Q3 2023 Bridgeline Digital Inc Earnings Call

Participants

Roger E. Kahn; President, CEO & Director; Bridgeline Digital, Inc.

Thomas R. Windhausen; CFO, Treasurer & Secretary; Bridgeline Digital, Inc.

Howard Allen Halpern; Senior Equity Analyst; Taglich Brothers, Inc., Research Division

Leo Federico Carpio; Research Analyst; Joseph Gunnar & Co., LLC, Research Division

Unidentified Analyst

Presentation

Operator

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

Thomas R. Windhausen

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 2023 third 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'll 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 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'd like now to turn the call over to Ari Kahn, Bridgeline's President and CEO.

Roger E. Kahn

Thank you, Tom, and good afternoon, everybody. In the third quarter, we made $1.2 million in new sales, including $600,000 in licenses, which will add $200,000 to our subscription license annual recurring revenue. Most new customers signed initial subscription terms for 3 years and typically renew for 2 successive 1-year terms totaling 5 years with the subscription.
Bridgeline's core products, including HawkSearch and recommendations, grew by over 15% CAGR and now accounts for 44% of our revenue. Our core products have over 98% revenue renewal. We also have legacy platform products, which we pivoted from in our e360 strategy as they had too expensive on the sales cycle and competed with companies like Salesforce who we prefer to make a partner rather than a competitor. These products have great gross margins to fund innovation but are not a focus of our company sales teams and declined this year with large customers reducing but not eliminating their license.
Although this decline hits the growth of our core products, we expect our core products line to outstrip the decline of legacy products in the near future as the 15% CAGR will soon causatively 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 upcoming events.
Bridgeline will launch native integration with Optimizely configured commerce in October. This integration allows for touchless sales to over 1,000 Optimizely customers where they can upgrade to HawkSearch with a click of a button. We already have 8 pre-signed customers and this will make us the only service product for the more than 1,000 Optimizely configured commerce customers. Many of these prospective customers are large businesses in need of our premier products. We will make a joint announcement with Optimizely as their October Optimizely User Conference.
Bridgeline's Bronco release is another important revenue driver for our core products that has already reduced our sales cycle from 12 weeks to less than 10 weeks and increases our total addressable market to now include companies who 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 is our Advanced Analytics system, which is an upsell opportunity to our customers like Hewlett Packard, who need more detailed information about the contribution of HawkSearch to their online revenue. Bridgeline will also release its franchise search solution this year, making it the first 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.
HawkSearch sales are largely driven through our platform partnerships with BigCommerce, Salesforce and Optimizely. We also have agency partners, including (inaudible) and Americaneagle.com to drive new Hawk sales. This quarter, we announced a partnership with oBundle, a specialist in BigCommerce with over 500 big towers customers who are now candidates to upgrade to HawkSearch.
Sales in our third quarter included Aaron Equipment, one of the world's leading dealers in the packaging industry, Aaron Equipment selected HawkSearch 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 at its B2B commerce sites. Valken Sports, a B2B paintball and sports retailer selected Hackers to drive online business over its 5 e-commerce sites using HawkSearch' multi-store fronts. Valken will be delivered partnership with BigCommerce and oBundle.
Designerie, an importer and distributor of European designer-focused furniture also purchased HawkSearch's multi-store front to power multiple e-commerce sites powered with e-commerce. The big sales for this quarter included Repli, who is a property technology company that selected WooRank to power SEOs for 500 websites improve their keyword tracking to analyze competitors and report on core web vitals.
Paul Byron Shoes chose our AI-driven search to power its online business the AV e-commerce platform in partnership with Magica. Now we've got several shoe customers, including Converse, Reebok, Adidas. Voltus, an electrical online distributors selected Bridgeline for its multilingual artificial intelligence and natural language processing search capabilities to power it's 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 that targets under service verticals would be everywhere campaigns. And these verticals include B2B electrical supply, footwear, franchise, and B2B plumbing distribution. 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 identify and fix website compliance issues with the American Disability Act and similar legislation in Canada and Europe. Bridgeline will sell accessiBe into our 600 customers, many of whom have active interest in accessibility, which not only increases their online sales ability but also reduces litigation risks associated with compliance legislation.
In the third quarter, Bridgeline delivered $3.9 million in revenue, including $3.2 million in subscription and license revenue and $700,000 in services. Subscription revenue was influenced this quarter by the full quarter reduction of a large customer I mentioned earlier, who is renewing for their ninth consecutive year on legacy Bridgeline products, restructured their website, which reduced their subscription revenue. This quarter, over 200 of our customers whose subscription was eligible for renewal renewed totaling $1 million in licenses.
Our core product customers remain at over 98%. Many customers renewed their subscription with a rate increase. Most customers start with a 36-month subscriptions as mentioned earlier and renewed for 2 successive terms. Our subscription license revenue was 81% of total revenue for the quarter with new contracts (inaudible) 3 years.
At this time, I'd like to turn the call over to our Chief Financial Officer, Tom Windhausen. Tom?

