Bridgeline Digital, Inc.

Good day and thank you for standing by. Welcome to the Bridgeline Digital third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tom Winnhausen, Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Winnhausen. I'm the Chief Financial Officer of Bridgeline Digital. I'm pleased to welcome you to our fiscal 2024 third 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 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 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 form-making statements made today. For more detailed information about these factors and other risks that may have 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 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, and you can obtain a copy of that on our website. I'd now like to turn the call over to Ari Cohen, Bridgeland's President and CEO. Ari? Thank you, Tom.

Good afternoon, everyone. Recent advances in AI, especially large language models and Gen AI, are revolutionizing e-commerce and reshaping online shopper expectations. As a result, nearly every e-commerce site will upgrade their site search to be both intelligent and conversational. This shift is disrupting the billion-dollar site search market, forcing everyone to reconsider their search provider. Hawk Search is uniquely positioned displaced competitors. Our team has a deep history in AI and is approaching the site search market in a more meaningful way than anyone else. This gives us an opportunity to take a disproportionate share of the market during this turbulent time. We're the only AI company offering merchandising AI agents that work directly with our customers' marketing team to continuously tune their site searches results. This capability, known as tailored AI, is already positioning us as a leader in the market. Tailored AI has helped double the average Hawk Search sale size, win new customers every week, secure top-tier partnerships, and gain recognition from leading analysts like Gartner. We have truly taken a different approach to AI by providing collaborative agents rather than a black box, one size fits all solution. Our competition only allows customers to enable AI and assumes they should then be hands-off as AI powers their site regardless of their corporate goals. With tailored AI, We deliver AI agents that collaborate with our customers' marketing teams to optimize their sites. Our customers are empowered to continually tune and train the AI agents based on their ever-changing goals, inventory, and market demands. We're moving fast in AI innovation. This year, we launched Concept Search. We launched Image Search, Visual Search, Conversation Search, and now Smart Response. No other platform has moved this quickly to seize the tailored AI opportunity in site search. As we continue to innovate, we expect these advancements to accelerate our growth, solidify our leadership in a market where search now drives 60% of our subscription revenue. This quarter, we sold 23 licenses with $420,000 in ARR, $1.4 million in TCV. That brings us to 70 licenses totaling $1.7 million in ARR and $5.1 million in total contract value this fiscal year. HawkSearch was the lion's share of these sales. Importantly, our investments in partner connectors accelerate sales by allowing customers to launch HawkSearch with the click of a button. We're launching multiple customers every single week. Our tailored AI approach also accelerates sales because our customers know that they can continually refine search results based on their merchandising goals. And this is different than competitors who simply have an AI button that puts the site on autopilot with no ability for ongoing tuning and therefore significant Q&A review before the launch. With each launch, we have more references and further recognition as leaders in the site search sector. Analysts continue to recognize HawkSearch for its advancements in AI, and this is driving demand and average sales price. Gartner recognized HawkSearch in its magic quadrant for search and product discovery, highlighting HawkSearch's strengths in both artificial intelligence and the B2B market. InfoTech Research Group awarded HawkSearch as a champion in enterprise search and recognized HawkSearch as a top-rated software within the category. Featured customers listed HawkSearch as a top performer in the Summer 2024 Customer Success Report for Enterprise Search Software. This quarter, HawkSearch launched the Gen A Powered Athena release, updating features with smart response and conversational dialogue based on search queries. where prompts for follow-up questions and suggestions to imitate a personalized in-person conversation with the sales assistant are available. Two important platform partners that we expect to continue to generate new sales for HawkSearch are Optimizely and BigCommerce. BigCommerce is promoting HawkSearch ahead of all other search providers on the first page of its app store, providing tens of thousands of BigCommerce customers the ability to upgrade to Hawk Search's AI technology. Hawk Search offers a one-click install for Optimizely and is recognized by Optimizely as a top paid app in their app store on the very first page. Hawk Search is now uniquely positioned to improve site search for more than 1,000 Optimizely configured commerce customers with several already purchasing licenses. We partner with the system integrator and Optimizely expert, xEngage, for our Optimizely connector, which leads to even more sales. HawkSearch AI will be showcased at Opticon 2024 in San Antonio, Texas this November with Optimizely. At the Applied AI Conference in Chicago this past June, Moblico presented HawkSearch as a key AI-powered site search platform for mobile devices. This is a new market in which HawkSearch's concept search is particularly well suited for success. And here are a few of the wins that we've had this quarter. Colonial Electric Supply, large electrical distributor, chose Bridgeline's HawkSearch to power product discovery for its optimizely platform e-commerce site. Colonial selected HawkSearch for its AI search capabilities and reputation in the electrical distributor sector. Grizzly Industrial, a leading industrial supplier, selected HawkSearch to power search on its e-commerce site. HawkSearch will enhance Grizzly's industry's e-commerce product discovery by offering precise search tailored to the needs of the machinery industry, including advanced part number search for both full and partial numbers, unit of measurement conversion for dimensional products, and merchandising tools to run product-specific campaigns. SalesRite, a large craft retailer, selected HawkSearch to improve its product discovery for both B2C and B2B sites. HawkSearch launched on two of SalesRite's e-commerce sites on the BigCommerce multi-storefront platform. Our partnership with SalesRite reflects our expertise in supporting retail and BigCommerce multi-storefront. Shadler Yesco, an electrical distributor with over 29 locations and 1,000 brands, implemented Hawk Search on its optimizely powered e-commerce site using the X-Engage connector for Hawk Search. And Voltus GmbH, a leading German electrical distributor, selected Bridgeline to power site search for its e-commerce site. Voltus aims to increase online revenue by using Bridgeline's AI-powered site search for its online catalog with more than 80,000 products. All in all, we had 23 license sales this quarter, 70 this year to date, and our average license sale is nearly double the MRR of last year. This increase in volume and size is largely due to our advances in AI. So at this time, I'll turn the call back over to our Chief Financial Officer, Tom Winhausen. Go ahead, Tom.

