Bridgeline Digital, Inc. Q1 FY2024 Earnings Call

Thank you for being with us, and welcome to Bridgeline Digital's First Quarter 2024 Earnings Conference Call. I will now turn the call over to CFO Tom Windhausen. Please proceed.

Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Tom Windhausen, I'm the Chief Financial Officer of Bridgeline Digital. I'm pleased to welcome you to our fiscal 2024 first quarter conference call. On the call with us this afternoon is Ari Kahn, Bridgeline's President and CEO, who will begin the call 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 that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 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 expressly disclaim and assume no obligation to inform you if they do. The 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 have an impact on 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 our earnings release by visiting our website. I would now like to turn the call over to Ari Kahn, Bridgeline's President and CEO. Ari?

Thank you, Tom. Good afternoon, everyone. Our first quarter of fiscal 2024 had the strongest subscription sales since I joined Bridgeline. We signed over $2.5 million in new customer contracts with 28 license sales, adding $750,000 in ARR, annual recurring revenue. Sales were driven by HawkSearch, with the release of Smart Search and Rapid UI creating demand that will continue to drive new sales in the future. Search is now well over 50% of subscription revenue for the company, and that percentage is expected to increase. Subscription revenue overall is 82% of our total revenue. Professional services revenue was down this quarter to $670,000 in part because we invested in making our products out of the box with the Rapid UI release last quarter that allows new customers to install HawkSearch with no implementation costs. This is a competitive advantage that shortens our sales cycle and increases our total addressable market. Rapid UI expands the total addressable market to include companies who seek to invest more of their budgets into the subscription and go to market more quickly than a custom implementation would allow. These customers can use the stated budgets to purchase additional subscriptions from Bridgeline such as our Smart Search product or invest in custom enhancements in the future after they launch and go live. Smart Search is the most important product release we have ever made. It delivers a clear value proposition to our customers. It increases their online revenue by allowing their customers to find products to buy that they may not have realized that they need or would not have found with traditional keyword-based search. 100% of Bridgeline's over 500 Search customers can increase their online revenue with Smart Search. Customers can add Smart Search to their existing HawkSearch license for an additional subscription fee, which gives Bridgeline an opportunity to significantly grow our HawkSearch revenue from our current customer base above and beyond the fact that Smart Search helps us win more new customers because along with Rapid UI, it allows a new customer to make an immediate improvement to their own revenue. Smart Search is an AI-based enhancement to HawkSearch that allows the shopper to find products with more intelligent natural search. First, while shopping, you can take a photograph with your smartphone and find products on a Smart Search-powered website. Secondly, on a Smart Search-powered website, you can describe your goal to create a shopping list rather than have to specify the individual items that you want to buy. And thirdly, you can do all of this in more than 50 languages. Here's an example: Let's say if you have a camper planning a trip. That camper can simply ask the website, 'What should I bring on a 2-week camping trip for cooking?' Smart Search's response will include all the expected products such as a cooking cylinder propane tank and will also include products such as a meal ready-to-eat food pouch, which the camper may not have thought about in the first place. The camper may then see a person on the street with cool hiking boots that they like, and they can quickly snap a picture with their camera, and the Smart Search-powered website will take that picture and immediately find those boots and allow that person to buy those during their search from the website. These experiences are not possible without Smart Search. Smart Search leverages the latest advancements in AI, including large language models, transformers, and vector databases to deeply understand your online catalog, including what products look like, how products can be used, and how products are related to each other. The future of online shopping is for websites to become intelligent sales advisers who can understand your needs and recommend solutions. Smart Search empowers your site to see and converse with customers today to help them find products that they may not have even realized that they needed. From a competitive point of view, Smart Search offers natural and intelligent capabilities that do not exist elsewhere in the market. And along with Rapid UI, it offers these abilities without the need to invest thousands of dollars and weeks of time in site redesigns or data integrations. Because Smart Search is out of the box for existing HawkSearch customers, they can upgrade without a complicated technical investment or the politics that accompany changes to their