Bridgeline Digital, Inc.

Good day and welcome to the Bridgeline Digital first quarter 2023 earnings. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand has been raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Chief Financial Officer Thomas Windhausen.

Thank you, and good afternoon, everyone. Thank you for joining us on the call today. My name is Tom Windhausen, Bridgeline's Chief Financial Officer. I'm pleased to welcome you to our fiscal 2023 first quarter conference call. On the call with us this afternoon is Ari Kahn, Bridgeline's President and CEO. We'll begin the call 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 I begin, I'd like to remind listeners that during the conference call today, 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 of the 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 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, and good afternoon, everyone. Happy Valentine's Day. In the first quarter, we won 22 license sales totaling over half a million in total contract value with a quarter million dollars in annual recurring revenue and three quarters of a million dollars in consulting services. Our customer base continues to expand their investment in our software with 10 subscription license sales to existing customers. Search is our strongest selling product line with better than 18% organic CAGR, renewal rates in the high 90s, and Search is now more than half of our subscription revenue. Search sales are driven by partnerships with Optimizely, BigCommerce, SiteSendMe, and other platforms, as well as agencies and system integrators. We've taken a vertical approach to sales and marketing and search with especially strong results in the B2B Electrical Distribution Center. Our recent partnership with Duda is an exciting opportunity where more than 1 million websites can now add our WooRank SEO optimization product to their site with the click of a button. Also, Duda partners with 20,000 digital agencies who can now make bulk purchases of WooRank for their customer bases. Since the last month alone, since January, our partnership with DUDA has sold more than 150 WU rank licenses. In the first quarter, BridgeLine delivered $4.1 million in revenue, including $3.2 million of subscription and license, and another $900,000 in services. Excluding non-recurring perpetual license sales of $100,000 in our prior year, comparable period. Total revenue decreased by $100,000 overall versus the first quarter of fiscal 22. This was driven by a single large customer who, while renewing for their ninth consecutive year on a legacy BridgeLite product, restructured their website, which reduced their subscription by half from $150,000 to $75,000 per quarter. Independent of this single customer reducing their subscription, our subscription renewal rate is over 90%, with more than 125 renewing customers, including Dairy Queen, Ron John, and Guardian Life. Our subscription and license revenue is 79% of total revenue, and our search products have grown to be more than half of our SaaS revenue. We ended our first quarter with $2.5 million in cash. During the quarter, we made the final earn-out payment of $250,000 from the Hawk Search acquisition, and now we have no remaining earn-outs due for any of our previous acquisitions. Bridgeline announced that its E360 dashboard is now available in the Shopify App Store. Shopify has partnered with Bridgeline to power analytics and prescribe new revenue strategies for their 4 million users across 175 countries. Shopify users can now use the Bridgeline E360 dashboard to grow their online revenue directly within the Shopify administrative interface. Bridgeline delivered several technological advances in its first quarter, including its HawkSearch Rapid User Interface Framework. The Rapid UI Framework reduces the time and expense of launching new HawkSearch-powered websites. The framework not only reduces the total cost of ownership for our new HawkSearch customers, but also accelerates Bridgeline's customer acquisition sales cycle by allowing prospective customers to see how HawkSearch improves search within their site before purchasing. We also expanded our natural language processing and machine learning capabilities in HawkSearch. to allow industry-specific intelligence to be bundled and loaded into sites with NLP industry knowledge packs. Knowledge packs allow us to offer additional value to customers in key industries by pre-configuring their site with synonyms, soft words, unit conversion, and other natural language intelligence commonly used by their specific customer base. For example, A hardware store site that sells paint may need to know that cotton and dove are versions of white and a search for either of those words should return all white tone products. Similarly, a US shoe store needs to understand that a search for sizes over 30 are European and should be converted to the US size before returning the search results. Our NLP search allows you to configure this type of intelligence And our NLP industry knowledge packs allow you to take this intelligence out of the box for key industries to increase your e-commerce conversion rate. We're off to a great start for 2023 and intend to continue to make investments in our products and marketing to grow market share, especially for site search, where we have enjoyed so much strong growth and customer success. At this time, I'll turn the call over to our Chief Financial Officer, Tom Winhausen. Tom?