Thanks, Ari. I'll provide an update on our financial results for the third quarter of fiscal 2024, which ended June 30, 2024. Total revenue for the quarter ended June 30, 2024 was $3.9 million compared to $3.9 million in the prior year period. Now, going into each component of revenue, our subscription license revenue, which is comprised of SAS licenses, maintenance and hosting revenue, and perpetual license revenue, For the quarter ended June 30th, 2024, it was 3 million compared to 3.2 million in the prior year period. As a percentage of total revenue, subscription and license revenue was 77% of total revenue for the quarter ended June 30th, 2024. Services revenue was 923,000 for the quarter ended June 30th, 2024, an increase from 742,000 in the prior year third quarter. As a percentage of total revenue, services revenue accounted for 23% of total revenue for the quarter ended June 30th, 2024. Robert Marlayson- cost of revenues 1.2 million for the quarter ended June 24 a decrease from 1.3 million in the prior year period. Robert Marlayson- And as a result, gross profit was 2.7 million for the quarter ended June 24 as compared to 2.6 million in the prior year period. Robert Marlayson- Or overall gross profit margin was 69% for the quarter ended June 24 compared to 68% in the prior year period. With subscription license gross margin that 72% for the quarter ended June 30th 24 compared to 73% in the prior period and service margins of 58% for the quarter ended June 24 compared to 44% in the same period 2023. Our operating expenses of 3.1 million were in the quarter ended June 24 or lower compared to 3.3 million in the prior year period. Moving down to below operating expenses, the change in fair value of our liability classified warrants resulted in non-cash gain of $88,000 this quarter compared to a non-cash loss of $107,000 in the prior year period. And moving to bottom line, gap in income loss. Our net loss was $300,000 for the quarter ended June 24 compared to a net loss of $800,000 in the prior year period. Moving to EBITDA, our adjusted EBITDA for the quarter ended June 24 was 3,000 compared to a negative 163,000 in the prior year comparable period. Now moving to our balance sheet. On June 30th, 2024, we had 1.2 million of cash and 1.5 million of accounts receivable. Our total debt outstanding as of June 30th, 2024 was under 500,000 euros or about 524,000 US dollars. With a weighted average interest rate of about 4.6%, with principal payments due through 2028. We have no other debt or remaining earnouts from any other provisions or from any other previous acquisitions. And June 30, 24, our total assets were $16 million and total liabilities were $5.6 million. In the quarter, cash decreased about $100,000, of which $19,000 was used in investing activities and $84,000 was used in financing activities. Our flat operating cash for the quarter was consistent with our EBITDA of $3,000 for the quarter ended June 2024. Finally, as an update to our cap table, as of June 2024, our cap table included 10.4 million shares outstanding, 39,000 shares from Series C preferred on an as-converted basis, 1.7 million warrants, and 2.1 million options. Of these warrants, Nearly $900,000 with an exercise price of $4 will expire in September 2024. After that, we will have about 800,000 warrants, primarily 180,000 warrants with a $2.85 exercise price expiring in May 2026, and 592,000 warrants with a $2.51 exercise price which expire in November 2026. Red Hat looks forward to continued growth and success in the remaining of 2024 and beyond as we continue to focus on driving growth, product innovation, customer success, and 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. As a reminder, to ask a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile our Q&A roster.

