Bridgeline Digital Q3 2023 Earnings Call Transcript

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August 11, 2023

There are 5 speakers on the call.

Operator

Thank you for standing by, and welcome to Bridgeline Digital's Third Quarter 2023 Earnings Call. I would now like to hand the call over to CFO and Treasurer, Thomas Windhausen. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhausen. I'm the Chief Financial Officer at Bridgeline. I'm pleased to welcome you to our fiscal 2023 3rd quarter conference call.

Speaker 1

This afternoon is Ari Kahn, Bridgeline's President and CEO, who will 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 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 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 Changes in economic, business, competitive, technological, regulatory and other factors could cause Bridgeline's actual results could differ materially from those expressed or implied by the projections or forward looking statements made today. For more detailed information about these 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.

Speaker 1

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'd like now to turn the call over to Ari Kahn, Bridgeline's President and CEO.

Speaker 2

Thank you, Tom, and good afternoon, everybody. In the Q3, we made $1,200,000 in new sales, including $600,000 in licenses, which will add $200,000 to our license annual recurring revenue. Most new customers sign initial subscription term for 3 years and typically renew for 2 successive 1 year terms are in the range of 5 years with the subscription. Bridgeline's core, including Hawk search and recommendations, grew by over 15% CAGR and now accounts for 44% of our revenue. Our core products have over 98% revenue renewals.

Speaker 2

We also have legacy platform products, which we pivoted from in our E360 strategy as they had too are very competitive in the sales cycle and competed with companies like Salesforce, who we prefer to make a partner. These products have great gross margins to fund innovation, but are not a focus of our company sales teams declined this year with large customers reducing, but not eliminating their license. Although this decline hit the growth of our are in the range of $1,000,000 We expect our core products line to outstrip the decline of legacy products in the near future as its 15% CAGR will soon cause it dominate our overall revenue, especially in license and subscription where nearly 50% of our revenue is already core. Not only will revenue soon be dominated by our growing core products, but that growth rate is expected to increase with some important are in the range of 2nd quarter. Bridgeline will launch native integration with optimizably configured commerce in October.

Speaker 2

This integration allows for touchless sales to over 1,000 Optimizely customers where they can upgrade to HawkSearch with the click of a button. We already have 8 pre signed customers and this will make us the only search product for the more than one will make a joint announcement with Optimizely at their October Optimizely user conference. Disline's Bronco release is another important revenue driver for our core products that has already reduced our sales cycle from are in the range of 12 weeks to less than 10 weeks and increases our total addressable market to now include companies We need a simple implementation without sacrificing features. Bronco accelerates sales with its out of the box UI and its self-service portal. Another important core growth area that will be announced and released in November are in our advanced analytics system, which is an upsell opportunity to our customers like Hewlett Packard, who needs have more detailed information about the contribution of HawkServe to their online revenue.

Speaker 2

Resign will also release its franchise search solution this year, making it the 1st site search provider to offer a site search product specifically for the franchise market. Bridgeline has already pre signed its first customer with our franchise solution and with our deep experience in this segment we expect to accelerate growth by being the only provider in this market. Huxford sales are largely driven through our participants are in the same store, and we also have agency partners including XEngage and American Eagle. Can drive New Hawk sales. This quarter, we announced the partnership with O bundle, a specialist in BigCommerce with over 500 BigCommerce customers who are now candidates to upgrade to HawkSurg.

Speaker 2

Sales in our Q3 included Aeron Equipment, are one of the world's leading dealers in the packaging industry and equipment selected Hawk Search for their B2B e commerce site because of its real time product indexing that allows customers to search and index data as it's being created or changed. We also signed Seattle Aviation, a worldwide aviation supplier who chose HawkSearch in partnership with Salesforce for personalized recommendations on its B2B Commerce site. Balkan Sport, A B2B Paintball and Sports retailer selected HawkSearch to drive online business over its 5 e commerce sites using HawkSearch Multi Storefront. Vulcan will be delivered in partnership with BigCommerce and O'Bundle. Designoree, an importer and distributor of European designer focused furniture also purchased HawxSearch's multi store front participants have power multiple e commerce sites powered with e commerce.