Thanks, Ari. I'll provide an update of our financial results for the first quarter of fiscal 2023, which ended December 31st, 2022. Our revenue for the quarter ended December 31st, 2022 was $4.1 million compared to 4.3 million in the prior year period. Going into each component of revenue, our subscription and license revenue, which is comprised of SAS licenses, maintenance and hosting revenue, and perpetual license revenue, For the quarter end of December 31st, 2022 was 3.2 million. The prior year period included 100,000 of non-recurring perpetual license sales. And the current year was impacted by a reduced contract from a long-time customer as Ari mentioned. As a percentage of total revenue, our subscription license revenue was 79% of total revenue for the quarter end of December 31st, 2022. Services revenue of $900,000 for the quarter ended December 31, 2022, compared to $900,000 in the prior year first quarter, as the percentage of total revenue services revenue accounted for 21% of total revenue. Our cost of revenue was consistent at $1.3 million for the quarter ended December 31, 2022, as compared to $1.3 million in the prior year period. As a result, our gross profit was $2.8 million for the quarter, compared to $3 million in the prior year period. Our overall gross profit margin was 69% for the quarter ended December 31st, 2022 compared to 70% in the prior year period. Our subscription and license gross margins were 73% for the quarter compared to 76% in the prior year period. And our services gross margin were 51% for the quarter compared to 48% in the same period last year. Our operating expenses were 3.2 million down 0.3 million from the prior year period. Moving below operating expenses, our change in fair value of liability classified warrants resulted in a non-cash income of $300,000 in the quarter, compared to $2.4 million in the prior year period. Changes in share price are the primary driver of the change in the fair value of the warrants. Our net loss was $100,000 for the fiscal quarter ended December 31st, 2022, compared to net income of $1.9 million in the prior year period, inclusive of those warrant fair value adjustments. Adjusted EBITDA for the quarter ended December 31st, 2022 was $0.1 million, which was consistent with the prior year period. Moving to the balance sheet, on December 31st, 2022, we had cash of $2.5 million and accounts receivable of $1.6 million. And we had total assets at December 31st, 2022 of $27.5 million versus total liabilities of $7.2 million. We look forward to continued growth and success in fiscal 2023 as we continue our focus on revenue growth, product innovation, customer success, and shareholder value. Thank you for joining us on the call today. At this time, I'd like to open up the call to questions and answers. Moderator, are you there?

Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11. Please stand by while we compile the Q&A roster. And our first question comes from the line of Howard Halpern with Taglit Brothers.

Good afternoon, guys. Good afternoon, Howard. How are you? Okay. Okay. Hopefully you're doing well, too. Thank you. One question that popped up during your commentary was, you know, the 150 new WooRank licenses. So you get those licenses, and how is the process to get those customers, upsell those customers to generate more recurring revenue?

Okay, great, great. Yep. So that's through our partnership with Duda, which has a million websites that are powered by Duda, and we're in their app store. Individual customers can start with a light version of WooRank that starts at only $10 a month and has good capabilities but limited capabilities, and there are upgrade options for them. going up to $25 for the next level and $50 for the level after that. So an individual customer can grow by a factor of five all by themselves. One of the most exciting things in the DoDOT partnership is access to the 20,000 agencies that private label DoDOT to create websites for their customers. And they're very motivated to add WooRank to their own customer's subscription. And this is because with WooRank, the agency themselves are able to create reports that identify where the strengths and weaknesses are of each individual site's Google core metrics. And they can then sell their own agency services to improve the site. based on those reports. So they get beautiful custom-made reports that they can provide to their customers and upgrade. And in that instance, similarly, we have three tiers for those customers as well. But in that case, we're selling in bulk to an agency who might buy 1,000 licenses at once. So this partnership is only one month old. It's off to an outstanding start, and we think that it's really going to make an impact on our revenues.

Okay, that's good. And can you talk a little bit about the pipeline of customers that you have or potential customers you have? And are you seeing them want – I know you have mostly out of the box, but you can do consulting and customizing. Are you seeing more and more that they want a little bit more customization than they have in the past?

Well, we're really focused on providing as much value out of the box as we can, which is why with Hawk Search, we released the Rapid UI Framework, which allows customers to install Hawk Search and have it up and running all by themselves. Now, you can always customize Hawk Search in a million different ways, and either our services or their own agency services can provide those customizations. But today our professional services is only 20% of our overall revenue. It's around $3 million a year. And we expect it to kind of stay at that level with our customers buying our software, using it out of the box, and only using us for the most sophisticated customizations. Some of the examples of things that we do with our customers on the customization front are knowledge management, so that's where we help them analyze the search terms that their customers are using, what the search results are, and whether those are actually converting into sales and improve the natural language processing behind the scenes inside a site search. We help them improve their site with regards to ADA, American Disability Act, compliance, and some other items, and then leave the graphical and uh, look and feel more to, uh, agencies that, uh, do that work.

Okay. And, uh, are you seeing any, uh, growing traction for a true presence and is that pipeline growing? And is that a higher value, higher value sale, but a warmer sales cycle?

