Earnings Call Transcript - BLIN Q2 2022

Operator, Operator

Good day and thank you for being here. Welcome to Bridgeline Digital Inc.'s Second Quarter 2022 Earnings Call. All participants are currently in listen-only mode. After the presentation, there will be a question-and-answer session. I will now turn the conference over to your speaker for today, Mr. Thomas Windhausen. Please proceed.

Thomas Windhausen, Chief Financial Officer

Thank you, operator, and good afternoon everyone. Thank you for joining us today. My name is Thomas Windhausen and I am the Chief Financial Officer of Bridgeline Digital, Inc. I am pleased to welcome you to our fiscal 2022 second quarter conference call. On the call this afternoon is Ari Kahn, Bridgeline Digital's President and CEO, who will begin with a discussion of our business highlights. I'll then update you on our financial results for the quarter and we'll conclude by taking questions. Before we begin, I would 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. 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 such as the impact of public health measures could cause Bridgeline's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by Bridgeline Digital with the Securities and Exchange Commission. Also, please note that, on the call this afternoon, we will discuss some non-GAAP financial measures when commenting on the company's financial performance. We do provide a reconciliation of our GAAP financials to these non-GAAP measures in our earnings release which you can find a copy of on our website. Now, I would like to turn the call over to Ari Kahn, our President and CEO. Ari?

Ari Kahn, President and CEO

Thank you, Tom. Good afternoon, everyone. We had great sales. Our second quarter was 33 license sales and an all-time high for us. Our software is becoming increasingly out of the box, which allows new customer licenses to contribute to our revenue more quickly as our licensed sales to services ratio grow. As each of these customers goes live typically in less than three months, we'll see their licenses drive strong net operating income for the business. An important change to our new customer acquisition strategy is our partner network. We have a dedicated partner team working with independent software vendors and agencies to win new business. Agencies like American Eagle and X-engage have been particularly strong. They continue to be key agency partners to help us win new customers. On the independent software vendor side, we partnered with BigCommerce and Optimizely and won several customers together. Bridgeline is the only out-of-the-box B2B site search connector for Optimizely. Optimizely B2B customers can purchase Hawksearch directly from the Optimizely administrative interface. With Optimizely, we've helped several B2B distributors grow online revenue including Crescent Electric, Cleaner's Supply, Torrco, and Gerrie Electric. We plan to expand our investments in the Optimizely partnership and the B2B distributors sector to build on this momentum. Our partnership with BigCommerce continues to drive growth as well, with new customers in manufacturing and automotive. Together with BigCommerce, Bridgeline now powers several manufacturers including Berlin Packaging, Techo-Bloc, and Waymaker. In addition to partner-driven sales, another important part of our strategy is cross-sales. With our expanding set of e-commerce apps, we can deliver faster and more efficient licensed sales through cross-sales. This provides tremendous value to our customers with continual and incremental improvements to their website and also drives more licensed sales per marketing dollar for Bridgeline as cross-sales require less advertising expenses. More than 25% of our new licensed sales this quarter were from cross-sales. We expect cross-sales to continue to deliver growth as we release and acquire new products and as our customer base of more than 2000 companies continues to grow. This quarter, we launched our E-360 dashboard to drive new sales and target cross-sales across our customer base. This dashboard provides online marketers with a glance view of their site's revenue performance and makes recommendations as to how Bridgeline software can help them grow. The dashboard organizes the challenges and opportunities related to e-commerce into three basic categories: traffic, conversion, and average order value. This helps busy marketers sift through the noise and focus on the revenue-generating aspects of their online sales. We also launched our TruPresence brand this quarter. TruPresence is our product suite tuned specifically for the franchise industry. Franchises have unique challenges that we've addressed for several years. TruPresence allows franchises to manage thousands of franchisee websites with distributed SEO requirements and complex location requirements. In our second quarter, one of our largest franchise customers, with nearly 2000 locations, launched TruPresence pages to help its customers find the nearest location and book appointments. We also won another important franchise, 1-800 Radiators. 1-800 Radiators is one of the nation's largest inventories of auto parts. They've selected Hawksearch to increase online B2B sales and improve site search and product recommendations throughout their parts catalog. WooRank and its DataBravo product continue to contribute to new online sales with long-term data licensed purchases for over $4000 in monthly recurring revenue each quarter this fiscal year. Other wins this quarter include a top sporting goods wholesaler that chose Hawksearch to power its five e-commerce sites. We won several other sporting goods customers this quarter as well, including Sports Station, a top sports retailer in Asia with more than 250 locations. In the United States, a leading privately-owned bank with a million customers selected Hawksearch to increase their customer signups and improve its corporate website. The bank chose Hawksearch for its powerful search recommendation engine and SEO features. This site will be implemented in partnership with Kentico on the Kentico experience platform. We're focused on B2B distributors and will keep investing in this market as our reputation is building momentum. In Europe, one of the largest industrial equipment and services B2B distributors chose Bridgeline Celebros software to power their online store. Celebros was selected for its natural language processing, Magento support, and B2B specific features. A global biotech B2B distributor chose Hawksearch to help its customers find products from our large online catalog. Hawksearch was selected because of its strength in the distributor sector and its references in electrical, medical, and automotive industries. Finally, Techo-Bloc, a landscaping distributor with over 700 stores across North America chose Hawksearch to drive online sales and their multi-language catalog. Hawksearch's cutting-edge technology supports 20 languages, expanding customer acquisition opportunities and revenue across international e-commerce. Last year, we made two acquisitions, and we continue to evaluate strategic opportunities. This is indeed a challenging environment for stocks right now, and we're only considering acquisitions that could be financed creatively. We believe that valuations of our targets are going to continue to drop through the year, and we intend to be patient and evaluate opportunities over time. The companies we consider need to have a customer base before we can cross-sell our existing products and, of course, products that can attract new customers. We look to companies globally with an emphasis in North America and Europe. We ended this quarter with $4.7 million in cash, which was after paying nearly $1 million for deferred costs and debt for the WooRank and Hawksearch acquisitions. Our cash balance and projected operations position us well to continue our investments in sales and marketing and product innovation without requiring any additional capital for operations.

