Bridgeline Digital Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2025

There are 4 speakers on the call.

Operator

Please note this conference is being recorded. I will now turn the conference over to your host, Tom CFO. The floor is yours.

Speaker 1

Excellent. Thank you. Good afternoon, everyone. Thanks for joining us today. My name is Tom Windhauser, and I'm the chief financial officer of Bridgeline Digital.

Speaker 1

I'm pleased to welcome you to our fiscal twenty twenty five second quarter conference call. On the call with us today is Ari Khan, 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 that 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.

Speaker 1

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 an indication of future performance. Changes in economic, business, competitive, technological, regulatory or 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.

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 now like to turn the call over to Ari Khan, Bridgeline's president and CEO. Ari? Thank you, Tom.

Speaker 1

Good afternoon, everyone.

Speaker 2

We continue to have strong sales for our Hawk search products. Bridgeline is not only winning new customers, it is expanding within the Bridgeline existing customer base, thanks to Hawk AI. In q two f y twenty five, Bridgeline signed 20 license sales, adding 1,700,000.0 in new contracts and 700,000 in annual recurring revenue. Revenue. Our sales cycle is only a hundred and twenty days with a 19% win rate on qualified leads.

Speaker 2

Year to date, we booked 4,200,000.0 in contracts with 1,600,000.0 in annual recurring revenue. We accomplished this with less than $250,000 per quarter in ad spend. Our high ROI in marketing proves strong demand for our Hawk AI products, a strong ecommerce market in general, and suggest that we should increase investments in sales and marketing. To build on this momentum, our board and executive team led a $2,200,000 capital raise. Ridgeline executives, board members, and shareholders participated in the raise.

Speaker 2

The raise was straight common stock and above market. The proceeds will be used to expand sales and marketing. Specifically, we will expand our lead generation budget, including conferences, online ads, and direct outreach. This increased lead gen was launched on 04/01/2025 and is funded through the rest of the year, and we are already seeing results. Our sales cycle is fast, so we expect to see an impact from the increased ad spend in our fourth quarter.

Speaker 2

We'll measure we measure a hundred and twenty day sales cycle from the time of first contact with a prospective buyer to closing the sale. Thus, April ad spend can impact August bookings. We have outstanding marketing automation that will allow us to increase lead generation and nurturing activities without a large headcount increase. This means our go to market campaigns are highly scalable and not limited by the number of people on our team. Doubling the investment in ad spend is intended to double the leads and in turn double sales.

Speaker 2

Hawk Search is in a huge market. We have plenty of room for growth relative to our budget and market share. We're excited about the future for the company. We are in the leader position in AI powered ecommerce search. We expect to increase our leadership with this marketing investment.

Speaker 2

Our revenue, which for the second quarter increased broad can broadly be broken into two segments, core and noncore. Core revenue comes from our ecommerce three sixty products led by Hawk Search and WooRank. Core revenue is more than 60% of our subscription revenue, It has double digit growth with net revenue retention of a 13% and CAC payback better than twenty months. Essentially, all of our new sales are core products. Our noncore products represent the balance of our revenue.

Speaker 2

Most of our services revenue is noncore. These products generate strong gross margins with minimal operating expenses and help fund growth for core. Some of our largest noncore customers have recently purchased core products. In recent quarters, noncore revenue has declined nearly the same rate core revenue grew, leaving total revenue relatively flat. We expect this balance to continue through the second half of FY twenty twenty five, with core revenue growth outpacing non core impact in Q1 for FY twenty twenty six.

Speaker 2

In addition to core being an even larger percentage of total revenue, in q one of f y twenty six, today's increased investments in marketing will further generate core revenue growth. This quarter, the TalkSearch expanded its Hawk AI feature set with the launch of smart conversion and a new smart response component that transforms traditional search into an interactive dialogue. Users can engage in a threaded conversation with Hawk AI agents to narrow down complex product needs. This allows Hawk Search to perform all the actions of a chatbot, including answering detailed questions about products and account history. We also released a rapid UI two point o product, which supports the latest Hawk AI products, including smart response and smart conversion.

Speaker 2

The rapid UI two point o interface leverages the streaming streaming API to enable real time, multi turn interactions with Hawk AI agents for fast and interactive search. Hawk Search also launched a new software development kit for BigCommerce Catalyst Connector. BigCommerce's Catalyst framework built on Next. Js gives merchants and developers more flexibility and control over storefront experiences. The new SDK expands Hawk Search's capabilities within the BigCommerce customer base.

