Bridgeline Digital, Inc. Q3 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Bridgeline Digital Inc. Third Quarter 2022 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tom Windhausen, Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhausen, and I'm Bridgeline's Chief Financial Officer. I am pleased to welcome you to our Fiscal 2022 Third Quarter Conference call. On the call this afternoon is Ari Kahn, Bridgeline's President and CEO, who will begin with a discussion of our business highlights. I will then update you on our financial results for the quarter, and we will conclude by taking questions. Before we begin, I'd like to remind listeners that during this conference call, comments that we make regarding Bridgeline are not historical facts, but rather forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. They 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 expressly disclaim and assume no obligation to inform you if they do. Results that we report today should not be considered an indication of future performance. Changes in economic, business, competitive, technological, regulatory, and other factors, such as the impact of public health measures, 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 this afternoon, we will discuss some non-GAAP financial measures when commenting on the company's financial performance. We provide a reconciliation of our GAAP financials to these non-GAAP measures in our earnings release. You can obtain a copy of the earnings release by visiting our website. I will now turn the call over to Ari Kahn, our President and CEO. Ari?

Thank you, Tom, and good afternoon, everyone. Bridgeline had 22% revenue growth this quarter compared to the same quarter last year, totaling $4.2 million. Most of our growth was in subscription and license, which increased by 29% to $3.4 million. Subscription license is now over 80% of our total revenue and drove gross profit to increase by 30% to $2.9 million, with a 5 point gain in gross margin percentage. We booked $690,000 in new license ARR from 23 sales this quarter. Our cross-sell strategy drove 11 license sales to existing customers on top of 12 newly won customers. And site search is our strongest growth area with 19% CAGR organic growth. Our cash and projected operations position us well to continue our investments in innovation and sales and marketing without additional capital for operations. We ended the quarter with $3.9 million in cash after paying $0.5 million in financing activities from the WooRank and HawkSearch acquisitions. We also negotiated a $600,000 discount to the earnout and working capital adjustment on the HawkSearch acquisition in consideration for a 6-month early payment. Our eCommerce360 strategy fuels more efficient growth, not only by winning new customers with multiple entry points to our product suite, but also through sales of new products to existing customers from our growing product suite. Bridgeline saw growth in the finance, automotive, retail, and manufacturing industries. Belmetrics, an auto parts dealer, chose our HawkSearch product to power their BigCommerce online store. This is the latest in a series of new automotive customers, including 1-800-Radiators and others. Procon Pumps, our B2B pump manufacturer, selected HawkSearch to power search, recommendations, and search information management on their online store. Our AI-powered search information management project increases B2B sales for companies with products that require unit measurement conversion. For example, with search information management, your customer can search for a part using metric sizes when the underlying catalog is in English measurements. This is a straightforward example, but the same technology powers searches for colors and other variations where more subjective conversions are needed. A new European customer is PharmaDirect, which selected Celebros to grow online revenue with superior site search on a B2C website, where Celebros' natural language processing better understands customer intent to provide more relevant product searches using intra-site search terms. In addition to new customer wins, we also had over 100 new customers this quarter, including Bristol-Myers Squibb, 7-Eleven, Shell Oil, and Triumph Motorcycles. Many of our customers are adjusting prices for inflation. Platform partners like Adobe, BigCommerce, Kentico, Optimizely, Sitefinity, and Shopify are an important part of our growth. This quarter, we released a new Magento connector for HawkSearch that reduces implementation time and cost for our customers while providing a more seamless look and feel to their product catalog management in Adobe and Magento's administrative interface. Sitefinity and BigCommerce continue to drive new business, often with sophisticated sales powered by both platforms simultaneously, as is the case with Sage Publishing, a new customer of ours. Our Kentico partnership drove the win of a large financial institution selecting HawkSearch to help their 1 million customers more easily find content on their website. Bridgeline's TruPresence product suite for the franchise industry continues to bring new opportunities, including a recent win using our DataBravo product for individual location analytics and personalized SEO recommendations. This line has added over $100,000 in ARR this fiscal year-to-date for the TruPresence product suite alone. It's winning customers ahead of schedule and the location analytics solution is already receiving outstanding feedback. Last year, we made two acquisitions, and we will continue to evaluate strategic opportunities. This is a challenging environment for public stocks, and we will only consider acquisitions that can be financed accretively. We believe that the valuations of our targets will continue to drop and intend to be patient as we evaluate opportunities. The companies we consider for acquisitions need to have a customer base that we can track to sell our product. In addition to acquisitions, we look for products that can be sold to our customer base while also attracting new customers. We consider companies globally with an emphasis on North America and Europe, and again, only consider opportunities with terms that are accretive compared to our enterprise value to revenue ratio. At this time, I'd like to turn the call back over to our Chief Financial Officer, Tom Windhausen. Tom?

