Bridgeline Digital, Inc.

Thank you for standing by, and welcome to the Bridgeline Digital Inc. Fourth Quarter 2022 Earnings Call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question-and-answer session. To ask a question at that time, please press star-1-1 on your touch-tone telephone. As a reminder, today's conference is being recorded. I will now turn the conference to your host, Mr. Tom Windhausen, CFO. Sir, you may begin.

Thank you very much. Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhouse, and I am BridgeLine's Chief Financial Officer. I am pleased to welcome you to our fiscal 2022 fourth quarter conference call. On the call this afternoon is Ari Khan, BridgeLine's President and CEO, who will begin 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 will 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. 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 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, our President and CEO. Ari?

Thank you, Tom. Good afternoon, everyone. This year, BridgeLine delivered 27% top line revenue growth, a $3.6 million increase in revenue to end of year with $16.8 million in total revenue. Most of our revenue growth was in subscription and license, which increased by 36% to $3.6 million to $13.6 million. Subscription and license revenue was over 80% of total revenue for the fourth quarter and the year. In the fourth quarter, we booked $1 million in new license ARR from 28 sales with $340,000 in ARR annual recurring revenue. Our cross-sale strategy remained strong and drove 13 license sales to existing customers on top of 15 newly won customers. Existing Bridgeline customers, including HP, 7-Eleven, and Sage Publishing, expanded their commitment to Bridgeline this quarter with further investments in Bridgeline software and services. We ended fiscal 22 with over $2 million in net income and $196,000 in adjusted EBITDA, driven primarily by our subscription and license revenue, which comprised over 80% of our total revenue with gross margins of 75%. We ended our fiscal year with $2.9 million in cash, that being after a prepayment of $1.7 million in the fourth quarter relating to a negotiated $600,000 discount to the earn-out working capital adjustment on the Hawk Search acquisition in consideration for just a six-month early payment. Our cash and projected revenue positions us well to continue our investments in sales and marketing and innovation without additional capital for operations. Our 28 sales in our fourth quarter included a top distributor who committed to more than a quarter million dollar multi-year license for Bridgeline's TruePresence and HawkSearch products to power their site search and recommendations. HawkSearch's AI site search technology was identified to help grow the distributor's massive online catalog with 700 sites, 5 million products, and 15 million monthly queries. A major Asia-Pacific retailer with 150 brands and 2,600 locations selected Bridgeline to power 10 of its brands, including New Balance, Reebok, Converse, Skechers, and Foot Locker. A leading plumber supplier has committed to a more than $60,000 license for Bridgeline's Hawk Search to power personalized recommendations and data quality enhancement capabilities. The supplier will use HawkSearch to power site search for their 28 distributor locations, 15 appliance stores, and distribution for their catalog of over 200,000 products. A garden and pet supply market leader is committed to a more than $80,000 license for Bridgeline HawkSearch to power personalized recommendations and data quality enhancement capabilities. The supplier will use HawkSearch to power site search functionality for two leading websites with millions of search inquiries each month. In addition to our new customer wins, we also had outstanding customer subscription renewals with more than 100 renewing customers, including Caterpillar, AstraZeneca, Hamaker Schlemmer, and Coca-Cola Europe Pacific Partners. As a percentage of revenue, customer subscription renewals were 94%. Partners are an important part of our growth, especially for driving Hawk Search sales. Bridgeline announced in October a new partnership with NITCO, the world's largest optimizely agency, which services 500 customers in 30 countries, including customers such as Panasonic, Heineken, and Electrolux. This partnership is focused on selling and implementing Hawk Search, which is Optimizely's first non-native site search integrated with both their B2B and their B2C platforms. In addition, BridgeLine partnered with Thanks Media, who's a systems integrator that services Fortune 500 customers such as PayPal, Target, and Ulta Beauty. Thanks Media is certified in both the Optimizely and BigCommerce platforms, and it has extensive experience with Hawk Search. This partnership helps Bridgeline sell HawkSearch licenses within the first month after signing. Further, BigCommerce has expanded the availability of Bridgeline's HawkSearch connector to their multi-storefront users, including leading brands such as Ted Baker, Vandy Group, and Aerofit B2B. This strategy has continually led to a strong growth rate and more online revenue for Bridgeline's customers. In our fourth quarter, we released the rapid UI framework for Hawk Search. This release speeds the time to market for our customers and reduces their total cost of ownership. It also accelerates bridge line sales cycle, which in turn improves our win ratio. The solution is built on a JavaScript framework called Handlebars that embeds an entire search experience directly into the website, including the search bar, intelligent autocomplete, and the full search results page. Sales and demo experiences are improved because our sales team can demo HawkSearch within the prospect's website rather than with the generic demo site. We plan to extend the framework to include additional HawkSearch components, such as recommendations and landing pages. BridgeLine expanded its executive team with John Murcott joining the company as EVP of products and strategy. Mr. Murcott brings more than 20 years of experience in the marketing technology sector to Bridgeline. He was a founding member of my first MarTech company, Fatwire, which he helped build and do an industry leader in content management before it was acquired by Oracle in 2011. All of these coming together leaves us really excited for fiscal 23. At this time, I'd like to turn the call over to our Chief Financial Officer, Tom Winhausen. Take it away, Tom.