Thomas R. Windhausen

Thanks, Ari. I'll provide an update on our financial results for the third quarter of fiscal 2023, which ended June 30, 2023. Total revenue for the quarter ended June 30, '23 was $3.9 million compared to $4.2 million 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 $3.2 million. As a percentage of total revenue, our subscription 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 slight decrease from $800,000 in the prior year quarter. As a percentage of total revenue, services revenue accounted for 19% of total revenue for the quarter. Our cost of revenue was $1.3 million for the quarter ended June '23, consistent with the $1.3 million in the prior year period. As a result, gross profit was $2.6 million for the quarter ended June '23 as compared to $2.9 million for the prior year period.
Our overall gross margin -- our overall gross profit margin was 68% for the quarter ended June '23 compared to 70% in the prior year period. Our subscription and 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.
Operating expenses were $3.3 million for the quarter ended June 2023, consistent with $3.2 million in the prior year period. The change in our fair value of our liability classified warrants resulted in a noncash charge of $100,000 compared to income of $400,000 in the prior year period. Changes in share price is the primary driver of the change in fair value of these warrants.
Our net loss was $800,000 for the fiscal quarter ended June 30, 2023, compared to net income of $400,000 in the prior year period. And 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 $2.6 million of cash and accounts receivable of $1.0 million. Our total debt outstanding was EUR 680,000 or about USD 740,000 with the weighted average interest rate of 4.5% and principal payments are due extending through 2028. We have no remaining earnouts from any previous acquisitions, and our total assets were $25.9 million for total liabilities of $6.7 million.
We look forward to continued growth and success in fiscal 2023 and beyond and we think that we will continue to focus on our revenue growth, product innovation, customer success and delivering shareholder value. Thank you for joining us on the call today.
At this time, we'd like to open the call to questions and answers. Moderator?

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Howard Halpern of Taglich Brothers.

Howard Allen Halpern

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

Roger E. Kahn

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 1 customer, that will be in next quarter, and that will be depending on our sales right now, it will be flat or down.

Howard Allen Halpern

Okay. But then for next year, do you anticipate the we should start to see some sequential growth?

Roger E. Kahn

So our strategy on all of this, Howard, 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 Hawk and WooRank, Hawk especially because that is selling really well. 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% [sound] and that growth that we see, which this quarter was 15% CAGR will shine through.

Howard Allen Halpern

Okay. And in one of the, I guess, partnership deals that you had with the selling over 500 in WooRank licenses through one partner. Are there other type of deals out there that you could get chunks of customers?

Roger E. Kahn

Yes, there are. And we signed a partnership with a company called Duda that has 10,000-plus customers and is selling in bulk to those. 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 and increase our total addressable market, both of which are going to drive growth for those core products.
One of them is our franchise search solution called Multi-Engine Management that's going to allow us to be the only search solution that has features specific for the franchise industry, and that's going to win chunks of customers, so to speak. 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, a new product that many of them need.
Third one is Bronco, which gives us an out-of-the-box user interface and a self-service portal so that we can sell into companies that need to launch right away rather than wait a few weeks for an implementation. And then the fourth and a big one is the Optimizely configured commerce, where we'll, with click of a button, have access to 1,000 Optimizely customers who [we can] purchase Hawk and recommendation.

Howard Allen Halpern

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 and integrate with your software?

Roger E. Kahn

That's interesting. And so we did that with accessiBe and we're selling accessiBe with a revenue share into our customer base. And we'll also be doing that with other partners. We'll 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. And that's both by innovation, acquisition and by partnering and reselling.

Howard Allen Halpern

And you see the opportunities in partnering. What is the landscape in the acquisition area, partnering a little bit easier at this point in time?

Roger E. Kahn

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 careful in terms of your own sales cost. But the M&A industry is, I think, a buyer's market right now. We're starting to see private company valuations going down as well as like 1.5x revenue lower. And so finally, it's starting to get into the area where we think it ought to be (inaudible) this market on the long-term.

Howard Allen Halpern

Okay. I'm excited on what's to come, and you guys keep up the great work.

Operator

Our next question comes from the line of [Per Jacobsen].

Unidentified Analyst

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 can share?

Roger E. Kahn

So the new customers that we gained, I don't have notion probably but I want to say 14, so that would be new logos that were acquired. We also upsell into existing customers each quarter in addition to that, but 14 new logos, I believe.

Unidentified Analyst

Okay. Thanks for sharing the information about the -- I mean, as I think I expressed before, there's definitely a growth story hidden somewhere in the legacy 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 what are you expecting?