Speaker 2

Last quarter, we discussed how q one sales were the second best sales quarter in company's history. We had another great and strong sales quarter in q two, and our first half license sales increased year over year by 24% to 1,600,000.0 in annual recurring revenue from 1,300,000.0 in ARR in the first half of FY twenty four, a 24% increase in ARR new sales. Customer wins and other highlights this quarter include Do It Best, the largest network of independent home improvement stores in The US. Hawk Search will help Do It Best increase order value, drive higher conversion rates, and increase traffic to their online store. Another important sale was to a Fortune 500 technology company who selected Hawk Search to power its ecommerce search in The Americas and Asia.

Speaker 2

The technology company has licensed hybrid search, which bundles Hawk Search keyword and Hawk Search Concept Search to deliver faster, more accurate results for complex long tail queries. A b to b North American distributor selected Hawk Search to power four of its ecommerce websites. The multisite engagement leverages Hawk Search's native Optimizely X Connect product and includes concept search, smart insight management, and AI powered personalization and recommendations. A global technology firm based in The Middle East has selected Hawk Search to deliver AI personalized results in both English and Arabic. Built on Hawk Search's flexible API and stacked hybrid infrastructure, the mobile first implementation is engineered for high speed performance and scalability.

Speaker 2

This continued moment momentum positions us for growth in 2026 as we expand our reach in b to b ecommerce, providing cutting edge AI search solutions that drive revenue and enhance customer engagement. Our recent investments in r and d have opened the door to partners whose customers need the latest AI powered ecommerce tools. Partner led sales have faster sales cycles, a higher win rate, and lower marketing costs. Hawk Search partnered with Shopware, a global open source ecommerce platform serving over a hundred thousand merchants. Known for its flexibility, AI first architecture, and strong mid market enterprise presence, Shopware empowers brands to create immersive shopping experiences.

Speaker 2

This quarter, Hawk Search also partnered with Groove Commerce, a leading b to b e commerce agency, to integrate Bridgeline's AI powered search technology into their solution for b to b merchants. As part of this initiative to strengthen joint go to market efforts, Bridgeline's EVP of products and strategy, John Murcott, presented on the future of AI in ecommerce at Groove's customer summit last month. Over the past year, we have launched eight AI powered products. In q two, we began to see those releases gain market traction with enhancements like smart conversion and real time streaming APIs. Our suite of AI products is more dynamic and interactive than ever before.

Speaker 2

This quarter marks a true turning point in our growth strategy. The expanded marketing budget is already fueling demand across our core verticals, and we're seeing higher conversion rates as a direct result of our go to market machine and increased campaign automation. So at this time, I'd like to turn the call back over to our chief financial officer, Tom Wenhausen.

Speaker 1

Thanks, Ari. I'll provide an update of our financial results for the second quarter of fiscal twenty twenty five, which ended on 03/31/2025. Total revenue for the quarter ended 03/31/2025 was 3,900,000.0, an increase from 3,800,000.0 in the prior year period. Now looking at each component of revenue, our subscription license revenue, which is comprised of SaaS licenses, maintenance, and hosting revenue for the quarter ended 03/31/2025 was 3,100,000.0 as compared to 3,000,000 in the prior year period. As a percentage of total revenue, subscription license revenue was 79 percent of total revenue for the quarter.

Speaker 1

Services revenue of 800,000 for the quarter ended 03/31/2025 increased 4% from 800,000 in the prior year period. As a percentage of revenue, services revenue accounted for 21% of total revenue for the quarter ended March 2025. Cost of revenue was 1,300,000.0 for the quarter ended March 2025, down 2% from 1,300,000.0 in the prior year period. And as a result, our gross profit was 2,600,000.0 for the quarter ended March 25 as an increase from the 2,500,000.0 in the prior year period. Overall gross profit margin was 68% for the quarter ended March 25 compared to 66% in the prior year period.

Speaker 1

Our subscription license gross margins were 72% for the quarter ended March 25 compared to 71% in quarter end March 24 and our services gross margins were 52% for the quarter ended March 25 compared to 47% in the prior year period. Moving to operating expenses, our operating expenses were 3,400,000.0 in the quarter ended 03/31/2025 compared to 3,000,000 in the prior year period. The current year period includes additional sales and marketing spend and some restructuring expenses. Moving to net income, our net loss was $700,000 for the quarter ended March 25 compared to a net loss of $600,000 in the prior year period. And our adjusted EBITDA for the quarter ended March 25 was negative $239,000 compared to negative 83,000 in March of twenty four.

