Earnings Call Transcript - BLIN Q2 2025

Operator, Operator

Good afternoon, everyone, and welcome to the Bridgeline Digital Second Quarter 2025 Earnings Call. Please note this conference is being recorded. I will now turn the conference over to your host, Tom Windhausen, CFO. The floor is yours.

Thomas Windhausen, CFO

Excellent. Thank you. Good afternoon, everyone. Thanks for joining us today. My name is Tom Windhausen, and I'm the Chief Financial Officer of Bridgeline Digital. I'm pleased to welcome you to our fiscal 2025 second quarter conference call. On the call with us today 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 we report today should not be considered an indication of future performance. Changes in economic, business, competitive, technological, regulatory or 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'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. Good afternoon, everyone. We continue to have strong sales for our HawkSearch products. Bridgeline is not only winning new customers, it is expanding within the existing customer base, thanks to Hawk AI. In Q2 FY '25, Bridgeline signed 20 licensed sales, adding $1.7 million in new contracts and $700,000 in annual recurring revenue. Our sales cycle is only 120 days with a 19% win rate on qualified leads. Year-to-date, we booked $4.2 million in contracts with $1.6 million in annual recurring revenue. We accomplished this with less than $250,000 per quarter in ad spend. Our high ROI and marketing prove strong demand for our Hawk AI products, a strong e-commerce market in general and suggest that we should increase investments in sales and marketing. To build on this momentum, our Board and executive team led a $2.2 million capital raise. Bridgeline executives, Board members and shareholders participated in the raise. The raise was straight common stock and above market. The proceeds will be used to expand sales and marketing. Specifically, we will expand our lead generation budget, including conferences, online ads and direct outreach. This increased lead generation was launched on April 1, 2025, and is funded through the rest of the year, and we are already seeing results. Our sales cycle is fast so we expect to see an impact from the increased ad spend in our fourth quarter. We measure a 120-day sales cycle from the time of first contact with a prospective buyer to closing the sale. Thus, April ad spend can impact August bookings. We have outstanding marketing automation that will allow us to increase lead generation and nurturing activities without a large headcount increase. This means our go-to-market campaigns are highly scalable and not limited by the number of people on our team. Doubling the investment in ad spend is intended to double the leads and in turn, double sales. HawkSearch is in a huge market. We have plenty of room for growth relative to our budget and market share. We're excited about the future for the company. We are in the leader position in AI-powered e-commerce search. We expect to increase our leadership with this marketing investment. Our revenue, which for the second quarter increased, can broadly be broken into two segments: Core and noncore. Core revenue comes from our e-commerce 360 products led by HawkSearch and WooRank. Core revenue is more than 60% of our subscription revenue and had double-digit growth with net revenue retention of 113% and CAC payback better than 20 months. Essentially, all of our new sales are core products. Our noncore products represent the balance of our revenue. Most of our services revenue is noncore. These products generate strong gross margins with minimal operating expenses and help fund growth for core. Some of our largest noncore customers have recently purchased core products. In recent quarters, noncore revenue has declined at nearly the same rate core revenue grew, leaving total revenue relatively flat. We expect this balance to continue through the second half of FY '25 and with core revenue growth outpacing noncore impact in Q1 for FY '26. In addition to core being an even larger percentage of total revenue, in Q1 of FY '26, today's increased investments in marketing will further generate core revenue growth. This quarter, HawkSearch