Roger E. Kahn

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 that we moved -- that reduced their license size. It was a large customer, and they couldn't do it all at once and they've ramped it down and that have caused successive quarter decline. And there's $45,000 in subscription revenue left -- next quarter, so I guess, in the current quarter, in our fourth quarter. So we'll see quarter-over-quarter if nothing were to change a $45,000 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 customer. And that was the largest impact. We do have currently in terms of subscription revenue, which is really the primary focus. About half of our revenue right now from legacy products. I hate to say that because we do respect these products, and we keep them current. We're just not focusing on winning new customers in those spaces. So overall, things do decline. The -- in 50% in the core products, now with the 50% in core products growing at this quarter, 15% CAGR and last quarter 18%, summers tend to be light quarters for us a little bit.
Sort of doing that math, you can see the increase in those quarters. Also, and the reason why I kind of wanted to focus on some of these future growth initiatives like Optimizely, Configured Commerce, Bronco, Advanced Analytics and franchise search, we do expect faster sales cycle and a larger total addressable market for our core products, and we're hopeful to see that allow us to grow at even faster rates.

Unidentified Analyst

Okay. 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?

Thomas R. Windhausen

Cash at June 30 was $2.6 million. $1.0 million of accounts receivable.

Unidentified Analyst

Okay. As usually, you guys are doing a good job. Can we ask that we get a little bit more noticed a little lag between the release of the quarterly and the call, as I said, it didn't even come true before the call so.

Roger E. Kahn

Okay. 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.

Unidentified Analyst

Okay. Appreciate it. And thanks for everything you do guys. Appreciate it.

Roger E. Kahn

Thank you. We appreciate your support.

Operator

(Operator Instructions) Our next question comes from the line of Leo Carpio of Joseph Gunnar.

Leo Federico Carpio

I actually have 2 quick questions. The first one, could you provide us an update on the industry environment in terms of what you're seeing and what particular trends is the economy or in terms of the economy having any impact on your sales cycle?

Roger E. Kahn

Thank Leo. 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 still large relative to us that the impact of macro deals and have less of -- to be a little bit smaller. We see sort of on 2 sides. One, on the valuation side, the private companies becoming significantly cheaper than last year.
But on the new sales side in terms of trends, we personally have not felt an appreciable change in demand, either -- neither in Europe nor in North America. We sell in both those markets. So we haven't felt that yet. Although we do see a lot of people kind of talk about it. But our sales cycle is the same length and our pipeline and our cost per lead in our pipeline hasn't changed.

Leo Federico Carpio

And then on the M&A side, you mentioned that the buy rates are coming down and seems to be more appealing. Any particular technology that you're looking at or considering that would be a nice add-on to your platform? Or are you just satisfied we'd like to have right now in the near term?

Roger E. Kahn

Yes. Okay. Well, we're not satisfied with what we have right now. We think that one of the key factors of growth -- efficient growth is an ability to upsell existing customers. We think in terms of our customer acquisition costs, and that is significantly less to sell into existing customers. Now we want to stay focused. I am still seeing a couple of deals a month come to me. I spent a lot of time in 2020 and 2021, making sure that every investment banker knew my name and would throw anything my way, even if they didn't 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 products that are easy to sell, meaning that they don't require significant professional services to implement. Ideally, point-and-click to purchase touchless sales as we say. So we look to a customer to prospective companies that can increase traffic to our customers' websites. We see products like this probably every quarter as candidates for acquisitions. We look for products that can help our customers convert more of their site visitors and to site buyers.
And in particular, we see competitors -- some of our existing products, competitors to HawkSearch, for example, that come to us for acquisitions. We haven't pulled the trigger on any of those. We did buy 2 sites search solutions, Celebros and HawkSearch. But we would consider that because what we think that we could integrate the customer bases and the technologies. And then we also look at products that increased the average purchase price similar to our own recommendation tool that makes impulse purchase recommendations on your checkout screen.
So those 3 broader categories that all are synergistic in their ability to drive customers' revenue. And what we're looking for, we're looking for companies that are generally $5 million in revenue. And in this market, we think the 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 debt could make something that makes sense.

Leo Federico Carpio

Okay. I just want a quick follow-up, the competitive environment? Is it still the same? Or any new players or pretty much static as you've seen in the last few quarters?

Roger E. Kahn

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, I'm sorry, Algolia has spent a lot of money on marketing and has done some great things from a technical perspective, and we see a fair amount of them, more of them this year than we did 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 some big commerce as well have increased substantially. And that might just be because we've spent so much time and had some success stories with them that we've got a certain amount of mind share within their customer base but it might also be because they're realizing that our products are better value and -- for their customers that are choosing us.

Operator

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

Roger E. Kahn

Great. Well, thank you for joining us today. We really appreciate the continued support of all our customers, partners and, of course, our shareholders. We're excited about our business and ongoing growth prospects, and we look forward to speaking to you again on our fourth quarter fiscal conference call, which will be in December 2023. Be well, and thank you.

Operator

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