customer experience and branding. HawkSearch sales are largely driven through our platform partnerships with BigCommerce, Salesforce, and Optimizely. We also have agency partners, including Xngage and AmericanEagle.com that help drive HawkSearch sales. Sales in the first quarter include Schaedler Yesco, an electrical distributor with 29 locations and 1,000 brands. Yesco chose Smart Search for its unique part number search functionality that allows shoppers to make full and partial part number searches while automatically performing unit of measurement conversions. Smart Search will go further for Yesco and allow an electrician to take a picture of a part while on the job and immediately find that part in their catalog. Another electrical distributor selected Smart Search to enhance their e-commerce by allowing contractors to search for products using images or describe more complex needs to the site to find electrical components. The total contract value for this enhancement is more than $875,000. A leading national insurance provider selected HawkSearch for its custom research portal and smartphone app. The insurance company used Rapid UI to immediately solve their clients' needs to find facts, policy information, and documents in the resource library. Saviynt, a leader in cloud identity and access governance, selected Smart Search to help its customer's support team to find information across several third-party knowledge bases. An example of what is called federated search, where HawkSearch indexes information from multiple repositories. A retailer specializing in agriculture and farming products chose HawkSearch and Smart Search to boost sales across their 25,000-product catalog. Smart Search will analyze their brochures and images to allow shoppers to find products using photographs or natural language. The customer tested Smart Search with hundreds of images taken in the field from a smartphone to ensure that their customers could find parts in real-world scenarios. A leading building materials retailer selected HawkSearch to enhance their e-commerce site, including product discovery in their catalog of over 5,000 products. Rainbow Resource Center, a top educational retailer, selected HawkSearch to power their e-commerce site. HawkSearch's capability for keyword-triggered promotional campaigns will allow the retailer to highlight special offers and featured products. Nail Gun Depot, a leading home improvement retailer, chose HawkSearch to auto-complete and granular relevancy tuning that will grow its revenue significantly and streamline the product discovery process for their large, complex product catalog. Overall, our marketing and lead generation is focused on narrow industries such as building supplies, where we can become the industry leader to make future sales even more efficient. We're also efficiently selling to our existing customers with products like Smart Search to further drive revenue without incurring large marketing expenses. Although cumulative subscription revenue is flat due to legacy product burn, HawkSearch has outstanding customer retention, is winning new customers rapidly and upsell opportunities within our customer base, and it continues to have double-digit growth. Our partnership with Optimizely and Xngage is an important part of our go-to-market strategy. In October, we joined Optimizely at their Annual User Conference, where we announced HawkSearch's integration with Optimizely-configured commerce using the Xngage connector. This announcement was followed with online webinars to further promote sales. HawkSearch is now in a unique position to improve site search for more than 1,000 Optimizely-configured customers, and several have already purchased a license. We recently announced a reseller partnership with accessiBe, the market leader in web accessibility. accessiBe helps over 180,000 companies, including PlayStation, Johnson & Johnson, and NBC, to improve compliance with the American Disability Act and similar legislation in Canada and Europe. Bridgeline will sell accessiBe to our 600-plus customers, many of whom have an active interest in accessibility, which not only increases their online sales but also reduces litigation risk with compliant legislation. HawkSearch has the only BigCommerce connector for search that supports multi-storefront. This is a big differentiator for our BigCommerce partnership. Multi-storefront gives HawkSearch an advantage in the franchise and chain store market and recently led to a furniture store in Europe to select HawkSearch. The store will use HawkSearch's Rapid UI to quickly go to market across multiple countries in Europe and multiple languages, with a unique user experience where users can see different furniture colors in the auto-complete drop-down from HawkSearch's search bar. Bridgeline will showcase the latest versions of this connector in May at the B2B Online Chicago Conference with BigCommerce. Going forward, we expect HawkSearch to drive much of the growth for Bridgeline, with investments in AI leading to new sales and upgrades in our existing customer base. Smart Search has been especially strong, with seven sales in just the last two months in a pipeline of more than $700,000 in annual recurring revenue. Our go-to-market strategy relies on partnerships and targeting narrow markets to maximize sales per market in dollars. So at this time, I'd like to hand off to our Chief Financial Officer, Tom Windhausen. Tom?