expanded its Hawk AI feature set with the launch of Smart Conversation and a new Smart Response component that transforms traditional search into an interactive dialogue. Users can engage in a threaded conversation with Hawk AI agents to narrow down complex product needs. This allows HawkSearch to perform all the actions of a chatbot, including answering detailed questions about products and account history. We also released a Rapid UI 2.0 product, which supports the latest Hawk AI products, including Smart Response and Smart Conversation. The Rapid UI 2.0 interface leverages the streaming API to enable real-time multi-turn interactions with Hawk AI agents for fast and interactive search. HawkSearch also launched a new software development kit for BigCommerce's Catalyst connector. BigCommerce's Catalyst framework, built on Next.js, gives merchants and developers more flexibility and control over storefront experiences. The new SDK expands HawkSearch's capabilities within the BigCommerce customer base. Last quarter, we discussed how Q1 sales were the second best sales quarter in the company's history; we had another great and strong sales quarter in Q2 and our first half license sales increased year-over-year by 24% to $1.6 million in annual recurring revenue from $1.3 million in ARR in the first half of FY '24, a 24% increase in ARR new sales. Customer wins and other highlights this quarter include Do It Best, the largest network of independent home improvement stores in the U.S. HawkSearch will help Do It Best increase order value, drive higher conversion rates and increase traffic to their online store. Another important sale was to a Fortune 500 technology company that selected HawkSearch to power its e-commerce search in the Americas and Asia. The technology company has licensed Hybrid Search, which bundles HawkSearch Keyword and HawkSearch Concept Search to deliver faster, more accurate results for complex long-tail queries. A B2B North American distributor selected HawkSearch to power four of its e-commerce websites. The multi-site engagement leverages HawkSearch's native Optimizely Xconnect product and includes Concept Search, smart insight management and AI-powered personalization and recommendations. A global technology firm based in the Middle East has selected HawkSearch to deliver AI personalized results in both English and Arabic. Built on HawkSearch's flexible API and SaaS hybrid infrastructure, the mobile-first implementation is engineered for high-speed performance and scalability. This continued momentum positions us for growth in 2026 and as we expand our reach in B2B e-commerce, providing cutting-edge AI search solutions that drive revenue and enhance customer engagement. Our recent investments in R&D have opened the door to partners whose customers need the latest AI-powered e-commerce tools. Partner-led sales have faster sales cycles, a higher win rate, and lower marketing costs. HawkSearch partnered with Shopware, a global open-source e-commerce platform serving over 100,000 merchants. Known for its flexibility, AI-first architecture, and strong mid-market and enterprise presence, Shopware empowers brands to create immersive shopping experiences. This quarter, HawkSearch also partnered with Groove Commerce, a leading B2B e-commerce agency to integrate Bridgeline's AI-powered search technology into their solution for B2B merchants. As part of this initiative to strengthen joint go-to-market efforts, Bridgeline's EVP of Products and Strategy, John Murcott, presented on the future of AI in e-commerce at Groove's customer summit last month. Over the past year, we have launched eight AI-powered products. In Q2, we began to see those releases gain market traction with enhancements like Smart Conversation and real-time streaming APIs. Our suite of AI products is more dynamic and interactive than ever before. This quarter marks a true turning point in our growth strategy. The expanded marketing budget is already fueling demand across our core verticals, and we're seeing higher conversion rates as a direct result of our go-to-market machine and increased campaign automation. So at this time, I'd like to turn the call back over to our Chief Financial Officer, Tom Windhausen.

