Earnings Call Transcript - BLIN Q1 2026

Operator, Operator

Good day, everyone, and welcome to the Bridgeline Digital First Quarter 2026 Earnings Call. It is now my pleasure to hand the floor over to your host, Thomas Windhausen. Sir, the floor is yours.

Thomas Windhausen, CFO

Thank you. Thank you, everyone, for joining us this afternoon. My name is Thomas Windhausen. I'm the Chief Financial Officer of Bridgeline Digital, Inc. We're pleased to welcome you to our fiscal 2026 first quarter conference call. On the call with me today is our President and CEO, Ari Kahn, who will begin the call with a discussion of our business highlights. Then I'll update you on our financial results for the quarter, and we'll conclude with some questions. Before I begin, I'd like to remind listeners that during the conference call, comments 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 Security Act of 1934 and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. The statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and 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 we report today will not be considered an indication of future performance. Changes in our economic, business, competitive, technological, regulatory and other factors could cause our results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more information, you can review our filings from time to time on the Securities and Exchange Commission website. On the call today, we'll also discuss some non-GAAP financial measures, and we have a reconciliation of our GAAP financials to those non-GAAP measures in our earnings release, which is on our website. I'd now like to turn the call over to Ari Kahn, Bridgeline's President and CEO. Ari?

Ari Kahn, President and CEO

Thank you, Tom, and good afternoon, everyone. Bridgeline's core products led by HawkSearch Suite and our AI products continue to lead our growth and our customers are having an outstanding experience as they've proven with their investments when they repeatedly increase their spending into their HawkSearch subscription and purchase add-on products as well. Enhanced hosting, expanded usage packages and the AI suite are all upsells to our existing customer base. Search is the heart of the online shopping experience for both B2B and B2C sites, with HawkSearch acting as our customers' online salesperson who intelligently interacts with their customers to increase traffic conversion and order size. Core products at Bridgeline now constitute 60% of our total revenue, growing 17% to $2.4 million this quarter from $2.0 million last quarter and was $9.2 million on a trailing 12-month basis versus $8.8 million for the prior 12 months. HawkSearch is an even larger percentage of our subscription revenue, now representing 63% of the subscription revenue at $2 million of revenue versus $1.9 million last quarter. Net revenue retention, which includes renewals and license expansion, was 107% for our core product line. This demonstrates best-of-class customer satisfaction and the rapid adoption of our new products by our customers. These new products include Smart Search, Visual Search, Smart Response, and our latest AI agents such as the Search Assistant, Analytics Assistant, and Merchandising Assistant. New customer acquisition continues to grow, with an average ARR per customer increasing by 12% this quarter to $28,000 from $25,000 last quarter. After customers make their initial purchase, they tend to subscribe to additional HawkSearch products. We have more than 200 customers in HawkSearch, with an average subscription per customer of $33,000, up from an average of $30,000 last quarter and up from $25,000 in Q1 of our fiscal 2025. This quarter, we sold 13 new licenses with $1.2 million in total contract value for over $350,000 in ARR and $700,000 in professional services. More than half of our new license sales include one of our AI products in their initial purchase, with many customers adding AI capabilities to their license after they go live with HawkSearch. In our first quarter of fiscal '26, we won several new customers, including many B2B manufacturing and distribution customers, where we're experiencing rapid growth and where HawkSearch was ranked #1 in Gartner's 2025 Critical Capabilities Report. Some recent new customers include a national closeout retailer with over 170 locations and a rapidly expanding e-commerce presence who selected HawkSearch to power their online store. This retailer replaced their previous search software with HawkSearch to increase online revenue because of HawkSearch's AI-driven relevance and filtering capabilities. A leading U.S. distributor of specialty lighting products is leveraging HawkSearch's Smart Search, enabling their customers to search with images, concepts, and questions that enhance their ability to find items quickly and accurately. A Midwest B2B distributor using our platform launched HawkSearch to elevate its online product discovery and delivery, providing an exceptional digital experience to its customers in the construction, industrial, plumbing, and HVAC industries. A leading wholesale supplier serving both B2B and B2C selected HawkSearch to power product discovery across 5 e-commerce sites, choosing HawkSearch for its B2B foundation, multisite support, and AI-driven recommendations. Also, a national industrial B2B supplier selected HawkSearch to improve search relevance, engage logged-in customers, and enable stronger merchandising capabilities. This industrial B2B supplier used HawkSearch's AI relevance tuning and business rules to enhance product discovery by providing precise control over how products are ranked and surfaced to customers. Because we've made early investments in AI and have a clean product architecture, we're able to rapidly release new products that drive revenue for our more than 200 customers and win more new customers against less nimble competitors. In Q1, we released Spark, our next-generation user experience platform for administrators. Spark natively integrates Hawk AI capabilities with advanced analytics, including merchandising and analytics assistance. Spark represents a significant step in modernizing the user experience while enabling scalable AI innovation across the platforms. We've also introduced contextual fields for HawkSearch. Contextual fields enable franchises and chains to provide customer-specific pricing and availability per store. This quarter, a customer leveraged contextual fields to provide contextual information across 120,000 products and 7,000 stores with more than 1,000 real-time updates per minute. HawkSearch advanced analytics API was released this quarter, allowing AI agents to integrate with HawkSearch analytics for greater visibility into customer behavior for automating merchandising. HawkSearch also launched an AI content extractor to accelerate customer adoption by having an agent examine the customers' product catalog and marketing materials to automatically configure HawkSearch. With our pipeline of new products that drive value to existing customers and increase new customer wins, we expect HawkSearch and our core products to become over 70% of overall revenue this year, ultimately driving faster, more profitable growth for Bridgeline as a whole. Due to outstanding customer satisfaction, our growth is expected to continue efficiently, allowing us to invest more in new products that drive customer and shareholder value. Now, with that, I'll turn the call over to our Chief Financial Officer, Tom Windhausen, who will share additional details. Tom?

