Earnings Call Transcript - BLIN Q2 2024

Operator, Operator

Thank you for joining us for Bridgeline Digital's Second Quarter 2024 Earnings Conference Call. Currently, all participants are in a listen-only mode. After the presentations, we will have a question-and-answer session. I will now turn the call over to Tom Windhausen, Chief Financial Officer. Please proceed.

Tom Windhausen, Chief Financial Officer

Thank you and good afternoon, everyone. Thank you for joining us today. My name is Tom Windhausen, and I'm the Chief Financial Officer of Bridgeline. I'm pleased to welcome you to our fiscal 2024 second 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 business highlights. I'll 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 the 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. We expressly disclaim and assume no obligation to inform you if they do. The results 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 any 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?

Ari Kahn, President and CEO

Thank you, Tom. Good afternoon, everyone. This quarter has been another thrilling period for Bridgeline, highlighted by impressive HawkSearch sales, advancements in artificial intelligence, and significant recognition and success in key partnerships. HawkSearch stands out as the premier site search product in the industry, featuring exceptional artificial intelligence capabilities for product discovery. Our platform partners view us as vital to their customers' success, leading to HawkSearch being considered an essential application for their commerce sites. Our overall figures include some legacy clients using older products, but the growing demand for HawkSearch and Smart Search, alongside our solidified partnerships, makes this an incredibly exciting time for Bridgeline, with our momentum consistently increasing. Currently, search accounts for close to 60% of our subscription revenue, and we anticipate this percentage to rise further. We have sold nearly 50 licenses this fiscal year, totaling over $4 million in contract value. We're launching a new customer every week, expecting to introduce about 10 customers this month alone. Each new launch adds to our references and bolsters our reputation as leaders in the site search industry. Many of our clients manage extensive product catalogs, such as Voltus with 80,000 products, and a building supply chain that chose HawkSearch for its 40,000 product catalog. Some customers opt for HawkSearch due to its AI capabilities with Smart Search, while others appreciate our seamless integration with platform partners, which allows for easy upgrades to HawkSearch. Our marketing efforts are focused on specific sectors, including B2B construction areas like electrical and plumbing supplies. By strengthening our presence in these markets, we have shortened our sales cycle and lowered our customer acquisition costs. Two major platform partners that we expect to continue driving new customers for HawkSearch are Optimizely and BigCommerce. On BigCommerce, HawkSearch is prominently featured on the first page of their app store, which has 60,000 customers generating $350 million in ARR, with 20% of those customers having over 250 products. This 20% represents a significant opportunity for us, and our visibility on BigCommerce's homepage enhances our lead generation and credibility within their ecosystem. BigCommerce collaborated with HawkSearch at the B2B online Chicago Conference this month to help their customers understand how HawkSearch can boost online sales, and we are witnessing exceptional lead generation within this environment. HawkSearch now offers a one-click installation for Optimizely and is recognized as a top-paid app in their app store. We have partnered with Optimizely on multiple online webinars and have recently launched numerous customer websites. HawkSearch is now well-positioned to enhance site search for more than 1,000 Optimizely-configured commerce customers, with several already acquiring licenses. Additionally, we have teamed up with the system integrator Xngage, a specialist in Optimizely, who helped develop the Optimizely connector, further opening the door for sales. Overall, our pipeline is experiencing 35% more traffic and a 66% higher conversion rate to lead generation compared to last year. We are receiving excellent reviews and analyst recognition, which generates leads and enhances our credibility against competitors. We have been recognized by top analysts such as InfoTech as leaders in market technology. Bridgeline is also acknowledged as one of the top 20 e-commerce solution providers for 2024 by ICON Outlook tech magazine. We anticipate more analyst recognition this year that will further facilitate lead generation and validation. Bridgeline is recognized as a leader in AI-powered site search. Our deep expertise in AI, backed by my PhD from the University of Chicago, enables us to identify emerging capabilities swiftly and integrate them into our software, enhancing our customers' success. In March, we launched our AI-powered Smart Search, which offers two new search methods: Concept Search and Image Search. These innovations transform how customers interact with search, leading to increased engagement and revenue for businesses. Smart Search employs AI models, vector databases, and large language models to handle customer queries, whether inputted or through images. Image Search allows customers to upload a product image, and HawkSearch will display similar items available for purchase. Concept Search enables users to articulate their needs in natural language, allowing the system to find relevant products or information. Generative AI enhances features to summarize search results for online shoppers and improves content for better search engine optimization. Smart Search has already been implemented on several customer sites, including Saviynt, Schaedler Yesco, Nail Gun Depot, Max Warehouse, and Rainbow Resource, with many new sites scheduled to launch soon. This focus drives our growth and is the primary priority for the company overall. Now, I'll turn the call over to our Chief Financial Officer, Tom Windhausen. Tom?

