Bridgeline Digital, Inc. (BLIN) Earnings Call Transcript & Summary

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

Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Tom Windhausen, and I'm the Chief Financial Officer of Bridgeline Digital. I'm pleased to welcome you to our fiscal 2023 fourth quarter conference call. On the call with us 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'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. We expressly disclaim and assume no obligation to inform you if they do. The results that we report today should not be considered 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 detailed -- 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 on the call this afternoon, we'll 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'd now like to turn the call over to Ari Kahn, Bridgeline's President and CEO. Ari?

Thank you, Tom. Good afternoon, everyone. In fiscal '23, Bridgeline signed more than $6 million in sales and had a revenue renewal rate of more than 90%. The HawkSearch product line led the company's sales with HawkSearch growing to nearly 50% of Bridgeline's revenue with a renewal rate of more than 95%. In our fourth quarter, Bridgeline booked an additional 27 sales for $900,000 in contract value that adds $375,000 in annual recurring revenue. Bridgeline closed the fourth quarter with 92% revenue renewal rate for $2 million in renewed contracts, totaling $9 million in renewals for the year. Earlier this year, we explained that a large customer on a legacy product was winding down its license over 2023, which impacted the year's revenue, but at the same time, we delivered strong sales with our core products, especially HawkSearch. And our revenue mix is now driven by our core product lines, which has seen over $6 million in new customer contracts with a 95% renewal rate. This positions us for growth in 2024, and we expect HawkSearch to lead the way with our recently released AI capabilities, such as our Smart Search module. HawkSearch sales are largely driven through our platform partnerships with BigCommerce, Salesforce and Optimizely. We also have agency partners, including Xngage and Americaneagle.com to drive new HawkSearch sales. Sales in our fourth quarter included Digible, a top multifamily apartment marketing agency who uses WooRank to grow online revenue for their customers. The agency will deliver WooRank SEO to accelerate its clients' online presence and help businesses access their digital reach, recognize areas for growth and implement fast and effective strategies for improvement. Filters Fast, a #1 filtration retail in the United States licensed HawkSearch to power their online search and recommendations. The HawkSearch Rapid UI feature was integrated with their custom e-commerce platform, which allowed Filter Fast to quickly launch their sites. Another new customer is Trident Enterprises. Trident Enterprises, a leading livestock sensing supplier selected HawkSearch to grow online revenue on their BigCommerce website. HawkSearch will help Trident's customers quickly find products in their massive catalog using artificial intelligence-powered search and natural language processing. The promoted franchise listed in the Franchise 500 list selected Bridgeline's TruPresence franchise software to host local pages for their over 1,800 locations through TruPresence in high-performance local page system. And another important win was the top financial institution who selected Bridgeline's accessibility product powered by accessiBe to ensure its website is accessible to all and compliant with the American Disability Act. Our partnership with Optimizely and Xngage is an important part of our future growth. In October, we joined Optimizely in their annual user conference, where we jointly announced HawkSearch's integration with Optimizely's configured commerce using the Xngage connector. This announcement was followed with online webinars to further promote sales. HawkSearch is now in a unique position to provide site search for more than 1,000 Optimizely configured commerce customers and several have already purchased the license for this integration. We recently announced a reseller partnership with accessiBe, the market leader in web accessibility. accessiBe helps over 180,000 companies, including PlayStation, Johnson & Johnson and NBC to improve compliance with American Disability Act and similar legislation in Canada and in Europe. Bridgeline's engineering team has focused on artificial intelligence to improve usability and productivity for both end users and site visitors. Unbound added the AI assistant to help content creation with gen AI capabilities to create new content for websites, and the same capability is now available on the HawkSearch landing page creator. HawkSearch announced an important AI-based capability called Smart Search as part of the Keywords to Concepts initiative. Smart Search has 2 core capabilities that improve sales conversions for HawkSearch-powered websites, Concept Search and Visual Search. Concept Search uses large language model to enable online shoppers to describe their goals in natural language rather than describe the product that they're searching for. For example, a shopper on a sporting goods site may search "I am going camping" rather than waterproof tents. And Concept Search will return a waterproof tents as well as additional items that they may need to purchase. This is important as many shoppers may know -- may not know what specific