Bridgeline Digital, Inc.

Thank you for standing by, and welcome to Bridgeline Digital's second quarter 2024 earnings conference call. 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. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Thomas Wenhausen, Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhausen, and I'm the Chief Financial Officer of Bridgeline. I'm pleased to welcome you to our fiscal 2024 second 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 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'd like to remind listeners that during the 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, 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 as an indication of future performance. Changes in economic, business, competitive, technological, regulatory, and other factors could cause Bridgeline's actual results to differ materially from those expressed or implied by the projections or any 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 would now like to turn the call over to Ari Kahn, BridgeLine's President and CEO. Ari?

Thank you, Tom. Good afternoon, everyone. This has been another exciting quarter for Bridgeline with outstanding HawkSearch sales, innovations in artificial intelligence, and excellent recognition and sales in key partnerships. HawkSearch is the best site search product on the market with the strongest artificial intelligence capabilities for product discovery. Because our platform partners see us as instrumental to their customers' success, they have embraced HawkSearch as a must-have app for their commerce sites that they power. Our consolidated numbers include some legacy customers on legacy products, but the underlying demand for HawkSearch, SmartSearch, and our strengthened partnerships with platforms are making this absolutely the most exciting time Bridgeline has seen, and our momentum continues to grow. Today, Search is nearly 60% of subscription revenue, and we expect that percentage to go up even further. We've sold nearly 50 licenses this fiscal year with over $4 million in total contract value. We're launching a new customer every single week. This month, we expect to launch nearly 10 customers. With each launch, we have more references and recognition as leaders in the site search sector. Many of our customers have extensive product catalogs, such as Volta's with 80,000 products, and a building supply chain that selected HawkSearch for its 40,000 product catalog. Several customers select HawkSearch for its AI capabilities with SmartSearch. Others choose us because of our seamless integration to our platform partners with connectors that allow them to easily upgrade to HawkSearch. Our marketing campaigns include a narrow focus on specific industries, including B2B construction sectors like electrical and plumbing supplies. By building a strong presence in these categories, we have accelerated our sales cycle and reduced our customer acquisition costs. Two important platform partners that we expect to continue to generate new customers for HawkSearch are Optimizely and BigCommerce. BigCommerce, HawkSearch is featured on their first page of their website app store. BigCommerce has 60,000 customers generating $350 million in ARR for them, and 20% of their customers have more than 250 products. This 20% is a great total addressable marketplace for us. And then you see HawkSearch in the top page of their own app store on BigCommerce. And as a result, our lead generation and credibility in the BigCommerce ecosystem is outstanding. BigCommerce partnered with HawkSearch at the B2B Online Chicago Conference this month to help their customers understand how HawkSearch can increase online sales, and we continue to see outstanding lead gen within the BigCommerce ecosystem. HawkSearch now has a one-click install for Optimizely and is recognized by Optimizely as a top paid app in their app stores. HawkSearch and Optimizely have partnered in several online webinars and have launched many customer websites recently. HawkSearch is now in a unique position to improve site search for more than 1,000 Optimizely configured commerce customers with several already purchasing licenses today. Furthermore, in the API ecosystem, we partnered with the system integrator Xengage, who is an who is an expert in Optimizely, and they helped build the Optimizely connector. This opens the door for even more sales. Overall, our pipeline has 35% more traffic and 66% more conversions and lead generation than it did last year. We're seeing excellent reviews and analyst recognition that generate leads and expand credibility against our competitors. We're recognized by top analysts such as InfoTech as leaders in the marketing technology sector. BridgeLine is also recognized as one of the top 20 e-commerce solution providers of 2024 by ICON Outlook Tech Magazine. We expect additional analyst recognition this year that will serve as further lead generation and affirmation. BridgeLine is recognized as a leader in AI-powered site search. We have deep expertise in AI. In fact, I have a PhD in AI from the University of Chicago. Our team's deep understanding of this field allows us to recognize new capabilities as soon as they become mature to more quickly include them in our software and make our customers even more successful. In March, we launched Zeus, the Zeus release for our AI-powered smart search. Smart search introduces two new ways to search, concept search and image search. This changes how customers interact with search, leading to increased engagement and revenue for businesses. Smart search uses AI models, vector databases, and large language models to process customer queries, whether typed or through images. Image search allows customers to upload an image of a product, and Hawk search will show similar items for purchase. Concept Search lets users describe their needs in natural language, and the system finds relevant products or information. Goose adds generative AI to summarize search results for online shoppers and improve content for better search engine optimization. Smart Search has already been implemented on several customer sites such as Saviant, Shadler Yesco, Nailgun Depot, Max Warehouse, and Rainbow Resource, with several new sites slated to launch in the upcoming week. This is driving our growth and is the primary focus for the company overall. At this time, I'd like to turn the call over to our Chief Financial Officer, Tom Windhausen. Tom?