We have a couple questions that were previously submitted, so while people go into the Q&A roster, we'll handle those. All right, the first one here, what are opportunities to expand within our existing customer base?

Okay, great. HawkSearch is the primary expansion opportunity, and we have more than 600 HawkSearch customers. Every single one of those Customers, just like every single website owner on the planet, needs to embrace what's happening with AI and upgrade their site search to include AI capabilities and conversational capabilities. So we see opportunities. We've already upgraded several customers within Bridgeline for Smart Search, but we're going to have hundreds more. And in general, Our pricing increases by about 35% when somebody upgrades to site search within Bridgeline. And nearly 60% of our subscription revenue is search revenue right now. So that's a significant increase for us. However, that increase really pales in comparison to the broader market opportunity. This entire market is undergoing a really disruptive shift where everybody needs to evaluate what they're doing in the search area and how customers' expectations are quickly evolving to interact with websites in a more natural way, in a multimodal, meaning images and cameras, driving search. and in a consultative way, meaning that they expect websites to come back with intelligent questions and to have a dialogue to better refine what products will fit their goals. And these are all opportunities for Hawk Search to grow across a billion-dollar market.

Great. Our next submitted question, how are our relationships with companies such as BigCommerce, Salesforce, and Optimizely helping expand our customer base? And what does our new customer pipeline look like?

Okay, great. Every e-commerce site has a content management and commerce platform as its foundation. And what we are doing is making it so that talk search is available point and click out of the box on each of these platforms and that doesn't mean that you won't do any work thereafter but it means that you can quickly try hawk out launch it in its vanilla form and tune it thereafter and this is important because it's actually different than the approach that other companies have taken at least in the ai part of of site search where they are thinking of AI as sort of this omnipotent capability that you just enable and it drives everything from that point forward. But we're partnering with Salesforce and with Optimizely and BigCommerce and Sitefinity and other commerce platforms so that you can quickly find us in their app stores. quickly and painlessly launch HawkSearch. And then from that point forward, tune HawkSearch to have more refined results based on your evolving business needs. So they're going to continue to drive a large part of our business for us. And already this has resulted in substantial improvements to our own sales pipelines. We have a pipeline now that is nearly triple the size of this time last year. We've got a conversion rate that is one and a half times what it was last year and an average sales price that is nearly double what we saw last year. And all of this is both bodes for Hawk Search really becoming the dominant revenue factor for a bridge line.

Great. Next question submitted. What types of doors have opened up after Hawk Search was named a top-performing enterprise search software provider? I think that's referring to the summer 2024 customer success report, an enterprise search for pre-featured customers. Okay.

Okay, great. Well, I'm happy to say that we're getting leads directly from analysts and directly related to these awards and reports um without naming names i'll say that uh one of the largest hardware suppliers came directly from uh this report and we're in a sales cycle for them right now and that would be um one of the largest customers bridge lines one to date in fact so uh they They produce leads, they reduce our customer acquisition costs, they accelerate our sales cycle, and it's a strategic part of our marketing going forward.

Great.

Okay, let's see if we've got any other questions there.

Again, if you would like to ask a question on the phone line, please press star 1-1 on your telephone.

We have one more submitted if we go through that. Ari, when will Hawk Search's momentum outpace that of the other products for Bridgeline and dominate the business?