Thanks, Ari. I'm excited to share with you this afternoon our positive financial results for the fourth quarter of fiscal 2022, which ended September 30, 2022. Our total revenue for the quarter ended September 30, 2022 was $4.2 million, an increase of 3% as compared to $4.1 million in the prior year period. Looking at each component of revenue, our subscription and license revenue, which is comprised of SAS licenses, maintenance, hosting revenue, and perpetual license revenue, Increased 3% for the quarter, ended September 30th, 2022 to 3.4 million. As a percentage of total revenue, our subscription license revenue was 82% of total revenue for the quarter ended September 30th, 2022. Our services revenue was 0.8 million for the quarter ended September 30th, 2022, up slightly from the 0.8 million in the prior year fourth quarter. As a percentage of total revenue, services revenue accounted for 18% of total revenue for the quarter ended September 2022. Our cost of revenue decreased 6%, or $0.1 million to $1.2 million for the quarter, compared to $1.3 million in the prior year period. As a result, our gross profit increased 7%, or $0.2 million to $3 million for the quarter ended September 30, 2022, as compared to $2.8 million for the prior year period. Overall, our gross profit margin increased to 71% for the quarter ended September 30, 2022, compared to 68% in the prior year period. Our subscription and license growth margins were 76% for the quarter ended September 22 as compared to 75% in the prior year period. And our services growth margins were 47% for the quarter ended September 22 compared to 37% in the same period in 2021. Our operating expenses slightly decreased to 3.4 million for the quarter ended September 22 from 3.4 million in the prior year period. Within operating expenses, we increased our spending in sales and marketing, supporting our current and future growth. Our net loss was $0.5 million for the quarter ended September 30, 2022, as compared to a net loss of $1.4 million in the prior year period. Moving to EBITDA, as already mentioned, our adjusted EBITDA for the quarter ended September 2022 with $0.1 million compared to $0.2 million for the prior year period. Moving to our balance sheet, at September 30th, we had $2.9 million of cash and $1.2 million of accounts receivable. And at September 30th, 2022, our total assets were $27.5 million and our total liabilities were $7.2 million. BridgeLight looks forward to continued success in fiscal 2023 and beyond as we continue our focus on revenue growth, product innovation, expanding customer success, and delivering shareholder value. Thank you for joining us on the call today. And at this time, we'd like to open the call to questions and answers. Moderator?

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your touch-tone telephone. Again, to ask a question, please press star 1-1. One moment, please, for our first question. Our first question comes from the line of Howard Halperin of Taglin Brothers. Your line is open.

Hi, Ari. This is Howard.

Hi, Howard.

Merry Christmas. Great year. Looking forward to the upcoming year. You talked about in, I guess, you know, in your prepared remarks, you mentioned TruePresence. What kind of traction are you seeing from there and what kind of opportunities do you see over the next couple years for that product?