Thanks, Ari. I'm thrilled to share with you all this afternoon our positive financial results for the third quarter of fiscal '22, which ended June 30, 2022. Total revenue for the quarter ended June 30, 2022, was $4.2 million, an increase of 22% compared to $3.4 million in the prior year period. Now going into each component. Subscription and license revenue increased 29% for the quarter ended June 30, 2022, to $3.4 million from $2.6 million in the prior year period. As a percentage of total revenue, subscription and license revenue increased to 81% of total revenue for the quarter ended June 30, 2022, compared to 76% in the prior year period. Subscription and license revenue encompasses SaaS licenses, maintenance, and hosting revenue as well as perpetual license revenue. This increase in subscription license revenue as a percentage of total revenue was driven by the prior year acquisitions of VuLink and HawkSearch, which have a high percentage of subscription revenue. Services revenue was $0.8 million for the quarter ended June 30, 2022, compared to the same $0.8 million in the prior year period. As a percentage of total revenue, services revenue accounted for 19% of total revenue for the quarter ended June 30, 2022. The cost of revenue increased by 7%, or $0.1 million, to $1.3 million for the quarter ended June 30, 2022, compared to $1.2 million in the prior year period. As a result, gross profit increased by 30%, or $0.7 million, to $2.9 million for the quarter ended June compared to $2.3 million in the prior year period. Our overall gross profit margin increased to 70% for the quarter ended June 30, 2022, compared to 65% in the prior year period. Our subscription license gross margins were 75% for June 2022 compared to 72% in the prior year period, and our services gross margins were 46% for the three months ended June 2022 compared to 45% for the same period in 2021. Our operating expenses increased to $3.3 million for the quarter ended June 30, 2022, from $2.9 million in the prior year period. Moving to other income and expense. For the quarter ended June 30, 2022, the change in fair value of our liability classified warrants resulted in non-cash income of $0.8 million compared to a $4.2 million non-cash loss for the same period in 2021. On the bottom line, our net income was positive $0.4 million for the quarter ended June 30, 2022, compared to a net loss of $3.6 million in the prior year period. The increase in net income includes the impact of fair value adjustments such as the warrants I just mentioned. Moving on to EBITDA. Our adjusted EBITDA for the quarter ended June 30, 2022, was $0.1 million compared to $0.3 million in the prior year period. Looking at our balance sheet, on June 30, 2022, we had cash of $3.9 million and accounts receivable of $1.8 million. Our total assets were $29 million and our total liabilities were $9 million. Bridgeline looks forward to continued success in the final quarter of fiscal '22 and beyond as we continue to focus on revenue growth, product innovation, expanding our customer success, and delivering shareholder value. Thank you for joining us on the call today. And at this time, we would like to open the call up to questions and answers.

Our first question comes from Howard Halpern with Taglich Brothers.

Congratulations.

Thank you, Howard.

Okay. I’m excited that TruPresence secured a new customer. What is the expected timeline for deploying with that customer?

This is great. So a big focus for us internally here is to reduce deployment time and the cost of initial implementation. And for this new customer who is using TruPresence, they're able to use the product right out of the box with zero services. It's a 100% pure software sale.

Okay. And I guess with that customer win, do you have a little bit of a pipeline developing for other potential customer wins for that product?

We do. We do. And specifically, in the TruPresence brand, all of our products adjust with tuning specifically for the franchise industry. And DataBravo was the underlying product that was sold with TruPresence. What DataBravo allows you to do, and we've got a great pipeline for this, is that when you are a franchise and you have several thousand franchisees, each with their own website, the challenge is that if one of those franchisees neglects their website, it can impact the core search engine optimization. That weakness will bubble up throughout the rest of your site and pull down all of their rankings. With DataBravo, you can evaluate your entire network of franchisee websites, identify any weaknesses, and receive recommendations on how to address those weaknesses to fix that site. And this is a need that's in very high demand. We've got a great pipeline of franchisees and nobody else is doing this.

Okay. And overall, how are customer acquisition costs trending for you?

So our CAC is improving every day, and it's in the 2.9 range of lifetime value to CAC right now. We think that's going to get even better. And part of the improvement is that we now have a broader product suite where our own existing customers have opportunities to buy additional products from us. We are going to keep expanding that suite. DataBravo, for example, is a launch that we did last year using some of the technology that we acquired with WooRank. And that will further reduce CAC going forward.

And talking about WooRank, are you still seeing the same kind of traffic that generates customer leads compared to a couple of quarters back?

It is consistent with what it's been for the past couple of quarters. And we're expanding our strategy with WooRank where we are creating partnerships with platforms. We'll be releasing Shopify specifically this quarter to further distribute WooRank, and all of those WooRank customers will then have a conversation to introduce our other products through our dashboard.

Okay. And I guess one last one. You talked in the press release about a partner relationship. What is that going to mean for you 1 year, 2 years, or 3 years down the road?

Well, as we announced that our new customer has a strong relationship with us. It very much changes the structure of our own sales team. Every single direct salesperson now owns one or more partnership relationships and manages that. The way we manage and structure our sales team is different. Our CAC goes down because now we’re coming in with a partner, which gives us lower marketing costs and greater credibility right from the start. So we expect this to be transformative for our product sales process, and in fact, it already is.

At this time, I am not showing any questions. I would now like to turn the conference back to management for closing remarks.

Thank you for joining us today. We appreciate the continued support of all of our customers, partners, and shareholders, and we're excited about our business and ongoing growth prospects. We look forward to speaking with you again on our year-end fiscal '22 conference call in December. Thank you, and stay healthy.

This concludes today's conference call. Thank you for participating. You may now disconnect.