products they need and instead only know the goal that they have such as the fact that they're going camping. One great part of Concept Search is that it's largely language independent and supports 50 languages even for sites that have not yet been translated. Visual Search allows online shoppers to upload an image or even take a picture with their iPhone to find visually similar products. Industries like fashion retail require this because customers want to find a product that is similar to the one that they've seen before but not exactly the same. Furthering our focus on the franchise market with TruPresence, Bridgeline released multi-engine management in partnership with an enterprise franchise customer. Multi-engine management allows franchisors to search and merchandising features across thousands of franchisee sites and then allow individual franchisees to further refine their individual sites. For example, when the chains of clothing retailers want to boost certain seasonal products to the top of their search results, they can do so from the multi-engine console to automatically boost sales in every single one of their stores who have those items in stock. Going forward, we expect HawkSearch and TruPresence to be important parts of our growth with advancements in AI across both product lines that will drive new sales and upgrades in our existing customer base. Smart Search has been especially strong with 7 sales in just the last 2 months and a pipeline of more than 700,000 in ARR since its release in September. 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 fourth quarter of fiscal 2023, which ended September 30, 2023. Total revenue for the quarter ended September 30, 2023, was $3.8 million compared to $4.2 million in the prior year period. Now going into each component of revenue. Our subscription license revenue, which is comprised of SaaS licenses, maintenance and hosting revenue and perpetual license revenue for the quarter ended September 30, 2023, was $3.1 million compared to $3.4 million in the prior year period. As a percentage of total revenue, subscription and licenses revenue was 81% of total revenue for the quarter ended 2023. Services revenue was over $700,000 for the quarter ended September 30, '23, a slight decrease from just under $800,000 in the prior year fourth quarter. As a percentage of revenue, services revenue accounted for 19% of total revenue for the quarter ended September '23. Our cost of revenue was $1.2 million for the quarter ended September '23, which was consistent with $1.2 million in the prior year period. And as a result, our gross profit for the quarter ended September '23 was $2.6 million compared to $3.0 million in the prior year period. Overall, our gross profit margin was 68% for the quarter ended September '23 compared to 71% in the prior year period. Our subscription and license gross margins were 73% for the quarter ended September '23 compared to 76% in the prior year period, and our services gross margins were 46% for the quarter ended September '23 compared to 47% in the same period in '22. Our operating expenses were $10.8 million for the quarter ended September 30, '23, an increase of $3.4 million in the prior year period. Our operating expenses in the current year quarter included a $7.5 million goodwill impairment charge. Moving to below OpEx. The change in fair value of our liability classified warrants resulted in noncash income of $200,000 compared to a slight loss in the prior year period. The change in share price is the primary driver of the change in fair value of the warrants. Moving to the bottom line. Our net loss was $8.1 million for the quarter ended September 30, 2023, compared to a net loss of $500,000 in the prior year period and the current year period included the impact of the $7.5 million goodwill impairment. Moving to EBITDA. Our adjusted EBITDA for the quarter in September '23 was negative $100,000 compared to a positive $100,000 in the prior year period. Moving on to our balance sheet. On September 30, '23, we had cash of $2.4 million and accounts receivable of $1.0 million. Our total debt outstanding at September 30, '23 was about EUR 660,000 or USD 700,000. The weighted average interest rate on that is about 4.5%, and principal payments are due through 2028. We have no other debt or remaining earnouts from any of our previous acquisitions on our balance sheet. And at September 30, '23, our total assets were $17.6 million and our total liabilities were $6.2 million. Finally, I want to give an update on our cap table. As of September 30, '23, our cap table included 10.4 million of outstanding shares, 39,000 shares from Series C preferred stock on an as-converted basis, 1.75 million warrants and 1.8 million options. In October '23, 54,000 warrants expired. That leaves just over 1.7 million warrants currently outstanding. 900,000 warrants with exercise price of $4 will expire in less than 1 year in September 2024. After that, we will have approximately 800,000 warrants, primarily including 180,000 warrants with a $2.85 exercise price expiring in May '26 and 590,000 warrants with a $2.51 exercise price which expire in November 2026. Bridgeline looks forward to continued growth and success in fiscal '24 and beyond as we continue our focus on revenue growth, product innovation, 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 up to questions and answers. Moderator?

[Operator Instructions] Our first question comes from the line of Mr. Halpern of Taglich Brothers.