Thanks, Ari. I'll provide an update of our financial results for the second quarter of fiscal 2024, which ended March 31, 2024. Total revenue for the quarter ended March 31, 2024 was $3.8 million, compared to $4.1 million in the prior year period. Now going into each component of revenue, our subscription license revenue, which is comprised of SAS license, maintenance, and hosting revenue, for the quarter ended March 31, 24, was $3 million, compared to $3.3 million in the prior year period. As a percent of total revenue, subscription license revenue was 79% of total revenue for the quarter ended March 2024. Our services revenue was $794,000 for the quarter ended March 31, 2024, a decrease from $821,000 in the prior year second quarter. As a percentage of total revenue, services revenue accounted for 21% of total revenue for the quarter ended March 31, 2024. Our cost of revenue for the quarter ended March 24 was $1.3 million, consistent with $1.3 million in the same comparable prior year period. And as a result, gross profit was $2.5 million for the quarter ended March 31, 2024, compared to $2.8 million in the prior year period. Our overall gross profit margin was 66% for this quarter ended March 24 compared to 69% in the prior year period. Our subscription and license gross margins were 71% for the quarter compared to 74% in the prior year period. And our services gross margin was 47% in the quarter compared to 49% in the prior year same period. Operating expenses were 3 million for the quarter ended March 31st, 24 compared to 3.5 million in the prior year period a decrease in expenses of $500,000. Moving to below OPEX, the change in fair value of our liability classified warrants resulted in a non-cash loss of $25,000 in the quarter compared to income of $171,000 in the prior year period. On the bottom line, our net loss was $602,000 for the quarter ended March 31, 2024, compared to a net loss of $511,000 in the prior year period. And our adjusted EBITDA for the quarter ended March 31st, 2024 was 83,000 compared to, was negative 83,000 compared to negative 144,000 in the prior year period. Moving on to our balance sheet, at March 31st, 2024, we had 1.3 million of cash and 1.5 million of accounts receivable. Our total debt outstanding as of March 31st, 2024 was 567,000 euros or approximately 600,000 US dollars. and the weighted average interest rate on that was 4.6%, and those principal payments are spread throughout now through 2028. We have no other debt or remaining earnouts from any previous acquisitions remaining. And at March 31, 2024, our total assets were $16.3 million, and total liabilities were $5.8 million. Finally, to give an update on our cap table, at March 31, 2024, our cap table included 10.4 million shares issued in outstanding, 39,000 shares from Series C preferred stock on an as-converted basis, 1.7 million warrants outstanding, and 2.1 million options outstanding. Of those warrants, nearly 900,000 whose exercise price is $4 will expire in September 2024. After that, we will have approximately 800,000 warrants, primarily including 180,000 warrants with a $2.85 exercise price, which expire in May 2026. and $592,000 more with a $2.51 exercise price, which expired in November of 2026. Bridgeline looks forward to continued growth and success in fiscal 2024 and beyond as we continue our focus on revenue growth, product innovation, customer success, and delivering shareholder value. Thank you for joining the call today. At this time, we'd like to open up the call to questions and answers. Moderator?