Thomas Windhausen, Chief Financial Officer

Thanks Ari. I'm excited to share with you this afternoon our positive financial results for the second quarter of fiscal 2022 which just ended on March 31, 2022. Total revenue for the quarter ended March 31, '22, which is comprised of both subscription and license and services revenue was $4.1 million versus $2.9 million in the prior year. Now going into each component of revenue, our subscription license revenue, which is comprised of SaaS licenses, maintenance and hosting revenue, and perpetual license revenue, increased 66% for the quarter to $3.3 million from $2 million in the prior year period. As a percent of total revenue, our subscription license revenue has increased to 80% of total revenue for the quarter compared to 69% in the prior year period. This increase in subscription license revenue includes the impact of our prior acquisitions of WooRank and Hawksearch, which have a high percentage of subscription revenue. Our services revenue of $0.8 million for the quarter compared to $0.9 million in the prior year period. As a percentage of total revenue, services revenue accounted for 20% of total revenue for the quarter. Our cost of revenue increased 25% or $0.3 million to $1.3 million for the quarter ended March 31, 2022, compared to $1.1 million in the prior year period. As a result, our gross profit increased 54% or $1 million to $2.8 million for the quarter as compared to $1.8 million in the prior year period. Our overall gross margin percentage increased to 68% for the quarter, compared to 63% in the prior year period. Our subscription license gross margins were 74% for the three months ended March 31, 2022 as compared to 70% in the prior year, and our services gross margin was 43% for the three months ended March 2022 as compared to 46% in the prior year period. Our operating expenses increased to $3.4 million in the quarter from $1.9 million in the prior year period. This increase in operating expenses includes the operating costs from our businesses acquired last year. This resulted in income from operations being a loss of $600,000 for the quarter as compared to a loss of $100,000 in the prior year period. Moving on to other income and expenses in the quarter ended March 31, 2022. The change in fair value of contingent consideration and other income expense reflected income of $0.5 million as compared to a slight loss in the same period in 2021. For the quarter ended March 31, 2022, the change in fair value of our liability classified warrants resulted in non-cash income of $0.4 million as compared to a $0.4 million non-cash loss in the prior year period. Overall, our net income was $0.3 million for the quarter ended March 31, '22 as compared to a net loss of $0.6 million in the prior year period. The change in net income includes the impact of the fair value adjustments that I just mentioned. Moving to EBITDA, our adjusted EBITDA for the quarter was negative $0.1 million compared to a positive $0.2 million in the prior year period. Moving on to our balance sheet, at March 31, 2022, as Ari mentioned we had $4.7 million of cash and accounts receivable of $1.4 million compared to the last quarter ended December 31 where we had cash of $6.4 million and accounts receivable of $1.3 million. In March our total assets were $30.3 million and our total liabilities were $10.3 million. Bridgeline looks forward to our continued success in the second half of this fiscal year and beyond as we continue to focus on revenue growth, product innovation, expanding our customer success, and delivering shareholder value. Thank you for joining us on the call today. At this time we'd like to open the call up for questions and answers.