Speaker 2

The big sale for this quarter included Repli, The property technology company has selected WooRank to power SEO for 500 websites, improve their keyword tracking to analyze competitors and report on Core Web Vitals. Paul Byron Chu chose our AI driven search to power its online business on the AB Commerce platform in partnership with MAGICO. Now we've got several Schuh customers including Converse, Reebok, Adidas, Foltest, an electrical online distributor, selected Bridgeline for its multilingual artificial intelligence in natural language processing search capabilities to power its online B2B catalog with over 80,000 products and there were several other ones this quarter as well. Many of these new customers are the result of our go to market strategy target underservice verticals with Be Everywhere campaigns and these verticals include B2B Electrical Supply, participants

Speaker 3

are in the range of

Speaker 2

$1,000,000 We recently announced a reseller partnership with Excevibe, The market leader in web accessibility. Acceptably helps over 180,000 companies including PlayStation, Johnson and Johnson and NBC to identify and fix website compliance issues with the American Disability Act and similar legislation in Canada and Europe. Bridgeline will sell acceptibe into our 600 customers, many of whom have active interest in accessibility, which not only increases their online sales ability, but also reduces litigation risk associated with compliance legislation. In the Q3, Red Lion delivered $3,900,000 in revenue including $3,200,000 in subscription and license revenue and are in services. Subscription revenue was excellent this quarter by the full quarter reduction of the large customer we mentioned earlier, This quarter over 200 of our customers whose subscription was eligible for renewal renewed totaling 1,000,000 in licenses.

Speaker 2

Our core product customers renewed at over 98%. Many customers renewed their subscription with a rate increase. Most customers start with a 36 month subscription as mentioned earlier and renewed for 2 successive terms. Our subscription license revenue is 81% of total revenue for the quarter with NuCon on track for the coming 3 years. At this time, I'd like to turn the call over to our Chief Financial Officer, Thomas Hoss.

Speaker 2

Thomas?

Speaker 1

Thanks, Ali. I'll provide an update on our financial results for the Q3 of fiscal 2023, which ended June 30, 2023. Total revenue for the quarter ended June 30, 'twenty three was $3,900,000 compared to $4,200,000 in the prior year period. Now going into each component of revenue, our subscription and license revenue, which is comprised of SaaS licenses, Maintenance and hosting revenue and perpetual license revenue for the quarter ended June 30, 2023 was 2,200,000 As a percentage of total revenue, our prescription and licenses revenue was 81% of total revenue for the quarter ended June 30, 23. Services revenue was over $700,000 for the quarter ended June 23, a slightly decrease from $800,000 in the prior year quarter.

Speaker 1

As a percentage of total revenue, services revenue accounted for 19% of total revenue for the quarter. Our cost of revenue was $1,300,000 for the quarter ended June 23, consistent with the $1,300,000 in the prior year period. As a result, Gross profit was $2,600,000 for the quarter ended June 23 as compared to $2,900,000 for the prior year period. Our overall gross profit margin was 68% for the quarter ended June 23 to 30% to 70% in the prior year period. Our subscription license gross margins were 73% for the quarter ended June 23 compared to 75% in the prior year period And our services gross margins were 44% for the quarter compared to 46% in the same period in 2022.

Speaker 1

Operating expenses were $3,300,000 for the quarter ended June 2023, consistent with $2,300,000 in the prior year period. The change in our fair value of our liability classified warrants resulted in non cash charge of $100,000 compared to income of $400,000 in the prior year period. Changes in share price are the primary driver of

Speaker 2

the change in fair value of this warrants.

Speaker 1

Our net loss was $800,000 for the fiscal quarter ended June 30, 2023 compared to net income of $400,000 from the prior year period. Moving to EBITDA, our adjusted EBITDA for the quarter was a negative $163,000 compared to a positive $63,000 in the prior year period. Moving on to the balance sheet. At June 30, 2023, we had $2,600,000 of cash and accounts receivable of 1,000,000 Our total debt outstanding was €680,000 or about US740,000 dollars with a weighted average interest rate of 4.5% and principal payments are due extending through 2028. We have no remaining earn outs from any previous acquisitions and our total assets were $25,900,000 with total liabilities of $6,700,000 We look forward to continued growth and success in fiscal 2023 and beyond will continue to focus on our revenue growth, product innovation, customer success and delivering shareholder value.

Speaker 1

Thank you for joining us on the call today. At this time, we'd like to open the call to questions and answers. Moderator?

Operator

Our first question comes from the line of Howard Halpern of Taglich Brothers.

Speaker 3

Good afternoon, guys.

Speaker 2

Good afternoon, Howard.

Speaker 3

So do Do you anticipate that this quarter should be the low point, at least with a subscription and perpetual license revenue line and that we should begin to see sequential growth from this point going forward?

