views
contained in this report.
Public Companies mentioned in this report:
Adobe Systems
(NASDAQ: ADBE)
EMC Corporation
(NYSE: EMC)
General Electric
(NYSE: GE)
Hewlett Packard
(NYSE: HPQ)
Honeywell International
(NYSE: HON)
IBM
(NYSE: IBM)
Microsoft
(NASDAQ: MSFT)
Oracle Corporation
(NASDAQ: ORCL)
Meaning of Ratings
Taglich Brothers, Inc.
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Bridgeline Digital, Inc.
Buy - the company is undervalued relative to its market and peers. We believe its risk reward ratio
strongly advocates purchase of the stock relative to other stocks in the marketplace. Remember, with all
equities there is always downside risk.
Speculative Buy - We believe that the long run prospects of the company are positive. We believe its
risk reward ratio advocates purchase of the stock. We feel the investment risk is higher than our typical
“buy” recommendation. In the short run, the stock may be subject to high volatility and continue to
trade at a discount to its market.
Neutral - We will remain neutral pending certain developments.
Underperform - We believe that the company may be fairly valued based on its current status. Upside
potential is limited relative to investment risk.
Sell - We believe that the company is significantly overvalued based on its current status. The future of
the company's operations may be questionable and there is an extreme level of investment risk relative
to reward.
Dropping Coverage – We have discontinued research coverage due to the acquisition of the company,
termination of research services, non-payment for such services or departure of the analyst.
Some notable Risks within the Microcap Market
Stocks in the Microcap segment of the market have many risks that are not as prevalent in
Large-cap, Blue Chips or even Small-cap stocks. Often it is these risks that cause Microcap stocks
to trade at discounts to their peers. The most common of these risks is liquidity risk, which is
typically caused by small trading floats and very low trading volume which can lead to large
spreads and high volatility in stock price. In addition, Microcaps tend to have significant
company-specific risks that contribute to lower valuations. Investors need to be aware of the
higher probability of financial default and higher degree of financial distress inherent in the
microcap segment of the market.
From time to time our analysts may choose to withhold or suspend a rating on a company. We continue to
publish informational reports on such companies; however, they have no ratings or price targets. In general, we
will not rate any company that has too much business or financial uncertainty for our analysts to form an
investment conclusion, or that is currently in the process of being acquired.
Taglich Brothers, Inc.
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