Congratulations on navigating an interesting year. So based on the commentary in the beginning, can we assume that the fourth quarter revenue is sort of going to be the low point and sequentially from that $3.8 million, we should start to see growth quarter-by-quarter?

Yes, you should start to see quarter-by-quarter growth. So last year, we had an important customer on a legacy product, wind down beginning the first quarter sequentially each quarter. And their final license decrease is actually Q1 this quarter that we're in right now. However, our other product lines have grown. Now we are more than half our core products, which are growing, and that's going to overshadow the legacy decline that we saw in the past.

How important, I guess, was it for you to begin developing the AI capabilities for new customers and to maybe upgrade and expand within your existing customer base?

So the advancements that have happened in AI as a science in the last 2 years have been amazing. My background is in AI. I've got a PhD in AI. And I'm very energized and excited about everything that's happened, especially with area of research called large language models. We've been able to very quickly incorporate capabilities in large language models, specifically into both HawkSearch and our TruPresence products. These capabilities are allowing our customers to increase the revenue on their websites by allowing the end users of those websites to more naturally search for products, even if they don't know what they need to just say what they're going to do. I'm going to go camping, for instance, and have the site, say, well, great, if you're going to go camping, here's the products we have that you might want to buy. Our existing customers have tremendous demand for these capabilities. In just a very short period of time, we've signed 7 licenses within our existing customer base, and we've got a huge pipeline over $700,000 in annual recurring revenue. And we are already winning new customers with these capabilities as well. They really differentiate HawkSearch anyone else in the marketplace, shows the company Bridgeline as a true innovator and leader in artificial intelligence and brings capabilities to TruPresence that are not there natively within any other page, local pages system, especially a franchise system. So we think that this is going to be a huge part of e-commerce 360 strategy for us, differentiator. And we've got the expertise in-house to move faster than anyone else.

So as AI continues to develop, you'll be able to maintain that cutting edge for your customers?

Yes. It's a sprint right now to get ahead, and we are moving very quickly. We've got a lead on all of our competitors. One of them Algolia is very strong. And I'll say that they've got some great capabilities. They're the only ones that are in the same area as we are from a lead perspective. And one of the amazing things that's happening with AI, and this will be disruptive across many, many industries is that the foundational capabilities from companies like open AI are mature and easy to develop a product. Now if you don't understand the underlying concepts, you can get caught up in $1 million debt in, but we do understand those concepts. So we don't need the hundreds of millions of dollars to develop, for instance, a large language model ourselves in the years and years of research. Now those are those capabilities are generally available. We know how to use them and we're going to move quickly. And this is going to change the software industry in many industries because if you can understand the business problems that your customers have, then you can solve them in new ways without an army of engineers. And it will level the playing field for companies that are Bridgeline size, with companies that are much larger and allow us to innovate through our customer relationships and our deeper understanding of the core business problems that they have as opposed to just raw math. So this is our time. We're excited for 2024. We're going to make big, big moves in AI.

And does all this also factor in, in potential acquisitions that you will look for companies now that it will leverage everything that you've developed?

It absolutely does, it does. It's interesting because we have, for a long time, held as the thesis that the customer base and an acquisition is something that is often undervalued and that we, and this is a big part of our e-commerce 360 capability, have an understanding of that and can leverage that with new products to cross-sell. Now when you take a look at a lot of the businesses that might be acquisition targets, a lot of times, they may have challenges with regards to innovating new technologies and that might be one of the reasons why they would be a candidate target for us. But over the years, they have cumulated customers, we can approach those customers with new capabilities, bring AI swiftly into the products that they're already using and grow on that customer base. So that is certainly an opportunity for us in 2024 and we're continuing to look at pipeline. It's a challenge. Our stock price is not helpful with regards to doing those acquisitions, obviously. But our capabilities are there. And we'll continue to evaluate companies and find the right one at the right time to add to our mix.

Okay. Well, keep up the great work, guys.

Thank you, Howard. Happy New Year.

You too.

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

Great. Well, Everybody, thank you for joining us today. We appreciate your continued support of all of our customers, our partners and our shareholders. We're really excited about our business, ongoing growth prospects and the new products that we're releasing. We look forward to speaking with you again in our first quarter fiscal '24 conference call that will be in February. And until then, Happy New Year, everybody, have a great 2024.

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