Thanks, Ari. I'll provide an update on our financial results for the first quarter of fiscal 2024, which ended December 31, 2023. The total revenue for the quarter ended December 31, 2023 was $3.8 million compared to $4.1 million in the prior-year period. Subscription and license revenue, which is comprised of SaaS licenses, maintenance, and hosting revenue, for the quarter ended December 31, 2023 was $3.1 million compared to $3.2 million in the prior-year period. As a percentage of total revenue, subscription and license revenue was 82% of total revenue for the quarter. Services revenue was $669,000 for the quarter ended December 31, 2023, a decrease from $854,000 in the prior-year first quarter. As a percentage of total revenue, services revenue accounted for 18% of total revenue in the quarter. Cost of revenue was $1.2 million for this quarter, a slight decrease from $1.3 million in the prior-year period. As a result, our gross profit was $2.6 million for the quarter as compared to $2.8 million in the prior-year period. Overall, gross profit margin was 68% for the quarter ended December 31, 2023, compared to 69% in the prior year comparable period. Subscription and license gross margins were 73% for the quarter, consistent with the prior-year period, and services gross margins were 44% compared to 51% in the prior-year period. Operating expenses were $3.2 million for the quarter ended December 31, 2023, consistent with $3.2 million in the prior-year period. Moving below operating expenses, the change in the fair value of our liability-classified warrants in the quarter resulted in non-cash income of $18,000 compared to income of $300,000 in the prior-year period. Net loss was $0.6 million or $600,000 for the quarter ended December 31, 2023 compared to a net loss of $100,000 in the prior-year period. And finally, adjusted EBITDA for the quarter was negative $117,000 compared to a positive $115,000 in the prior-year period. Moving on to the balance sheet. At December 31, 2023, we had cash of $1.4 million and accounts receivable of nearly $1.3 million. Our total debt outstanding, as of December 31, 2023, was approximately EUR 585,000 or USD 646,000. That debt has a weighted average interest rate of 4.68%, with principal payments due through 2028. We have no other debt or any earn-outs from any previous acquisition. At December 31, our total assets were $16.6 million and our total liabilities were $5.7 million. We did have a decrease in cash in the quarter, and that was a result of timing of collections of receivables as well as timing of vendor payments. Specifically, the quarter included over $200,000 of payments to a certain partner vendor, which will not recur. Finally, I'll give an update on our cap table. As of the end of the period December 31, 2023, our cap table included 10.4 million outstanding shares, 39,000 shares from Series C preferred stock on an as-converted basis, 1.7 million warrants, and 1.8 million options. In October 2023 during the quarter, 54,000 of warrants expired. Another nearly 900,000 warrants whose exercised price is $4 will expire in approximately 7 months in September 2024. After that, we'll have 800,000 warrants outstanding, primarily including 180,000 warrants with a $2.85 exercised price expiring in May 2026 and just under 600,000 warrants with a $2.51 exercised price, which expire in November of 2026. We look forward to continued growth and success in fiscal 2024 and beyond as we continue our focus on revenue growth, product innovation, customer success, and delivering shareholder value. Thank you all for joining us on the call today. And at this time, I'd like to open the call for questions and answers.

Our first question comes from Howard Halpern of Taglich Brothers. Please go ahead, Howard.

Good afternoon guys. With all the recent innovations that you have announced, what are we looking at now in terms of the sales cycle and potential deal size? And how that might translate into future growth?