Thomas Windhausen, CFO

Thanks, Ari. I'll provide an update of our financial results for the second quarter of fiscal 2025, which ended on March 31, 2025. Total revenue for the quarter ended March 31, 2025, was $3.9 million, an increase from $3.8 million in the prior-year period. Now looking at each component of revenue, our subscription and license revenue, which is comprised of SaaS licenses, maintenance and hosting revenue, for the quarter ended March 31, 2025, was $3.1 million as compared to $3.0 million in the prior-year period. As a percentage of total revenue, subscription and license revenue was 79% of total revenue for the quarter. Services revenue of $800,000 for the quarter ended March 31, 2025, increased 4% from $800,000 in the prior-year period. As a percentage of revenue, services revenue accounts for 21% of total revenue for the quarter ended March 2025. Cost of revenue was $1.3 million for the quarter ended March 2025, down 2% from $1.3 million in the prior-year period. As a result, our gross profit was $2.6 million for the quarter ended March '25, an increase from the $2.5 million in the prior-year period. Overall, gross profit margin was 68% for the quarter ended March '25 compared to 66% in the prior-year period. Our subscription and license gross margins were 72% for the quarter ended March '25 compared to 71% in the quarter ended March '24. And our services gross margins were 52% for the quarter ended March '25 compared to 47% in the prior-year period. Moving to operating expenses. Our operating expenses were $3.4 million in the quarter ended March 31, 2025, compared to $3 million in the prior-year period. The current year period includes additional sales and marketing spend and some restructuring expenses. Moving to net income. Our net loss was $700,000 for the quarter ended March '25 compared to a net loss of $600,000 in the prior-year period. And our adjusted EBITDA for the quarter ended March '25 was negative $239,000 compared to negative $83,000 in March '24. Moving to the balance sheet. On March 31, 2025, we had cash of over $2.7 million and accounts receivable of $1.4 million, and our total debt outstanding was EUR 374,000 or approximately USD 406,000. The weighted average interest rate was 3.8% with principal payments due through 2028, and we have no other debt or remaining earnouts from any prior acquisitions. As of March 31, 2025, we had total assets of $17 million and total liabilities of $6.4 million. Next, moving on to the cap table. As of March 2025, our cap table included 11.9 million outstanding shares, 862,000 warrants and 2.1 million options. As a reminder, in September of 2024, nearly 900,000 warrants, whose exercise price of $4, expired. The remaining 861,000 warrants consist primarily of 167,000 warrants with a $2.85 exercise price expiring in May '26 and another 592,000 warrants at $2.51 expiring in November 2026. Bridgeline looks forward to continued growth and success in fiscal 2025 and beyond as we continue our focus on revenue growth, product innovation, customer success in delivering on shareholder value. Thank you for joining us on the call today. At this time, we'd like to open the call up to questions and answers.

Operator, Operator

The remaining 861,000 warrants include mainly 167,000 warrants with a $2.85 exercise price expiring in May 2026 and another 592,000 warrants at $2.51 expiring in November 2026. Bridgeline anticipates ongoing growth and success in fiscal 2025 and beyond as we maintain our emphasis on revenue growth, product innovation, and customer success while delivering value to our shareholders. Thank you for participating in the call today. We would now like to open the floor for questions and answers.

Thomas Windhausen, CFO

Thanks, Jenny. While we wait for those questions to come in, we have a couple that were sent in advance. So we'll go through those. I already have a question here from Howard Halpern at Taglich Brothers. First one, are you at an inflection point to increase your sales efforts to bring in new customers?

Ari Kahn, President and CEO

Okay. Well, both product competitiveness and market conditions are making now the time to increase sales investments. The $2.2 million capital raise was initiated specifically for this reason. We're more than doubling our ad spend. We're not increasing sales and marketing personnel at this time because our automated go-to-market machine allows us to both generate and nurture leads with AI agents and push them through the funnel without increasing labor. We'll hire people later after those leads mature if needed. This increase in spend started on April 1. So we have a 120-day sales cycle. This means that we should expect to see an increase in deal flow starting at the end of our fourth quarter and that would lead to a revenue impact in our first quarter of FY '26.

Thomas Windhausen, CFO

Excellent. Does Bridgeline have a handle on the return we should see for every extra dollar spent on acquiring a new customer?

Ari Kahn, President and CEO

Yes, we modeled that actually fairly closely in a couple of different ways, both with CAC payback, but also with LTV to CAC as a ratio of long-term value to customer acquisition cost. And we are generally seeing around a 3x, three times value of our LTV-to-CAC ratio. CAC for us is measured to include all customer acquisition costs. This means ad spend, sales salaries and commissions. Long-term value is based on a 75% gross margin and an average customer retention rate of 5 years, a customer lifespan of 5 years. When we put this together with our 120-day sales cycle, we expect to see a significant increase in new customer acquisitions in the Q1 of FY '26. And historically, Q1 has been especially large. Q1 of FY '24 was the best quarter in the company's history and Q1 of FY '25 was the second-best quarter in the company's history. So when our increased investments that are really starting happening right now in April and May mature in August and September and then turn into revenue in October and November, I'm pretty hopeful, I'm excited about the prospects for growth. And the market is moving in the direction that we want to be. So we're ready to go.