Speaker 2

So our low quarter for subscription license is probably going to be next quarter. There's another 45,000 in subscription and license burn off from that one customer that will be in next quarter and that will be it. Okay. Depending on our sales right now, they'll be flat or down.

Speaker 3

Okay. But then for next You anticipate then you should start to see some sequential

Speaker 2

decline. Exactly. So our strategy on all of this, how it is and for everybody is that we've got a set of products from recent acquisitions and innovation that are really selling and we talk a lot about are in the range of $1,000,000 and we've got some legacy products that are generating EBITDA for us and we're treating those customers really well, but we're not adding new customers and over time those customers are declining. So our core revenue is going to be more than 50% down And that growth that we see, which this quarter was 15% CAGR, will Okay.

Speaker 3

And in one of the, I guess, partnership deals that you had with are over 500 WLAN Acquises through 1 partner. Are there other types of deals out there that you could get chunks of customers?

Speaker 2

Yes, And we signed a partnership with a company called Duda that has 10,000 plus customers and is selling in bulk to vote. So those are opportunities. And then also when we sell into the franchise space, we actually are winning chunks of customers, so to speak. There's 4 big things that are coming down the pipe in the near term that are going to reduce our sales cycle have increased our total addressable market, both of which are going to drive growth for those core products. One of them is are our franchise search solution called multi engine management that's going to allow us to be the only search solution that have features specific for the franchise industry and that's going to win chunks of customers, so to speak.

Speaker 2

The other one is advanced analytics, which is actually an upsell opportunity with substantial MRR that's going to allow us to sell into our existing customer base have a new product that many of them need. Third one is Brionco, which gives us an out of the box user interface and a self-service portal so that can sell into companies that need to launch right away rather than wait a few weeks for an implementation. And then the 4th and the big one is the Optimizely configured commerce, where we'll, with a click of a button have access to 1,000 Optimizely customers who can purchase Hawken and Rekognition.

Speaker 3

Okay. And also, do you see out there the potential for other types of partnerships like you described where Software that your customer base needs that you could bring into the fold

Speaker 2

That's interesting. And so we did that with Xsepi will be announcing those along the way. We're in negotiation with a couple right now. And one of the things that we want to do strategically is to leverage our customer base And to be able to sell more into it. That's both by innovation, acquisition and by partnering and reseller.

Speaker 3

And you're seeing the opportunities in partnering. What is the landscape in the acquisition area? Is partnering a little bit easier at this point in time?

Speaker 2

Well, partnering is easier, not just at this point in time. In general, it is, but you get a smaller cut of the overall revenue. So you got to be are careful in terms of your own sales costs. But the M and A industry is, I think a buyer's market right now we're starting to see private company valuations going down as low as like 1.5x revenue lower. And so finally, it's starting to get into the area where we think it ought to be.

Speaker 3

Okay. Well, I'm excited about this market for the long term. Okay. I'm excited on

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Per Jacobsen.

Speaker 4

Hi, guys. How are you doing?

Speaker 2

Good. Far, how are you?

Speaker 4

Doing well. Thanks. Hey, I was wondering a couple of things. Just a Small thing first, how many net new direct customers did we gain in this quarter? Is that something you could share?

Speaker 2

So the new We also upsell into existing customers each quarter in addition to that, but 14 new logos, I believe.

Speaker 4

Okay. Thanks for sharing the information about the I mean, as I think I expect Paul, there's definitely a group story hidden somewhere in the nicotine numbers. So thanks for sort of starting to dissect that. Following up on Howard's question, it's hard to sort of grasp because you're talking about An incline and a decline, when do you think that materially the incline will exceed the decline? I mean, when do you expect?

Speaker 2

I think that that's coming in our Q1 absolute worst case would be our Q2, so that would be either in the quarter ending December, worst case, the quarter ending March. So we do have so we had a customer who, we announced this actually at the beginning of the year

Speaker 1

participants have removed

Speaker 2

that reduced their license size. It was a large customer and they couldn't do it all at once and they ramped it down and that have caused successive quarter declines and there's $45,000 in subscription revenue left next quarter, so I guess in the current quarter and our 4th quarter. So we'll see quarter over quarter, if nothing were to change, a 45 ks decline. Now of course, we're winning customers as well and it will be less than that we expect. But then at that point, we're done with that particular say that because we do respect these products and we keep them current.