Great. Great. So this has been a big focus of ours. We've made a lot of investments and specifically made our software easier to buy by allowing our customers to have immediate value towards their own businesses. The two big releases that happened last quarter to this end include Rapid UI and Smart Search. What Rapid UI does is allow our customers to launch their site immediately without having to purchase any professional services for a custom implementation. This allows us to take all of the expressive power in HawkSearch that powers massive sites like hp.com and make that available for small, medium, businesses that can't invest a huge amount of money in a custom implementation. It increases our total addressable market. It also changes the structure of initial deals so that our initial deals now are primarily licensed, and many of them had zero services whatsoever. This allows us to increase our license fee because now the budget can be allocated that way for recurring high-margin revenue. It allows us to win customers we couldn't win otherwise because they either don't have the time or they don't have the money to do a custom implementation. And it decreases our sales cycle by allowing us to avoid having to specify out a custom implementation, which takes a lot of time, and also allowing us to just immediately take the customer's website and give them a customized demo with their own product catalog rather than a generic demo around the catalog. So that's huge. Now in addition to that, so there's Rapid UI, increasing our TAM, our total addressable market, decreasing our sales cycle, and shifting revenues from services to subscription. What Smart Search does is, and this is my background, artificial intelligence, I'm really passionate and excited about this, it leverages huge advancements that have happened in the last 18 months around what are called large language models and artificial intelligence. A lot of us have seen the news around ChatGPT and other companies that are enabling natural language agents to automatically convert and find information for you. Well, those fundamental libraries cost billions of dollars to create, and what companies like OpenAI did a very good job at was to create interfaces so that people that don't have billions of dollars can leverage those products with infrastructure. Because we understand artificial intelligence very well, not just myself, but many of the engineers and our team, we're able to look at those capabilities that are now available, look very carefully at our customers and our prospective customers from a use case scenario and connect the dots to put that together into a set of capabilities that are very different from what you can get from other companies and then directly deliver value to our customers. Here's how we can deliver value: So the value for our customer is increasing their online revenue. One of the challenges that they have is that their customers don't even know what they want to buy sometimes. They know what they want to do, but they don't necessarily know what they want to buy, or they don't know that the online store has the products that they need. I need to fix this tractor, and I know that I need to replace a certain gear. What I don't know is that I also need to replace certain washers and other things. Well, I'm underneath the tractor, I can take a picture of the gearbox, have Smart Search automatically figure out what parts in the tractor supply catalog are necessary for performing that task and tell me which ones I can purchase. I might not realize I needed that washer or other component, but now I do. Instead of running down to the local tractor supply store and buying it from TSC, I'm actually buying it online from the customer that owns Smart Search. These capabilities allow our customers to avoid revenue leakage in a huge way, avoid their customers forgetting to buy something, and make them do without it, or buying something from someone else because they don't realize that they have it. Clear revenue impact. Now, one of the great things that we've done is that we've made Smart Search completely backwards compatible with our standard HawkSearch keyword capability. This is super important because that means every single one of our HawkSearch customers can push a button and turn on Smart Search. So our sales cycle into our existing customers to upgrade Smart Search is super short. Every single one of them can derive value from this. We've got a great market right there that can increase our Smart Search revenue by over 30% all by itself, in addition to us being more competitive with other search products in the market. So these two features, by themselves, we think are really important. You can see an impact in our financial statement. We do have a lot of services revenue this quarter than we traditionally have shown. Our subscription revenue bookings don't hit the P&L on day one, but we're excited that we're going to start seeing a greater revenue mix of subscription versus total revenue and faster sales cycles, thanks to these two products, and we've got more in the pipeline.

Okay. And regarding sales growth, are we starting to see sequential sales growth as the legacy customer has completely wound down?

It took a year for them to wind down, which was good because we were able to get additional revenue along the way, and December was their last month, which had the final decrease of specifically $25,000 in MRR. We’ve got substantial new sales and continuing momentum that is to fill that hole, and we expect to start seeing growth.