Well, TruePresence is our brand that focuses specifically on the franchise market. This is a very tight market. We've got great traction in it with customers like UPS, Alpha Graphics, Sport Clips. And we've taken every single one of our products and created a TruePresence version of it. So now from an entree point in terms of becoming a TruePresence customer for Bridgeline, We can help you increase your traffic with WooRank. We can increase your conversion with our Hawk Search True Presence product. We can increase your average order value with our recommendations product and so forth. So we think this is going to continue to be a big part of our growth. And each True Presence deal, they tend to be significantly larger than other deals. and they grow as our customers grow. So, for instance, we won an electrical distributor with 700 locations, and that's, you know, it's essentially like selling 700 licenses all at once, and as that distributor grows and opens new locations, the license fee grows proportionately, and we don't have to do any work for that. So, it's a very important part of our model.

Okay, and in terms of, and you talked a little bit about this in the press release, but how important is it, you know, your customer base, growing your customer base, and then selling back into your customer base more offerings?

Right. Well, you know, for SaaS software companies like us, the customer acquisition cost is a major impediment to growth. A lot of times for a SaaS company, it can take 15 months just to break even on your customer acquisition costs. However, if you've got multiple products and you can sell a product into an existing customer, those customer acquisition costs are substantially lower. For instance, there's basically no advertisement budget needed to sell to your existing customer base, your commissions to your existing sales reps. can be much lower. You don't need to have high-level executive sales reps to sell to an existing customer because you're not dancing with a new partner, so to speak.

It's less sophisticated.

So what our strategy is is to grow more quickly on a per sales and marketing dollar basis by, in addition to winning new customers, selling to existing customers. And that's where important new products that we're innovating and releasing internally as well as looking for acquisitions and acquiring new products come into play. And we're going to continue to focus on that throughout 2023, both on the acquisition and the innovation side.

And how important are your partners now for growth over the next few years?

Hawks Search was a game changer for Bridgeline in terms of its go-to-market strategy. Before HawkSearch, we really didn't have any partners that were making a significant impact on our growth. Today, thanks to the partners that came with HawkSearch, we have partners attached to more than 80% of our new deals. We classify our partners into two groups. We have what we call ISV partners, independent software vendor partners. These are generally platform companies like Optimizely, BigCommerce, SiteFindy, Salesforce.com. And we also have a second class of partners, which are agencies. Agencies are systems integrators that are implementing MarTech solutions. And our partnerships with the ISVs generally are around making our software out of the box, compatible with each of those ISVs so that their customers can just turn us on with a flip of the switch. And that is huge because each of these ISVs have typically thousands of existing customers that once we establish a partnership and are compatible with their software can be sold our software in the same low cost customer acquisition cost model that we do in terms of selling into our own customers. So you're going to continue to see press releases from Bridgeline about partnerships. You're going to see us at all of our ISV partners' conferences that we can attend. And I expect that that 80% ratio of new customer wins being attached to a partner is going to remain.

And just one last one about, you know, acquisitions. When you're looking for an acquisition or is it, Are you getting customer feedback on maybe products or offerings that they would like to see Bridgeline have within the portfolio, or are you looking for just a potential larger customer base that you could sell into?

Yeah, yeah. You know, we've had instances where we've had customers explicitly say hey here is a particular product that we love we know that you guys are acquisitive you should consider buying that company we haven't pulled the trigger on any of those that's happened however um we look at both our target acquisition software and its customer base we want to be able to cross sell into that customer base that's hugely valuable And, of course, the software is important, and it's got to be able to sell into our customer base as well as win new customers. We're different than other companies that you see in the mark tech space that are doing roll-ups of apps. Those companies are often purely financially modeled, and they're buying an app, and they're stripping costs, and that's the end of their strategies. Bridgeline's different because we're buying apps and we're buying customer base. We're putting our dashboard on top of those apps so that the new customer base will immediately be able to see the strength of their website with regard to traffic conversion and average order value and receive intelligent recommendations as to the other products that Bridgeline offers that can help them grow their own revenues. So we have a much more strategic growth strategy from an inorganic perspective in not just looking at reducing costs, but instead looking at accelerating growth. And we're doing that through our cross-sells, with our dashboard, and really leveraging that customer base.