Thomas Windhausen, CFO

Great. One more question from Howard. Is most of our product development internal? Or are there acquisition opportunities to expand our technology and our customer base?

Ari Kahn, President and CEO

Okay. So our AI-based product development has been internal. And we really have extensive expertise in AI, including me, I've got expertise as well, but our R&D team that have their hands on the keyboards too, which is the most important thing. And we're likely to continue internal R&D, especially in AI in the foreseeable future. If we were to do an acquisition, it would likely be to acquire a company that has not yet really added much AI to their product and avoid the price premium that an acquisition of an AI company would carry along with it. And then we would have our engineers add AI capabilities and upsell those new capabilities to the acquired customer base and cross-sell HawkSearch and WooRank and other products into that customer base and sell that new product into ours. That said, we have nothing in our M&A pipeline to announce at this time. And M&A is not our primary focus. We have excellent momentum, and our number one focus is organic sales with M&A being an opportunistic thing.

Thomas Windhausen, CFO

Great. We do have one more question that was sent in advance. When do we expect to see growth in top line revenue?

Ari Kahn, President and CEO

Okay. Growth in top line revenue. So in recent quarters, noncore revenue declined at nearly the same rate that core revenue grew, leaving us relatively flat overall. Core revenue is more than 60% of total revenue. Every quarter, that ratio gets even larger with core revenue becoming a higher percentage and this leaves less room for the noncore revenue to have an impact. The additional sales and marketing spend focus on core products, which is going to further increase that gap. So you'll start seeing this growth really in our Q1 of FY '24, and for the second half of FY '25, the balance is still going to be similar with relatively flat growth. So that's where we're going with that.

Thomas Windhausen, CFO

Great. Jenny, do we have any callers on the line for questions?

Operator, Operator

Yes, we do. We have a question from Casey Ryan of WestPark Capital. Casey your line is live.

Ari Kahn, President and CEO

Hi, Casey. How are you doing?

Casey Ryan, Analyst

Hi, Ari. Great quarter. Thanks for the update today. I have a few questions. One of them is about the sales and marketing expenses. We should expect that to increase a bit. I know you're not adding headcount, but we are increasing our marketing spending in areas like digital. Considering this in relation to sales, do you think we should anticipate that becoming a larger percentage of sales in the latter half of the year?

Ari Kahn, President and CEO

Yes, you should absolutely expect that. You're correct. We anticipate that our sales and marketing expenses will increase by between $250,000 and $500,000 per quarter over the next few quarters.

Casey Ryan, Analyst

Okay. Great. That's very helpful. And what you're expecting is some multiple payback on that in terms of what you're able to capture. It's what you've seen historically and potentially, hopefully, we'll sort of see that?

Ari Kahn, President and CEO

Yes, that's right. That's right. So I can't quite do the math in my head. But let's just use round numbers: $1 million being spent over 2 or 3 quarters, but $1 million will be an even number. We talk about that 3:1 LTV-to-CAC ratio then that would produce about $3 million in LTV for us at a 75% gross margin. So $3 million divided by 75% is $4 million in revenue. And our average life span with customers is 5 years, so that would turn into about $800,000 in annual recurring revenue from such an investment.

Casey Ryan, Analyst

Okay. Good. And then that 5-year number is a good number to share with us and really helpful. But that's not really what contracts look like. What is the standard contract length currently? I understand that the net retention at 113% is a really great number. So people are renewing and adding. But what's the standard contract? Is it one year, multiyear month-to-month?

Ari Kahn, President and CEO

Our average initial contract duration is 30 months, or 2.5 years. Some clients start with two years, while others opt for three, but that's the typical range we observe. Additionally, I was pleased to discover that our customers generally purchase twice as much software from us throughout their relationship compared to their initial contracts. For instance, if they begin with a $36,000 annual recurring revenue contract, they are likely to invest another $75,000 in annual recurring revenue with us over the subsequent years. This is very encouraging.