Speaker 1

Moving to the balance sheet, on 03/31/2025, we had cash of over 2,700,000.0 and accounts receivable of 1,400,000.0. And our total debt outstanding was €374,000 or approximately 406,000 USD. The weighted average interest rate was 3.8% with principal payments due through 2028. And we have no other debt or remaining earn outs from any prior acquisitions. As of 03/31/2025, we had total assets of 17,000,000 and total liabilities of 6,400,000.0.

Speaker 1

Next moving on to the cap table, as of March 2025, our cap table included 11,900,000.0 outstanding shares, 862,000 warrants and 2,100,000.0 options. As a reminder, in September of twenty twenty four, nearly 900,000 warrants whose exercise price was $4 expired. And the remaining 861,000 warrants consist primarily of 167,000 warrants with a $2.85 exercise price expiring in May 26 and another 592,000 warrants at $2.51 expiring in November 2026. Virgin looks forward to continued growth and success in fiscal twenty twenty five and beyond as we continue our focus on revenue growth, product innovation, customer success and delivering on shareholder value. Thank you for joining us on the call today.

Speaker 1

At this time, we'd to open the call up to questions and answers. Moderator?

Operator

Thank you very much. We will now be conducting our question and answer session.

Speaker 1

You. Jenny. While we wait for those questions to come in, we have a couple that were sent in advance, so we'll go through those. I already have a question here from Howard Halpern at Taglich Brothers. First one, are you at an inflection point to increase your sales efforts to bring in new customers?

Speaker 2

Okay. Well, both product competitiveness and market conditions are making now the time to increase sales investments. The $2,200,000 capital raise was initiated specifically for this reason. We're more than doubling our ad spend. We're not increasing sales and marketing personnel at this time, because our automated go to market machine allows us to both generate and nurturing lead, and nurture leads with AI agents, and push them through the funnel without increasing labor.

Speaker 2

We'll hire people later after those leads mature if needed. This increase in spend started on April 1. So we have a hundred and twenty day sales cycle. This means that we should expect to see an increase in deal flow starting at the end of our fourth quarter, and that would lead to a revenue impact in our first quarter of FY twenty six.

Speaker 1

Excellent. Do you do we, Bridgeline, does Bridgeline have a handle on the return we should see for every extra dollar spent on acquiring a new customer?

Speaker 2

Yeah, we model that actually fairly closely in a couple of different ways, both with CAC payback, but also with LTV to CAC as a ratio, long term value to customer acquisition cost as a ratio. And we are generally seeing around a three times value of our LTV to CAC ratio. CAC for us is measured to include all customer acquisition costs. This means ad spend, sales salaries, and commissions. Long term value is based on a 75 percent gross margin and an average customer retention rate of five years, or customer lifespan of five years.

Speaker 2

When we put this together with our one hundred and twenty day sales cycle, we expect to see a significant increase in new customer acquisitions in the q one of FY twenty six. And historically, q one has been especially large. Q one of f y twenty four was the best quarter in the company's history, and q one of f y twenty five was the second best quarter in the company's history. So when our increased investments that are really starting happening right now in April and May mature in August and September, and then turn into revenue in October and November. I'm pretty hopeful.

Speaker 2

I'm excited about the prospects for the growth. And the market is moving in the direction that we want it to be, so we're ready to go.

Speaker 1

Great. One more question from Howard. Is most of our product development internal or are there acquisition opportunities to expand our technology and our customer base?

Speaker 2

Okay. So our AI based product development has been internal, and we we really have extensive expertise in AI, including me, I've got expertise as well, our R and D team that have their hands on the keyboards too, which is the most important thing. And we're likely to continue internal R and D, especially in AI, in the foreseeable future. If we were to do an acquisition, it would likely be to acquire a company that has not yet really added much AI to their product and avoid the price premium that an acquisition of an AI company would carry along with it. And then we would have our engineers add AI capabilities and upsell those new capabilities to the acquired customer base cross sell Hawk Search and WooRank and other products into that customer base and sell that new product into ours.

Speaker 2

That said, we have nothing in our M and A pipeline to announce at this time, and M and A is not our primary focus. We have excellent momentum. And our number one focus is organic sales with M and A being an opportunistic thing.

Speaker 1

Great. We do have one more question that was sent in advance. When do we expect to see growth in top line revenue?

Speaker 2

Okay. Growth in top line revenue. So recent quarters, non core revenue declined at nearly the same rate that core revenue grew, leaving us relatively flat overall. Core revenue is more than 60% of total revenue. Every quarter, that ratio gets even larger, with core revenue becoming a higher and higher percentage.