Well, it is a longer sales cycle and it is a higher value sale. So we did a very large sale, um, Just recently with a B2B electrical distributor, one of the largest B2B electrical distributors in America in the Forbes private company, Fortune 100 list, for 750 sites. So True Presence allows all of our software, including Hawk Search, to be able to manage franchises and chains that have a large number of websites. But because those deals are so large and a lot of times there are a lot of considerations of how to coordinate, in this instance, 750 site owners and profit centers and so forth, they're more political and take more time. Out of all of our products, Orchestra, Unbound, WooRank, True Presence, And Celebros and HawkSearch, and I'll mention Celebros and HawkSearch are essentially merged code bases. We sell both brands out there, but we treat them as one line. The SiteSearch, Celebros and HawkSearch is by far the strongest growth product line for us in either its true presence form or in its regular form. We had 18% CAGR in this quarter, in our first quarter, with... Hawk and Celebros. In Hawk and Celebros, we have very strong renewal rates. And as it grows as a larger percentage of our overall revenue, the general characteristics of our financials will start to mirror that set of growth. And it's going to be very impressive, I believe. Okay.

And one last one is, you know, As we always discuss, I guess, you know, what are you seeing in terms of, you know, potential acquisitions out there in terms of adding customers or adding, you know, complimentary technology? And, yes, so what are you seeing out there?

Well, we're still seeing companies that are explicitly looking for acquirers. But we have seen things slow down a little bit. I think that a lot of companies that – See, this is just a difficult market to sell in. So they're not hiring bankers and doing outbound research as much as they were, for instance, last year, which is probably smart, actually. And therefore, we're doing more outbound research on our own side to look at acquisitions and reach out to companies that we think would be good fit and it would be mutually beneficial to their shareholders, our shareholders, to bring them in.

Okay. Well, look forward to seeing what transpires. Okay, guys, keep up the good work. Thank you, Howard.

Thank you. And our next question comes from the line of Leo Carpio with Joseph Gunner. Hello, Leo.

Good afternoon, R.A. Afternoon, Ari. I've got two questions. The first question is, what are you seeing in terms of the industry environment? Are your customers still concerned about the economy and potential recession impact, and is that affecting the pipeline? And then the second question is – I'll do a follow-up.

Okay, great, great. Well, the market overall, we have not seen a – a change one way or the other today versus 12 months ago in terms of the size of our pipeline, our customer acquisition costs, or the length of our sales cycle. We are there for expanding our investments. in sales and marketing we do think that burning cash could be uh a bad idea so we don't want to be a company that is uh losing significant amount of money but at the same time especially in the light of some companies that we consider to be competitors apparently pulling back on their efforts we're going to push forward we're seeing great conversion rates on our own sales and we think that this market is going to be fine for us and that might B, because we're relatively small. So you can have a lot of big swings at the top end in terms of this $100 billion market that we live in, and we're swimming underwater.

We don't notice the waves. One moment for our next question. Okay. And our next question comes from the line of Harvey Bibikoff with Bibikoff and McInnes.

Hey, Harvey, how are you? Good to hear from you.

Hi, good to hear from you, Harvey. Hope all is well.

All is fine. I just have one question. In your presentation, you said you're off to a good start for 2023. I'm looking at the numbers, and I don't understand what you're talking about. What is the good start?

Fair enough, fair enough. The Good Start is really about the 18% organic kegger in our site search. So I did point to one thing. I didn't want to, like, dwell on it too much, but we do have a fairly broad product line with some products that are legacy. And they've got some long-term great customers that have been using it for a long time, but our – declining in terms of the usage. So we had a significant customer that was paying $150,000 in monthly recurring revenue, restructured their own website in the context of them renewing their subscription for the ninth consecutive year to $75,000 in monthly recurring revenue. So this resets our SaaS revenue to a different level. It's It's fine and natural, but given our own size, and they're not a 5% customer, but they're very significant, puts us on that trajectory. Another thing that can be a little confusing with our own revenues is that we do occasionally sell a perpetual license, and we did not sell any perpetual licenses this quarter, so that is a difference between a year ago. But what I'm focused on is the growth products that we have, in particular Hawk Search, which is now more than half of our overall revenue and is growing. And it's going to take a little bit of time for it to really shine through and for everyone to see that growth. So admittedly, it's obfuscated by some of our other products, and it's taken over quickly.

All right, Ari, thank you. Great, thank you.

Thank you. And I'm showing no further questions. So with that, I'll hand the call back over to management for any closing remarks.

Great. Thank you for joining us today. We appreciate the continued support of our customers and our partners and our shareholders. We're excited about our business and ongoing growth prospects. We look forward to speaking with you again on our second quarter fiscal 23 conference call in May. Thank you. Have a great day.

This concludes today's conference call. Thank you for participating and you may now disconnect.