Operator, Operator

Thank you for joining us on the call today. We would like to open the floor for questions. We have a question from Howard Halpern from Taglich Brothers. Your line is open. Please go ahead.

Howard Halpern, Analyst

Congratulations guys. Great quarter.

Ari Kahn, President and CEO

Thank you Howard.

Howard Halpern, Analyst

Just going to describe how important is the development of that dashboard in both providing customer satisfaction and driving new sales of your offerings?

Ari Kahn, President and CEO

Well, the dashboard itself, so we've got about 25%, a little bit more than that, of our new sales are happening within our existing customer base. So we've got a pretty broad product catalog now. None of our customers actually own all of our software, and we're expanding inside of that. The number one lead generation tool for us that 25% is the dashboard. So it's making customers aware of the different products that we have and making recommendations. So when one of the products they don't own can help them and then notifying us on the other side and helping us understand which customers might get value from a product like Hawksearch, for instance, for us to speak with them. One of our customers, National Notary Association, bought Hawksearch this most recent quarter. We've helped them because they've gone online, driven a tremendous amount of revenue. They've got a complex product catalog and by recognizing that customers can convert to larger sales and increase average order value, our dashboard is a great way for them to see the different value that we have. As our product catalog grows, we will do acquisitions and we can release new products; that dashboard is going to become even more important. Our customers are inundated with firms all over the place saying, 'Hey, you should buy my widget, buy this, buy that.' They can't even make a decision because there are so many options. The dashboard simplifies everything for them, cuts it down into three basic categories: how do we drive more traffic to your site, how do we convert that traffic into a customer, and how do we get each of those customers to buy more? By simplifying everything, that's where the value comes in for our customers. Keep it simple; just tell me what I need to drive revenue, and they get that from the dashboard.

Howard Halpern, Analyst

Okay. And I guess, in other questions in terms of the dashboard and potential for future acquisitions of product, are you looking for acquisitions that might have a larger customer base and how easily have you made that dashboard to integrate all that to exploit a larger customer base?

Ari Kahn, President and CEO

Right. So, on our acquisition strategy, integration is a huge risk. Integration, meaning technically bringing products together, was a big part of the initial concepts behind the dashboard. We believe that to grow both organically and inorganically is the best route for Bridgeline. To simplify integration, by having a common dashboard, it's really just integrating at the interface level and not going inside of databases and other lower areas where integration risk compounds. It makes integration very fast, like, 'All right, just put this dashboard on top of the product we just acquired.' All its customers learn about the rest of Bridgeline and add information about the new product we acquired to the dashboard so that all Bridgeline customers can learn about the new products available. So it simplifies things quite a bit. On the M&A front, it's a little tricky right now because the market has fallen significantly and that has made it challenging to do acquisitions without diluting ourselves with a capital raise that happens at these depressed levels. However, we're patient and watching.