Casey Ryan, Analyst

That is great. That's a great metric, too. Okay. So the other thing I'm curious about is you mentioned that HawkSearch was sort of made available to people in Arabic in terms of customers. How many languages can you do? Or can you do as many as you need? And is it easy to sort of translate the software? But I'd be curious about where your strongest language-wise in international?

Ari Kahn, President and CEO

Yes. Our default language model supports 50 languages, and our architecture allows our customers to plug in their own language models or just switch to different ones. A lot of times switching language models involves bringing in language or industry-specific language to the model, but it might also involve some less mainstream language that they're interested in. We have several customers that are using Asian languages, customers in Indonesia and Japan, and simplified Chinese; we see in all of the major Romantic languages and in Germany.

Casey Ryan, Analyst

Perfect. Can you tell me if a company like HP, which may have a site in multiple languages, could have a customer initially approach in English and then want to deploy another site in French or another language? Would this be considered a smaller add-on for creating that mirror site in a different language?

Ari Kahn, President and CEO

Yes. Actually, adding a second language won't cost the customer anything if it's supported by our foundation. It's one of the 50 languages in our foundation model. So they'll get that out of the gate. Now, their own product catalog may not be localized in different languages. So they'll have an additional effort on their side in terms of displaying search results for their product catalog. So we do see that requires some effort from us sometimes, but natively, our smart search, our AI-powered products support multiple languages. And our non-AI products, the keyword search is dependent upon matching the underlying data set, so that really just depends on their localization there.

Casey Ryan, Analyst

Good. That's helpful. I understand. The last question is somewhat on my wish list, but perhaps yours as well. Have you had any discussions about AOV pricing and its connection to the benefits you’re providing to customers? Has this topic come up in conversations with customers, or has it been something we've considered could be feasible in the future?

Ari Kahn, President and CEO

Yes. It's not the here and now yet. I love AOV pricing. That's where the rubber hits the road and larger enterprise customers are not so open to that because their numbers are so big, and they swing a lot. The more of the mid-market customers are more. But in our space, that has not been the standard, so we haven't been able to do that. I think Shopify is an example where their payment gateway is like a credit card almost, taking a few percentages is an example that really did a great job in terms of integrating that and having it makes sense to their customers. We're not there.

Casey Ryan, Analyst

It was really a great quarter. One small administrative question. Tom, did you mention that total shares are 11.9 million? Does that include everything? I know the reported number was around 10.5 million, but that might just be the basic number. I want to confirm that the 11.9 million is accurate.

Thomas Windhausen, CFO

Yes. The 10.4 million, 10.5 million number is what we would have had at the end of last quarter. We did the $2.2 million capital raise. So the spread between the 10.4 million and 11.9 million is the 1.4 million shares of equity issued in March.

Casey Ryan, Analyst

Okay. Got it. Perfect.

Thomas Windhausen, CFO

Well, I know, not a diluted number.

Casey Ryan, Analyst

Yes. Okay. Perfect. Really tremendous progress and a really good quarter. We’re excited to see how the rest of this year unfolds. Thanks for taking my questions.

Ari Kahn, President and CEO

Thank you, Casey.

Operator, Operator

Thank you very much. Well, we appear to have reached the end of our question-and-answer session. I will now hand back over to the management team for their closing comments.

Thomas Windhausen, CFO

Thank you, Jenny.

Ari Kahn, President and CEO

Thank you, everybody, for joining us today. We appreciate the continued support of all of our customers, partners and our shareholders. We're excited about our business, the ongoing growth prospects. We look forward to speaking with you again on our third quarter fiscal call this August. Be well. Thank you.

Operator, Operator

Thank you very much. This does conclude today's conference. You may now disconnect your phone lines at this time, and have a wonderful afternoon. We thank you for your participation.