Okay. And one other question with regard to search. Now that is an independent product? So if you were to sell it to a new customer, is that then a potential down the road to backfill and then sell them your HawkSearch product?

Yes. Our customers, our new customers can start with Smart Search or HawkSearch or both. Either way, what we expect to see is that most companies will either start with HawkSearch or start with both. We don't expect people to just do Smart Search. And part of that is because humans have trained themselves over the past 20 years to search for things with keywords rather than to just saying what their goals are. Consequently, you won't have as effective results from most sites if you leave the keyword search out of it for basically cultural reasons. And that's fine. Also, for a lot of domains, people know, especially in the B2B world, exactly what product they want. You don't want to miss out on those. So you're going to get, I think, most customers buying both; they're buying HawkSearch. The decision to upgrade to Smart Search is, I think, very easy, and it's really a financial one for most customers, whether right now makes sense for them, based on whatever their market is. So if we can get a fast sale by just selling HawkSearch today and give them a little bit of time to reap the benefits of that and come back in six months to do the upgrade, that works just as well.

And one last question because I know the search is for the stores and improves the ROI from customer inquiries. Are you also seeing customers who want to use it internally to help their efficiencies?

We have, and that's not the most common use case. But we get sales every quarter to that end. One of the examples in the most recent quarters is a customer whose customer support team has a huge number of databases with FAQs and other third-party information, and they use HawkSearch internally to find that. An interesting use case that happened just this quarter is a customer that has thousands of tens of thousands of PDFs of product descriptions that they consider proprietary information, and they don't want to share that online, but they want Smart Search to read all of that information, learn more about their products, and then to be able to intelligently help their customers find products they need. Think of Smart Search as having a large language model that is capable of understanding in general what somebody is speaking about and asking for. We have what is called a vector database, which serves as long-term memory for Smart Search, allowing it to study an existing catalog, grow shares about those products, and so forth to understand what is in the product. When we bring those two together, we get more intelligent results, training off of proprietary internal information that you don't want to share with the outside world, thus making Smart Search understand your products even better and giving more intelligent results for your customers.

Okay. Thanks for the input and keep up the great work, guys.

Thank you, Howard.

Next question comes from Jacobson. Your line is open.

Yes hello, good afternoon guys. And Happy Valentine's, I guess.

That's right. Happy Valentine's. Sorry, I've got to run out down the store and get some tacos for my wife. I forgot.

There are challenges ahead. I have two points to make. First, I want to commend the team for successfully entering the AI space in a profitable way. It's impressive to see this achievement. Second, could you provide some insight on the balance sheet concerning current assets? I acknowledge the mentioned $200,000 issue, but there has been a discussion about a decline of around $530,000 in current assets over the past quarter. Is there anything you can share about this situation?

Yes. Yes. And Tom can provide a little bit additional detail, but I'll provide some higher-level color, which is that first and foremost, the company has sufficient cash and it has no intention of doing any capital raises to bolster that cash position. Second of all, we have the ability this fiscal year to become cash positive for that closed, so there isn't a recurring or structural cash challenge at all. Tom can speak a little bit more to the financials.

Now we had a decrease there in cash. If you look in those current assets, you'll see receivables are up $200,000 or so. So that is cash that we can go out there and collect and bring that in and really not much in short-term assets or short-term liabilities that drove in the quarter to just play timing inside receivables and payables.

Thank you for that. I appreciate it. So if we expect to become cash flow positive, can we estimate when that might occur? Also, can we discuss whether this will be due to increased sales, reduced expenses, or another factor contributing to our profitability?

Right, right. Okay. Great. So as an expectation, it will be towards the end of this fiscal year, and it's going to be driven by increases in gross profit, not decreases in expenses. It's not going to be a huge positive cash flow; it's going to be positive cash flow. We never expect to fall below $1 million in cash. But we don't see any need to reduce expenses. We think that strategically continuing to invest in R&D and improve our market position, especially in artificial intelligence, generates the most long-term value for the company, as well as, of course, investing in marketing and winning new customers. So look at gross profit increases. And the gross profit is primarily driven through subscriptions at a 73%, I think, GM this quarter versus services. We expect that revenue mix between services and subscriptions to continue to be in the 80s.