Tom Windhausen, Chief Financial Officer

Thanks, Ari. I'll provide an update on our financial results for the second quarter of fiscal 2024, which ended March 31, 2024. Total revenue for the quarter ended March 31, 2024, was $3.8 million compared to $4.1 million in the prior year period. Now going into each component of revenue, our subscription license revenue, which is comprised of SaaS license, maintenance and hosting revenue, for the quarter ended March 31, 2024, was $3 million compared to $3.3 million in the prior year period. As a percent of total revenue, subscription and license revenue was 79% of total revenue for the quarter ended March 2024. Our services revenue was $794,000 for the quarter ended March 31, 2024, a decrease from $821,000 in the prior year second quarter. As a percentage of total revenue, services revenue accounted for 21% of total revenue for the quarter ended March 31, 2024. Our cost of revenue for the quarter ended March 31, 2024, was $1.3 million, consistent with $1.3 million in the same comparable prior year period. As a result, gross profit was $2.5 million for the quarter ended March 31, 2024, compared to $2.8 million in the prior year period. Our overall gross profit margin was 66% for this quarter ended March 2024 compared to 69% in the prior year period. Our subscription and license gross margins were 71% for the quarter compared to 74% in the prior year period, and our services gross margin was 47% in the quarter compared to 49% in the prior year same period. Operating expenses were $3 million for the quarter ended March 31, 2024, compared to $3.5 million in the prior year period, a decrease in expenses of $500,000. Moving to below OpEx, the change in fair value of our liability classified warrants resulted in a non-cash loss of $25,000 in the quarter compared to income of $171,000 in the prior year period. On the bottom line, our net loss was $602,000 for the quarter ended March 31, 2024, compared to a net loss of $511,000 from the prior year period. Our adjusted EBITDA for the quarter ended March 31, 2024, was negative $83,000 compared to negative $144,000 in the prior year period. Moving on to our balance sheet, at March 31, 2024, we had $1.3 million of cash and $1.5 million of accounts receivable. Our total debt outstanding as of March 31, 2024, was EUR 567,000 or approximately USD 600,000 and the weighted average interest rate on that was 4.6%, with principal payments spread throughout now through 2028. We have no other debt or remaining earnouts from any previous acquisitions. On March 31, 2024, our total assets were $16.3 million and total liabilities were $5.8 million. Finally, to give an update on our cap table, at March 31, 2024, our cap table included 10.4 million shares issued and outstanding, 39,000 shares from a Series C preferred stock on an as-converted basis, 1.7 million warrants outstanding and 2.1 million options outstanding. Of those warrants, nearly $900,000 whose exercise price is $4 will expire in September 2024. After that, we will have approximately 800,000 warrants, primarily including 188,000 warrants with a $2.85 exercise price, which expired in May 2026, and $592,000 more with a $2.51 exercise price, which expired in November 2026. Bridgeline looks 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 for joining the call today. And at this time, we'd like to open up the call to questions and answers.

Operator, Operator

Thank you for joining the call today. We are looking forward to continued growth and success in fiscal 2024 and beyond as we maintain our emphasis on revenue growth, product innovation, customer success, and delivering shareholder value. At this time, we would like to open the call for questions and answers.