Howard Halpern, Analyst

And just one final one. Are you happy with the level of sales and marketing expense going forward that you reported for this quarter?

Ari Kahn, President and CEO

Yes. So we reported about $1.25 million in sales and marketing. That's great, and we're going to actually increase that a little bit going forward to be close to about $1.5 million a quarter in sales and marketing. Our new customer rent to sales dollar is right where it should be. We're looking at a lifetime value of about 3 to 1 for the customer acquisition cost, and we think that's healthy and appropriate, and it's time to continue to invest on the sales side and win even more deals.

Howard Halpern, Analyst

Okay. Thanks and keep up the great work.

Ari Kahn, President and CEO

Thank you.

Operator, Operator

The next question that you have is from the line of Walter Ramsley from Walrus Partners. Your line is open. Please go ahead.

Walter Ramsley, Analyst

Thank you. Congratulations. Excellent quarter, I have to say. I have got a few kind of detail questions if you don't mind. The item that was mentioned with the contingent payment and that was adjusted to a profit. Can you just kind of go through that and explain what happened there?

Ari Kahn, President and CEO

Walter, I think that's one for Tom.

Thomas Windhausen, Chief Financial Officer

Sure. So the two things that our balance sheet has to adjust to fair value each period are the warrants and the contingent consideration. You probably hear more of earnouts from the prior acquisitions. In the period, we had an adjustment as to what our expected ultimate payout will be, so we reduced the liability, and that change in the balance sheet comes through the income statement.

Walter Ramsley, Analyst

No, I get that. Not just what was it that changed? Was it that they're not doing as good as you thought or the value of the securities that you're giving them went down?

Thomas Windhausen, Chief Financial Officer

Some mechanics. It's not all revenue-driven. There are some other operating results in there, and mechanics and working capital adjustments.

Walter Ramsley, Analyst

Okay. All right.

Thomas Windhausen, Chief Financial Officer

Final payment.

Walter Ramsley, Analyst

And operating thing. Okay, I get that. And as far as the warrants, you mentioned that. Can you just tell us how many warrants are outstanding and then kind of review for us again when they expire and at what price?

Thomas Windhausen, Chief Financial Officer

Sure. 1.7 million outstanding. In our 10-Q, which we'll file tonight, there will be a full table with all the exercise prices and the expiration dates, but there really is no change in the warrants from our past quarter. There are a handful that do expire here in May 2022. But not much change going forward in Q3 but with an average price on those around $4.

Walter Ramsley, Analyst

Okay, and I don't know if you want to get into it, but are there any macroeconomic factors that are really either helping or weighing on the business, the supply chain, inflation, the war, the lockdowns in China, anything like that?

Ari Kahn, President and CEO

Not affecting us significantly. Our team is distributed with some in Israel, some in Belgium, and the rest in the United States and Canada. We are not impacted by the war, and the primary concern for us is that our stock prices have declined, which restricts our ability to use stock for acquisitions. However, we are willing to wait, as companies are becoming less expensive each day. We typically purchase private companies, which tend to have lower valuation expectations than public ones. Despite the macroeconomic situation, it hasn't affected us, and our customers continue to invest in technology without reducing their expenditures.

Walter Ramsley, Analyst

Okay, well, you're like the only company in the world that seems to be saying that, but congratulations.

Ari Kahn, President and CEO

Thank you Walter.

Operator, Operator

There are no further questions at this time. I would like to turn the call back to our presenters for any closing remarks.

Ari Kahn, President and CEO

Thank you. Everybody Thanks for joining us today. We appreciate the continued support of our customers, our shareholders, and our partners. We're excited about the business. I mean, things are really going well, and our growth prospects are better than ever. So we look forward to speaking with you again on our Q3 fiscal call. We'll see you all soon. Stay healthy and well. Thank you.

Operator, Operator

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