Okay. Well, from a momentum perspective, in terms of growth, Hawk Search certainly is growing leaps and bounds faster than everything else. It is very dominant and now represents 60% of our subscription revenue. However, that doesn't shine through in our financials yet, and it will at its current pace in just a couple of quarters. We expect the growth of HawkSearch to outpace any decline in other revenue in that time period. And most importantly, because what we've done with AI and because we are in a disruptive market, I mean, Site search, everyone, everyone has to reevaluate this. They might stay with their current solution, but everyone's got to evaluate it. And with our advances in AI, this creates an opportunity for an inflection point in the site search market that could be just absolutely incredible for a bridge line. So we're positioned for that. We're taking a leadership role in AI that is beyond what anyone else is doing. Quite frankly, we have a very deep understanding of how AI works and how it collaborates, not replaces, but collaborates with a merchandising team. And these together can completely create exponential growth in that market.

Moderator, do we have anyone on the Q&A list?

We do. One moment for our first question. And our first question is going to come from the line of Casey Ryan with West Park Capital. Your line is open. Please go ahead.

Ari Thomas, how are you? Nice quarter. I have a question about, hey, great to talk to you. What are the incremental margins? You're talking about sort of expanding what the, you know, A, like, example customer might spend using Hawk Search, right? What's the incremental gross margin, I guess, is what I'm thinking about. So the corporate average is 68%. But if a customer moves from billing, say, $12,000 a year or something to $20,000 because they're utilizing more features of Hawk, does the gross margin expand, say, directionally far above the corporate average?

Yeah, that's a really great point. Our cost of goods sold with this increase in revenue, our cost of goods sold are essentially constant for this. So we should start seeing our gross margins approaching 80%. As our customers begin to – and that's even without the AI. Then as our customers start using more and more of the AI, that's going to be in the – mid 70% range so I expect us to stabilize in the in the high 70s and one of the things that has happened recently that has been very I think it's going to be very impactful on gross margin is above and beyond all of that we've seen customers that have become so reliant upon the performance for Hawk Search that they are asking for isolated environments rather than a staff environment and paying a premium to be able to isolate their performance from anyone else. And in those instances, you also start averaging in about an 80% gross margin as well. So we expect to be in the high 70s altogether, and we're going to be there, and I'm talking about for subscription in the near term. One other point on that is that our sales now have a much higher percentage of license to services than they have historically. And our services are selling at a premium this quarter. We had pretty high services gross margin. I think we should be striving for 50% in that range. but the subscription will become a larger percentage of our revenue as well, Casey.

Yeah, that's actually a helpful point on the services side. So that 58% margin was just sort of an anomaly, you know, maybe in the quarter and shouldn't be something we expect every quarter moving forward from here.

Right, that is an anomaly. Historically, we've been in the 40s, and I think that 50 is about the highest anyone should ever expect, and if we get a 58, then...

great we'll take it but uh that doesn't fairly repeatable okay uh thank you that's really helpful and then one more question i'm just thinking about um on the opx line you know maybe this is a market that needs uh evangelism and there's a natural you know cycle to it i think as you were suggesting as customers you know need to evaluate what these tools can do for them and start to integrate them and as you say not integrate them but um Is there any value or potential, say, in like a, you know, unconstrained resource market where more sales and marketing could speed that up? Or does the market feel too big and it kind of needs to move at the pace and you guys can't necessarily drive that yourself?

I think that an increased sales and marketing would have results for us. We see that a market is almost infinite and our ability to increase investments in sales and marketing would proportionally impact sales for us. We have focused in R&D recently and made a lot of investments in that regard, including partnerships with some revenue share to accelerate some development to help manage our own expenses But sales and marketing is a place where we're looking for ways to invest even more, and in particular for partnerships to help manage that customer acquisition cost, because we expect that if we invest more in sales and marketing, we're going to get proportionate results.

Yeah, that makes a lot of sense. Thank you. It was a great quarter. I look forward to following along as we move forward. Thanks. Thank you, Casey.

Thank you. And again, to ask a question, please press star 1-1 on your telephone. And I'm showing no further questions, and I'd like to hand the conference back to management for closing remarks.

Thank you, everybody. Thank you for joining us today. We appreciate the continued support from all of our customers, our partners, and our shareholders. We're excited about our business and ongoing growth prospects, And we look forward to speaking with you again on our fourth quarter fiscal 24 conference call, expected to be in December of 2024. Be well, everyone. Thanks.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.