Tom Windhausen, Chief Financial Officer

We have received some questions that we will address for those who couldn't attend. We will go through these questions and provide our responses, after which the moderator will invite the rest of the group to participate, but we will first continue with the Q&A moderated by ourselves.

Ari Kahn, President and CEO

Howard Halpern sent in a couple of questions since he couldn't join us today. The first question was about when revenue from HawkSearch will start showing significant growth for the Company. HawkSearch is now approaching 60% of our subscription revenue, and we anticipate that in fiscal year 2024, beginning in October, subscription revenue will be largely driven by HawkSearch. This product is expected to surpass the combined revenue of all our other products. With RapidUI and our integrations with platforms like Big Commerce and Optimizely, HawkSearch is primarily out of the box. Therefore, we do not expect subscription revenue to be significantly influenced by services revenue, which is mainly driven by Unbound rather than HawkSearch, and this aligns with our strategic goals. We aim for HawkSearch to be as out of the box as possible to enable continued growth for the Company. Currently, about 80% of our revenue is from subscriptions, and we want this trend to persist. The second question was regarding whether our AI Smart Search technology has uses outside of our customer base and how our customers are adopting this new offering. Traditionally, our focus has been on the e-commerce sector, and we plan to maintain this as a key business driver for both B2B and B2C markets. Additionally, Smart Search is expanding into content websites and intranets, where generative AI can summarize and combine multiple articles to deliver customized search results relevant to user queries, while filtering out unnecessary information found in the underlying documents.

Tom Windhausen, Chief Financial Officer

Next question, provide some color on the Company's thinking on product mix on a go-forward basis, i.e., how does the Company maintain a diverse product base while HawkSearch is scaling up?

Ari Kahn, President and CEO

All right. That one's from Pierre Jacobson, Pierre. Bridgeline's e-commerce 360 strategy allows us to grow through acquisitions. But HawkSearch has such a strong sales trajectory, especially with Smart Search that's dominating our focus for this year and likely for the next year as well. In terms of innovation, we're expanding HawkSearch with AI capabilities, connectors to partner platforms and performance improvements. We're focusing sales on partnerships on HawkSearch with the assigned resources to key partners like BigCommerce and Optimizely in particular. And we're leading with HawkSearch in our marketing conference province. HawkSearch is fully integrated with Unbound and WooRank and Celebros is merging with HawkSearch. So anyone using those products benefits from all of our innovations in AI. Of course, all of our products are important, but because HawkSearch is growing at a substantially faster rate than anything else, it's going to dominate our mix in the foreseeable future.

Tom Windhausen, Chief Financial Officer

Can you provide a rough breakdown of revenue and margin sources? Our largest contributors to revenue and margin are Unbound, which represents about 60% of services and 20% of subscription, with search making up 30% of services and 60% of subscription. Both Unbound Search segments deliver similar gross margins, approximately 40% to 45% for services and 70% to 75% for subscription. Regarding cash burn and our projected cash position through the end of the year into next year, we manage our finances carefully and can generate cash. If necessary, we can cut non-personal marketing spending by $150,000 to $250,000 per quarter. Currently, our marketing efforts are resulting in strong subscription sales with a long-term return on investment, and we plan to maintain those investments despite potential immediate negative cash flow and losses, as we've seen recently with a loss of $83,000 this quarter. We anticipate that our lowest cash level will be around $1 million, and we can adjust that through our advertising expenditures, while ensuring we do not alienate stockholders to generate cash.

Ari Kahn, President and CEO

Moderator, are there any other questions out there from the group?

Operator, Operator

I show none in queue, sir.

Ari Kahn, President and CEO

Excellent.

Operator, Operator

I'm just going to turn the call back to management for remarks.

Ari Kahn, President and CEO

Well, there we are. Thank you, sir. Thank you, everybody, for joining us today. We appreciate the continued support of all of our customers, partners and our shareholders. We're really excited about our business and ongoing growth prospects, and we look forward to speaking with you again in our third quarter fiscal conference call in August 2024. Till then, be well. Thanks.

Operator, Operator

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