Yes. I think the gross margins are impressive. Regarding the increases in license sales, are we anticipating a rapid growth, or is it expected to be more gradual from this point onward? What are we forecasting?

No, it's more linear, and that's the nature of SaaS. So most of our new sales are in the $25,000 to $50,000 in annual recurring revenue for sales and generally in HawkSearch. And often they have an initial engagement of 24 months to 36 months in that range. We typically see 5-year total lifetime with HawkSearch customers. They start with a 2-year or 3-year renewal and renew several times in a row. Because that initial deal is largely subscription, it gets recognized as revenue pro-rata over the life of that initial contract. So we don't get spikes. Our current quarter, which was outstanding and very exciting about it, is not going to be able to generate a big spike in our Q2 from a revenue perspective, even though that was from a booking. An important component to revenue growth is net revenue retention, NRR. Bridgeline's products broadly fall into two categories. We've got our growth products, which is really HawkSearch. Most of the products fall under this, particularly HawkSearch. The net revenue retention in the high 90 percentiles. When we look at some of our legacy products, they have lower revenue retention. Large customers that have maybe $20,000, $30,000 in monthly recurring revenue will have large amounts of total revenue. One of the reasons we don't sell those anymore is that the whole marketplace is so dominated by larger players like SAP or Salesforce that can demand those products, and they have long sales cycles. But those types of products will bleed down, creating a little inevitability in revenue because of just the size that they have, and those clips will be more apparent. HawkSearch is over 56% of our subscription revenue and growing very rapidly, those clips become more and more inconsequential. 2024 is the year when we really started to dominate our search platforms, lots of smaller customers, steady growth, predictable growth, and the ability to continue to invest in marketing and sales thus will lead to predictable revenue streams and predictable cash flows.

Okay. Yes. I appreciate that, and thanks for providing that information. With respect to the change of the product mix, I mean, that's actually really great. So with respect to the new contracts, whatever the term is that where we reached a new benchmark in the time, at least that you have been here, what was the comparable in the last quarter on that? Do we have any idea of that?

I'm sorry, I had a bit of a connection issue there. In terms of new customer wins, this most recent quarter was more than double our previous quarter in annual recurring revenue. We achieved around twice the amount compared to the last quarter. One exciting aspect we noticed is that many of the sales from this quarter started and concluded within the first quarter. This indicates that our sales cycle for many of these transactions is under 90 days. Smart Search was only pre-released in late October, and a significant portion of those sales occurred in December, which leads us to believe that we have an opportunity for substantial growth. It's essential for us to invest in sales and marketing, not just innovation, as those areas support our research and development efforts. We need to find a balance in our investments to effectively target those markets. Improving customer acquisition costs is a major focus for us; that's why we specifically seek out underserved markets where we can establish a strong presence, like the niche market of electrical distributors, which wasn't even on my radar a year and a half ago. Currently, we are at the New York Build Conference at the Javits Center, engaging with electrical distributors. Targeting these narrower markets is an effective strategy for gaining new customers.

Okay, thank you very much. That’s all I got. Thank you.

Thank you. I would now like to turn the conference back to management for closing remarks.

Well, thank you, everybody, for joining us today. I have to say, this is a very exciting time in computer science. It's an opportunity for people to understand artificial intelligence and to do exciting things for people who understand their customers and their markets and what those specific needs are to make a real impact. I think that we're there to do that. We appreciate the continued support from all of our customers and our partners and, of course, our shareholders. We're excited about the business's ongoing growth prospects. We look forward to speaking with you again on our second quarter fiscal 2024 conference call, which will be in May. Be well.

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