Good day, and thank you for standing by. Welcome to the Bridgeline Digital Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

And I would now like to hand the conference over to your speaker today, Mr. Thomas Windhausen. Mr. Windhausen, please go ahead..

Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Tom Windhausen. I’m the Chief Financial officer of Bridgeline. I’m pleased to welcome you to our fiscal 2023 second quarter conference call.

On the call with us this afternoon is Ari Kahn, Bridgeline’s President and CEO, 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 historic 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, 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 more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by Bridgeline Digital with the Securities and Exchange Commission.

Also, please note that on the call this afternoon, we will discuss some non-GAAP financial measures when commenting on the company’s financial performance. We provide a reconciliation of our GAAP financials to these non-GAAP measures in our earnings release. You can obtain a copy of our earnings release by visiting our website.

I would now like to turn the call over to Ari Kahn, Bridgeline’s President and CEO..

Thank you, Tom, and good afternoon everyone. In the second quarter, we signed $1.4 million in new sales, including $600,000 of licenses and over $800,000 in services. HawkSearch continues to be our best-selling product. And most HawkSearch contracts have a three-year initial term creating a strong backlog for future revenues.

HawkSearch has organic growth in the high teens and renewal rates of over 95%. This product line represents more than 40% of our revenue. HawkSearch sales are often sourced from partners, which lowers marketing expenses. Key platform partners include Optimizely, BigCommerce, Sitefinity, and Salesforce.

Agency and system integrators also drive new sales with several important partners, including Xngage and Americaneagle.com. Important HawkSearch sales in our second quarter included the expansion of our relationship with UPS through the addition of HawkSearch to their Bridgeline product suite.

Growth in the footwear market, including Crocs, Foot Locker and New Balance in Asia and growth in the B2B industrial distributor market with [Black Hawk] dealers industrial supply and Thomas Scientific. Our go-to-market strategy concentrates on verticals where we have strong case studies and can dominate with an be everywhere campaign.

These core sectors include B2B electrical supply, footwear, franchise and plumbing distribution. Woorank is another important product for Bridgeline, and we’ve augmented our direct Woorank strategy with partner-driven sales. Last quarter, we announced our partnership with Duda to sell Woorank and Duda’s app store.

This partnership has already sold over 500 Woorank licenses to the Duda customer base. Woorank allows Duda users to increase traffic to their sites by improving their rank on search engines such as Google. Through this partnership, more than 450,000 businesses can now add Woorank to their site with a click of a button.

Also Duda partners with 20,000 digital agencies who can now make bulk purchases of Woorank to their customer base. We not only grow sales to new product development acquisition, but we’re also able to leverage our customer bases for cross sales of third-party products.

Last week, we announced the partnership with accessiBe, a market leader in web accessibility. accessiBe is trusted by over 180,000 customers, 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.

With accessiBe technology, Bridgeline not only increases our customers’ total accessible market to include those with disabilities, but we also reduce our customers’ legal risk associated with compliance violations. Bridgeline has delivered several important innovations in our product line this year.

Most recently, we announced our Bronco release for HawkSearch, which helps boost revenue for our customers while reducing their implementation costs. Bronco improves coordination across our products and pre-taxtunes HawkSearch our website for their industry while providing more out-of-the-box capabilities to accelerate time to market.

Bronco directly embeds Woorank and e-commerce 360 into the HawkSearch dashboard with Woorank customers alerted to SEO opportunity and e-commerce 360 providing advanced analytics and recommendations for Bridgeline products and partner products like accessiBe.

Bronco’s Rapid UI Framework provides point-and-click site configuration that enables customers to build and modify their site quickly. It also allows our sales team to easily demonstrate the power of HawkSearch to prospective customers in the context of their own website.

Bronco introduced HawkSearch industry accelerators, which are an important part of our vertical go-to-market strategy. Industry accelerators package domain-specific intelligence that HawkSearch has learned, while powering other sites within that industry.

When a new site is launched, rather than having to learn the behavior of its customers, it can use machine learning and human intelligence accumulated from similar sites in its industry to inject months of optimization on day one.

For example, our machine learning on the B2B electrical distributor site may discover that beige light switches sell better than orange ones and therefore, pushes beige to the top of the web page and orange towards the bottom. Human configuration may further tune the site to tell us that cotton and dover synonymous color name and customer searches.

Bridgeline’s industry accelerators package this kind of intelligence from dozens of sites into a single package, so that when a new customer within an industry launches a new site, they can immediately incorporate optimizations learned from months or even years of customer behavior across similar sites on day one.

In the second quarter, Bridgeline delivered $4.1 million in revenue, including $3.3 million of subscription and license and $800,000 in services.

Subscription revenue was influenced this quarter by the full quarter reduction of the large customer we mentioned last quarter, who has renewed for their ninth consecutive year on a legacy Bridgeline product restructured their website and this reduced subscription significantly for that account.

Regardless of the full three-month impact of this reduction, subscription revenue for the second quarter grew from the first quarter, thanks to strong sales and renewals.

This quarter, over 200 of Bridgeline’s existing customers, representing more than 90% of customers and of recurring revenue that was contracted for renewal during this quarter, renewed for a total contract value of $4 million with several customers increasing the size of their license.