Thank you, sir. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the question queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster.

We have some questions that were submitted that we will, for those that couldn't attend. So we'll go through some of those questions and we'll give our responses and then Madhuri will ask you to check in with the rest of the group. But we'll continue on with the Q&A moderated by ourselves here first.

Okay, cool. Well, Howard Halford sent in a couple of questions. He wasn't able to join us today. And the first one was, when will revenue from HawkSearch begin to show the real revenue growth of the company? HawkSearch is approaching 60% of subscription revenue. As such, we expect to see FY24, which begins in October, to have subscription revenue dominated by HawkSearch. And that's really when it's going to drive past all of our other products combined. Rapid UI and our connectors to platforms like BigCommerce and Optimizely make HawkSearch largely out of the box. So we're not expecting subscription, so we're not expecting services revenue to be dominated. And services revenue is mostly dominated by Unbound as opposed to Hawk Search. And that is strategic for us. We want Hawk Search to be as much out of the box as possible and for the company to continue to grow. It's approximately 80% of our revenue is subscription right now and for that trend to continue. Second question. was does your AI Smart Search technology have applications beyond your customer base? How are your customers embracing this new offering? So our historical focus has largely been on e-commerce side. This is going to continue to be primary business driver in both B2B and B2C. Smart Search is also expanding our presence in content websites. And even intranets, where its generative AI is able to summarize and combine multiple articles to provide tailored search results that directly speak to the query while leaving out superfluous information that may be in underlying documents.

Next question, provide some color on the company's thinking on product mix on a go-forward basis, i.e., what's the company's view or how to maintain a diversity product-based while HawkSearch is scaling up.

All right. That one's from Per Jacobson. Pierre. Bridgeline's e-commerce 360 strategy allows us to grow through acquisition. But HawkSearch has such a strong sales trajectory, especially with SmartSearch, that's dominating our focus for this year and likely for the next year as well. In terms of innovation, we're expanding HawkSearch with AI capabilities, connectors, to partner platforms and performance improvements. We're focusing sales on partnerships on HawkSearch with assigned resources to key partners like BigCommerce and Optimizely in particular. And we're leading with HawkSearch in our marketing conference presence. HawkSearch is fully integrated with Unbound and WooRank and Celebro is merging with HawkSearch. So anyone using those products benefits from all of our innovations in AI. Of course, all of our products are important, but because HawkSearch is growing at a substantially faster rate than anything else, it's going to dominate our mix in the foreseeable future.

All right, follow-on question there. Can you provide a rough breakdown on revenue and margin sources? I'll take that. Our largest contributors to revenue and margin are Unbound, we just talked about, and Search, being about 60% of services and 20% of subscription. And search being 30% of services and 60% of subscription. Both unbound and search deliver similar gross margins of 40 to 45% for services and 70 to 75% margins for subscription. And finally, we had a question about some insight into cash burn and projected cash position to the end of the year going into next year. As rule of thumb, we manage our financials so we can generate cash If we need to reduce non-personal marketing spending, we can by $150,000 to $250,000 per quarter. At this time, our marketing is generating great subscription sales for long-term ROI, and we'll continue to make those investments, even though it may lead to immediate negative cash flow and negative EBITDA like we've seen the last couple quarters, $84,000, $83,000 this quarter. We expect our low watermarked cash to be around $1 million. and we can adjust that through advertising spend, and we do not intend to deal with stockholders in order to generate cash. Moderator, is there any other questions out there from the group?

I show none in queue, sir. Excellent. Okay, great. Okay. Oh, sorry. No, I'm just going to turn the call back to management for remarks.

Well, there we are. Thank you, sir. Thank you, everybody, for joining us today. We appreciate the continued support of all of our customers, partners, and our shareholders. We're really excited about our business and ongoing growth prospects, and we look forward to speaking with you again in our third quarter fiscal conference call in August 2024. Until then, be well. Thanks.

And this concludes today's conference call. Thank you for participating. You may now disconnect.