Thomas Windhausen, CFO

Great. Thanks, Ari. I'll provide an update on our financial results for the first quarter of fiscal 2026, which ended December 31, 2025. Our total revenue for the quarter ended December 31, 2025 was $3.9 million compared to $3.8 million in the prior year period. Looking at components of revenue, we'll start with subscription revenue, which is made up of our SaaS licenses, maintenance, and hosting. For the quarter ended December 31, it was $3.2 million compared to $3.0 million in the prior year period. As a percentage of revenue, that puts subscription revenue at 81% of total revenue for the quarter ended December '25. Moving to services, the services revenue was $758,000 for the quarter ended December '25 versus $743,000 in the prior year period, which places services revenue at 19% of total revenue for the quarter ended December '25. Our cost of revenue was $1.3 million for the quarter December '25 compared to $1.3 million in the prior year period, and that left our gross profit at $2.6 million, an increase from $2.5 million in the prior year comparable period. The overall gross profit percentage was 66%, with subscription gross margin at 69% compared to 71% previously, and services gross margin this quarter was 55% versus only 51% in the prior year same period. That resulted in operating expenses of $2.8 million for the year ended quarter, December 31, '25, down from $3 million in the prior year comparable period. That put our net loss at $100,000 compared to a loss of $600,000 in the prior year period. We also ended with positive EBITDA in the first quarter; adjusted EBITDA was a positive $122,000 compared to negative adjusted EBITDA of $193,000 in the prior year period. Moving on to our balance sheet, at December 31, '25, we had cash of $1.5 million and accounts receivable of $1.6 million, and our total debt was down to EUR 200,000, approximately USD 236,000, with a 3.25% average interest rate, and those payments are due throughout 2028. Additionally, we have no other debt or contingent payments or earn-outs remaining from previous transactions. Our total assets were $15.7 million at December 31, 2025, and liabilities were $6.2 million. Looking at our cap table, at December 31, 2025, we had 12.2 million shares outstanding, 860,000 warrants, and just under 2 million stock options. The 860,000 warrants have 2 primary tranches, 167,000 expiring on May 26 at $2.85 and $592,000 with an exercise price of $2.51, expiring in November 2026. Bridgeline looks forward to continued growth and success in '26 and beyond, focusing on revenue growth, product innovation, customer success, and delivering shareholder value. Thank you for joining us on the call today. At this time, we'll open up the call to questions and answers. Moderator?

Operator, Operator

Certainly. Your first question is coming from Casey Ryan from WestPark Capital.

Casey Ryan, Analyst

I want to discuss the ARR figures to ensure we're understanding them correctly because they are impressive. For '24, we mentioned $18.5 million as an ARR figure. In the last call, we talked about a $25,000 figure, and now we're seeing a $33,000 figure. This trend aligns with the new customer ARR numbers you're providing. In Q4, the September quarter, you mentioned 18 customers generating about $1.25 million in ARR, and now you're indicating 13 customers generating $1.2 million. The key point is that it seems customers are spending more on a per customer basis, but we aren't seeing a significant increase in the overall revenue figures yet. I want to explore how ARR influences your future numbers and its impact on those figures.

Roger Kahn, President and CEO

Yes, let's tease out a couple of details here, starting with the per customer and per new customer sales. For new customers, we have an average of $28,000 in ARR this quarter, which is 12% up from the $25,000 for winning a new customer in our Q4. After those customers buy initially, most of them invest even more with us. Taking a look at our overall revenue divided by our number of customers, we're now at $33,000 per customer compared to $30,000 last quarter and $25,000 a year before. Those are the figures you just pointed out, and I just reiterated.