Renewals included Global 500 enterprises such as AstraZeneca, Toyota and UPS. Our subscription and license revenue was 80% of total revenue for the quarter, with new contracts typically signing for three-year initial term and generally renewing for multiple subsequent years.

At this time, I’d like to turn the call over to our Chief Financial Officer, Tom Windhausen.

Tom?.

Thanks, Ari. I’ll provide a further update of our financial results for the second quarter of fiscal 2023, which ended March 31, 2023. Total revenue for the quarter ended March 31, 2023 was $4.1 million compared to $4.1 million in the prior year period.

Now going into each component of revenue, our subscription and license revenue that is comprised of SaaS comprised of SaaS licenses, maintenance and hosting revenue and perpetual license revenue for the quarter was $3.3 million, which was consistent with the prior year period amount.

As a percent of total revenue, subscription licenses was 80% of total revenue for the quarter ended March 31, 2023. Our services revenue was $821,000 for the quarter ended March 2023, up slightly from $811,000 in the prior year quarter.

As a percentage of total revenue, services revenue accounted for 20% of total revenue for the quarter ended March 31, 2023. Our cost of revenue decreased to $1.26 million for the quarter ended March 2023 compared to $1.33 million in the prior year period.

And as a result, our gross profit increased $49,000 or 2% to $2.83 million for the quarter ended March ‘23 as compared to $2.78 million for the prior year period. Overall, our gross profit margin was 69% for the quarter ended March ‘23 compared to 68% in the prior year period.

We have a subscription license gross margin of 74% for the quarter compared to 74% in the prior year period and our services gross margin up 49% for the quarter ended March ‘23, up from 43% in the same period in 2022. Our operating expenses were $3.5 million for the quarter ended March ‘23 compared to $3.4 million in the prior year period.

The increase includes an additional $200,000 of expense across sales and marketing and research and development related to our investments. The change in fair value of our liability classified warrants resulted in a non-cash income of $200,000 for the period ended March ‘23 compared to income of $400,000 in the prior year period.

Our change in share price is the primary driver of the change in the fair value of these warrants. Moving on to net income. We had a net loss of $500,000 for the fiscal quarter ended March ‘23 compared to net income of $300,000 in the prior year period. Moving to EBITDA.

Our adjusted EBITDA for the quarter ended March 2023 was negative $144,000 compared to negative $72,000 in the prior year period. Next, moving on to our balance sheet. At March 31, 2023, we had cash of $2.8 million and accounts receivable of $1.1 million. Our cash increased this quarter despite debt payments of €300,000 in the quarter.

Our total debt outstanding as of March 31, 2023 is €700,000, with a weighted average interest rate of 4.1% with principal payments due through 2028. Further, we have no remaining earn-outs from any of our previous acquisitions. As of March 31, 2023, we had total assets of $26.8 million and total liabilities of $6.9 million.

We look forward to continued growth and success in fiscal 2023 and beyond as we continue to 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’ll open the call to questions and answers.

Moderator?.

Thank you. [Operator Instructions] Our first question….

Question. Can you give us an update on the industry environment in terms of what you’re seeing in terms of the market and customer appetite in any particular technologies they’re interested in? Thanks..

Yes. Thanks, Bill. We’re seeing the – our existing customers are continuing to make enhancements to their site. So from that perspective, we’re not seeing any change in investments for the industry. Our new customer acquisition is also on par with last year.

So regardless of the recession for the customer base that we have and the prospective customers that we have, we’re not seeing a change. One of the things that we’ve seen is an awful lot of interest in AI, and that’s driving some pretty interesting demand.

We’re seeing people integrate our software with other products like HubSpot, for example, even our ChatGPT. And that’s going to – that’s really getting us excited about the potential for offering broader solutions.

And we were looking at some partnerships with other companies, including the accessiBe partnership, where we’re able to offer broader solutions with not just the technology that we own ourselves, but incorporating that with other partner products as well..

Okay, and quick follow-up. In terms of the competitive environment, is that the same? You mentioned AI.

Is that having any impact on competition or competitors kind of like a tip-top match situation?.

Yes, not yet, not yet, but it is common. The enhancements in AI are – a lot of them are open source, like Open AI and so forth that are going to allow lot of companies to rapidly bring new capabilities into their product. And this is actually a big part of our industry accelerator package that we’re offering now.

We think that the future – the near-term future for AI is not broad-based generative AI like ChatGPT, but instead have domain specific.

So we’re using third-party AI products, Open AI products to understand narrow industries like footwear or B2B electrical distributors or plumbing or paint supplies and to have hyper strong expertise in those narrow niches, so that we can dominate them one at a time..

All right. Thank you..

Thank you, Leo..

Thank you. [Operator Instructions] I’m not seeing any questions in the queue. This will end the Q&A session. I would now like to turn the conference back to management for closing remarks..

Thank you for joining us today. We appreciate the continued support of our customers, our partners and of our shareholders. We’re excited about our business and ongoing growth prospects, and we look forward to speaking with you again on our third fiscal quarter 2023 conference call, which will be in August 2023.

Thank you, everybody, and have a great week..

This concludes today’s conference call. Thank you all for participating. You may now disconnect, and have a pleasant day..