I do have one more quick one. Sales and marketing expense, about $1.4 million a quarter. You're pretty happy with that? or do you think it might increase just a touch?

Well, we're going to increase our sales and marketing expense a little bit next year. 1.4 is approximately where we're at. We're going to accelerate that. We feel that we have to be careful about our bottom line in 2023. We think that the, although we've not seen a slowdown in terms of our own sales yet, We're still in, we think, perilous waters from a macroeconomic perspective. But investing in sales and marketing, when you've got a product that has all the right features and people are really calling for it, you don't want time to slip by. So we're moving fast on the sales front.

Okay. Keep up the great work. I look forward to 2023 and have a happy and healthy new year.

Thank you. Happy and healthy New Year to you.

Thank you. One moment, please. Our next question comes from the line of Leo Carpio of Joseph Gunner. Your line is open.

Hi. Good afternoon, Ari. I actually got two questions. The first question is regarding the economy. What's the economy's impact to your business pipeline right now? Is it serving as a Headwind, tailwind, and is it focused on any particular product or industry you're seeing right now? And I'll ask the second question as a follow-up.

Okay. Okay, great. You know, the market that we're in is so large relative to us, and even in a horrible economy, it's still growing in the double digits by any real measurement. that we're fortunate that we've not felt any headwinds yet. Things could change and we're cognizant of that and we're careful about it. But as it stands right now, we think that the MarTech industry overall is growing. And, you know, one thing that we still see is challenges in terms of hiring. And we're focused very much on our own R&D teams. making sure that we treat them great and that they have room to innovate because even with these headlines of layoffs at Facebook and so forth it's a great job market for these guys and and that's a little bit of a challenge for us but we have a really excellent team and they're coming out with new products left and right and our sales team is winning deals and in fact the bell rang earlier today I'm looking forward to our next press release to tell everybody of our latest conquest

Thanks. And then the follow-up question is regarding M&A. You talked about it in the past as being, you know, you're having your criteria of companies that you want to acquire, but market conditions are a bit choppy for acquisitions. So just give us like an update in terms of how, what tech you may be interested in and how it has to relate to market conditions in terms of are you still just waiting on the sidelines or more of wait until 23 for more stability?

We have, we're still very interested in acquisitions. We think that that's an important part of fiscal 23 for us. The private markets held pretty strong relative to the public markets last year in terms of the targets that we spoke to who started last year looking for as a multiple of revenue. three or four or five times revenue and ended the year still at two or three times revenue. And we think that there's opportunity for them to be a little bit cheaper next year. So we're focused on apps that help companies grow revenue that are active in our most critical ISV partners. And that means Optimizely, Sitefinity, big commerce, Salesforce, cloud craze. And we're looking for companies that are between $3 and $6 million in revenue that we can pick up for two times revenue or less with the right payment terms and earn out, typically an earn out directly proportional to retained revenue over the first two years. and initial payment of 50% with 50% being the earn out. Those are the terms that we think make sense. It's a little bit of a challenge for us because our market cap to revenue is not at two times, so we have to really structure the deal right to make sure that it's accretive, which is one of the reasons that we've not done a deal in the last couple of quarters. But we're still seeing companies come to us every month, and I feel like we're going to find the right targets in 23.

All right. Well, thanks, Ari, and congrats to the quarter.

Thank you, Leo. Happy holidays.

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your touchtone telephone. Again, to ask a question, please press star 1-1. One moment, please. I'm showing no further questions at this time. Let's turn the call back over to management for any closing remarks.

Great. Well, thank you, everybody, for joining us today. We really appreciate all of the support from you, our shareholders, as well as from our customers and our partners. We're excited about our business, the ongoing growth prospects for 2023, and we look forward to speaking to you again on our first quarter of FY23 conference call in February. Stay healthy and well. Happy holidays. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect. Have a great day.