Casey Ryan, Analyst

Sure. And maybe that response sort of leads us into the conversation. I think the answer is there are lots of targets and customers to pursue. But has anything changed? Has the fact that your average package is going up, has that taken some potential customers out of the market for your services just in that it's a more robust tool? Or do you still feel like there are hundreds of thousands of customers left to win?

Roger Kahn, President and CEO

Yes, I think our total addressable market hasn't changed. On the initial purchase last year, people weren't as inclined to buy the AI add-ons they needed to be proven. That adoption is more readily purchased now than before. Our customers that we won last year are adding to their base license Smart Search and Smart Response, and new customers are buying those more often right from the start.

Casey Ryan, Analyst

Okay, that's good to hear. So, certainly, that can be a tailwind for NRR, which is that net purchase number as we move through '26. The other question I had was, have things changed competitively? Has anyone noticed your success and tried to bring products into the sales channels that you are? Or have competitors fallen away and said this isn't for us, we're not winning here and HawkSearch is gating us?

Roger Kahn, President and CEO

In our deals, we're still seeing the same top competitors as we did in 2025. That hasn't changed. We believe one of the ways we're differentiating even better now than we were last year is through our analytics. You cannot have artificial intelligence without data. If you lack sufficient data behind these AI agents, you end up with ineffective agents. We've created a data lake that allows all our customers to have their data. We're cultivating a library of agents, and they can create their own AI agents to monitor that lake and automatically tune HawkSearch for them based on customer behavior. This approach has raised eyebrows among our prospective and existing customers, and it is helping us differentiate and win more deals.

Casey Ryan, Analyst

That's terrific to hear. I just want to revisit the ARR figure for a moment. The growth in it has been impressive and is obviously crucial, projecting a good trend for future growth. Should we expect growth rates similar to what we've seen over the last 18 months, or is that just a spike due to the addition of AI features, and may the growth moderate?

Roger Kahn, President and CEO

We expect the growth to continue. Our HawkSearch had a 17% growth rate this quarter, and our goal is to escalate that to 20% this year. We anticipate continued increases for two reasons: we have a robust pipeline of new customers, and as we continue to release products, existing customers have ample opportunity for add-on growth. Both factors will drive growth even faster. Our sweet spot market has been strong in B2B manufacturing and distribution. The market is incredibly large relative to our size and is maturing quickly regarding technology adoption. We're optimistic about that specific market while also selling elsewhere, targeting our marketing dollars where our high win rate lies.

Casey Ryan, Analyst

Thank you for mentioning the marketing dollars. I know you didn't specifically address that, but there were some indications last quarter; you guys mentioned wanting to spend a little more on sales and marketing and doing it smartly. As we've moved through this October to December period, has your spending aligned with your plans? Or has it been above or below your expectations?

Roger Kahn, President and CEO

We maintained consistency with our cost per lead. Our marketing dollars are working effectively. We do seek more marketing dollars, but not by injecting capital at unfavorable rates. There's substantial opportunity for growth. Our marketing is proving effective; we've had success at industry conferences. One example is B2B Online Chicago every spring. We also have our customer conference, to which our partners are invited to sponsor. About 60% of the cost of that conference is covered by our partners, and both our customers and prospective customers attend, which greatly impacts revenue and proves efficient. We're pleased with the marketing dollars and aim to find more smart investment avenues.

Casey Ryan, Analyst

Terrific. One last question regarding the gross margin line. It has remained stable within a few points for a while. Should we expect that to continue? Is there any reason to think that perhaps with new products, we might see gross margin affected, or could there be expansion due to pricing changes? What's your outlook on the mid-60s range?

Roger Kahn, President and CEO

We expect the combined gross margin for services and subscriptions to remain in the mid-60s, around 65% to 67%. We assess that on a line item basis for professional services gross margin and subscription gross margin, as there are different characteristics. This quarter, our services gross margin was unusually high at 55%, and subscription gross margin was at 69%. We anticipate services gross margin to stabilize in the low 50s, around 53%, which is a bit better than last year due to the higher value we deliver amid AI initiatives allowing us to bill at a higher rate. Subscription gross margin, primarily influenced by hosting costs, should hover around 70% going forward. For the remainder of this year, that's what we should anticipate. Combining both, you're looking at 65% to 67%.

Casey Ryan, Analyst

Great, that's a terrific outlook and indicates a continuation of strong trends from last year. Congratulations on a good quarter, and I'll jump back in the queue.

Operator, Operator

Thank you. There are no further questions in the queue.

Roger Kahn, President and CEO

Thank you, everyone, for joining us today. We appreciate your continued support, the support of all our customers, partners, and our shareholders. We're excited about our business and ongoing growth prospects. This is indeed an exciting time. AI is making substantial changes in the industry, especially marketing, and we have made investments to continue innovating in this area. We look forward to speaking with you again on our second quarter fiscal 2026 conference call, which will be in May. Until then, please be well.

Operator, Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.