Speaker 2

We're just not focusing on many new customers in those basis though overall things do decline. The 50% in the core products. Now with the 50% in core products growing at this quarter 15% CAGR and Last quarter 2018% as summers tend to be light quarters for us a little bit. Participants are doing that math, you can see the increase in those core. Also, and the reason why I kind of wanted to focus on some of these future growth initiatives like Optimize and Configured Commerce, Bronco, Advanced Analytics and Franchise Search, we do expect faster sales cycle in a larger total addressable market for our core products and we're hopeful to see that allow us to grow at even faster rates.

Speaker 4

Okay. Thank you. I may have missed this, and I didn't have access to The quarterly report before the call. So what does the cash position look like now?

Speaker 1

Cash at June 30 was 2,600,000 Okay. There's $1,000,000 of accounts receivable.

Speaker 4

Okay. Hey, Ashish, you guys are doing a good job. Can you ask that we get a little bit more notice, a little lag between the release At the quarterly and the call, it didn't even come through before the call. Okay.

Speaker 2

Okay. You know what, that hasn't been on my radar and thanks for bringing that off and we'll see what we can do.

Speaker 4

Okay. Thank you. I appreciate it. And thanks for everything you do, guys.

Speaker 2

Appreciate it. Thank you. We appreciate your support.

Speaker 4

Thanks.

Operator

Thank you. On your telephone to ask a question. Our next question comes from the line of Leo Carpio of Joseph Gunnar.

Speaker 2

Afternoon, gentlemen. I actually have 2 quick questions. First one, could you provide us an update on the industry environment in terms of what are you are seeing what particular trends, is the economy or considering the economy having any concern any impact on your sales cycle? Thanks.

Speaker 3

Thanks, Leo.

Speaker 2

So first of all, with the caveat, I hate to think, especially for a company the size of Bridgeline in terms of macroeconomics because the market overall is so large relative to us that the impact of macro deals tend to have less of to be a little bit smaller. We see sort of on two sides, 1 on the valuation side, But on the new sales side, in terms of trends, we personally have not felt an appreciable change So we haven't felt that yet, although we do see a lot of people kind of talk about it. But our sales cycle has the same length And then on the M and A side, you mentioned that the valuations are coming down and seem to be more are appealing. Any particular technologies that you're looking at or considering that would be nice add on to your platform? Or are you just satisfied with what you have right now in the near term?

Speaker 2

Yes. Okay. We're not satisfied with what we have right now. We think that one of the participants are selling to existing customers. Now we want to stay focused.

Speaker 2

I am still seeing a couple of deals a month come to me. I spent a lot of time in 2020 2021 making sure that every investment banker knew my may not even think that it was relevant and I can quickly triage it. So I see a lot of deals coming, but Our focus is all about helping our customers increase their online revenue. And we want to do so with are products that are easy to sell, meaning that they don't require significant professional services to implement, ideally participants are at this point and click to purchase touchless sales as we said. So we look to customer or to prospective companies candidates for acquisitions.

Speaker 2

We look for products that can help our customers convert more of their site visitors and their site buyers. And in particular, we see competitors, some of our existing products, competitors to Hawk Search, for example, that come to us for acquisitions. We haven't that we could integrate the customer bases and the technologies. And then we also look at products that increase the average purchase price similar to our own recommendation tool that makes impulse purchase recommendations on your checkout screen. So those three broader categories that all are synergistic in their ability to drive customers' revenue are what we're looking for.

Speaker 2

Were looking for companies that are generally $5,000,000 in revenue. And in this market, we think that deals happen at less than 2x revenue, which is a little bit of a challenge for us because we're not trading at that point, but leverage buyouts with that could make something make sense. Okay. Just one quick follow-up. The competitive environment, is it still the same, any new players or pretty much back as you've seen in the last few quarters.

Speaker 2

So there's 2 aspects to the competitive environment, the partners and the competitors. On the competitor side in our space, things haven't changed. However, Sorry, Albolia has spent a lot of money last year and that's competing directly with HawkSearch. On the partnership side, what we've seen is that the leads that we're getting from Optimizely in particular and from BigCommerce as well have increased substantially and that might just be because we've spent so much time and have so many success stories with them that we've got certain amount of have mind share within their customer base, but it might also be because they're realizing in our products are better value and for their customers that are choosing us.

Operator

Thank you. I would now like to turn the conference back to management

Speaker 2

Great. Well, thank you for joining us today. We really appreciate the continued support of all of our customers, partners and of are with our shareholders. We're excited about our business and ongoing growth prospects and we look forward to speaking to you again on our Q4 fiscal conference call, which will be in December of

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Bridgeline Digital Q3 2023
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