Speaker 2

And this leaves less room for the non core revenue to have an impact. The digital sales and marketing spend is also focused on core products, which is gonna further increase that gap. So you'll start seeing this growth really in our Q1 of FY24 and for the second half of FY25, the balance is still going to be similar with relatively flat growth. So that's that's where we're going with that.

Speaker 1

Great. Jenny, do we have any callers in on the line? Question?

Operator

Yes, we do. We have a question in from Casey Ryan of West Park Capital. Casey, your line is live.

Speaker 3

Hey, Casey. How are you doing? Ari. Very good quarter. Thanks for the update today.

Speaker 3

Just a few questions. Guess one of the questions you've touched on a lot of these things in your commentary and the Q and A so far. The sales and marketing line, we should expect to see that tick up a little bit. I understand you're not adding headcount, but we're adding marketing spend, whatever that looks like digital. Just as we frame it around percentage of sales, do you think we should, you know, think about that rising as a percent of sales Yeah.

Speaker 3

Through the back half of year?

Speaker 2

Rising. You you absolutely should. You're right. And so we're gonna see sales and marketing increasing between 250 k and 500 k per quarter

Speaker 3

Okay. For the

Speaker 2

next few quarters.

Speaker 3

Okay. Great. That's very helpful. And what you're expecting is is is some multiple payback on that in terms of what you're able to capture. It's what you've seen us clearly and potentially, hopefully, we'll sort of see that.

Speaker 2

Yeah, that's right. That's right. So I can't quite do the math in my head. But if we talk about, let's just use for round numbers, million dollars being spent over, you know, whatever, two or three quarters, but a million dollars being an even number. We talk about that $3,000,000 above and beyond what we currently have.

Speaker 2

When we talk about that three to one LTV to CAC ratio, then that would produce about $3,000,000 in LTV for us at a 75% gross margin. So 3,000,000 divided by 75% is 4,000,000 in revenue. Mhmm. And and our average lifespan is with customers is five years, so that would turn into about 800,000 annual recurring revenue

Speaker 3

Got it. From such an investment. Mhmm. Okay. Good.

Speaker 3

And then, that five year number is a good number, to share with us and really helpful. But but that's not really what contracts look like. What what is the standard contract length currently? I understand that the net retention at one thirteen is a really great number, so people are renewing and adding. But what's a standard contract?

Speaker 3

Is it one year, multiyear, month to month? Yeah.

Speaker 2

Yeah. So our average initial contract is thirty months, so that's two and a half years. Some people are starting off with a two year, some are starting with a three year, but that's generally what we see. And here's something that we just ran some numbers on that I was kind of excited to see is that our customers tend to buy twice as much software from us over their lifespan as their initial contract. So if they kick off a contract with a, let's say that it's a $36,000 ARR initial contract, They're gonna buy another $75,000 in ARR from us over the next few years in the future.

Speaker 2

So that's great.

Speaker 3

That is great. That's that's a great metric too. Okay. So the other thing I'm curious about is you mentioned that Hawkridge was sort of made was was able to be made available to people in Arabic in terms of customers.

Speaker 2

How many languages can you

Speaker 3

do or can you do, you know, as many as you need? And is it easy to sort of translate the software? But I'd be curious about where your strongest language was internationally. Right.

Speaker 2

Yeah. So we have our our default language model. Our default large language model supports 50 language, five zero out of the gate. And our architecture allows our customers to plug in custom, their their own language models or to switch to different ones. A lot of times switching language models involves bringing in language or industry specific language to the model, but it might also involve some, you know, less mainstream language that they're interested in.

Speaker 2

We have several customers that are using Asian languages, customers in Indonesia and Japan, simplified Chinese we see, and all of the major romantic and German.

Speaker 3

Okay. Okay. Perfect. And then tell me about this, guess. Is is someone like HP, and I don't know if their site is in multiple languages, but a customer came to you in English and then wanted to redeploy another one in, you know, French or something.

Speaker 3

Is that sort of a sort of a secondary, is that just sort of a smaller add on to sort of create that mirror site in like a different language?

Speaker 2

Yeah. Actually, adding a second language won't cost the customer anything if it's supported by our foundation it's one of the 50 languages in our foundation model. They'll get that out of the gate. Now they'll get that from us. Their own product catalog may not be localized in different languages.

Speaker 2

So they'll have an additional effort on their side in terms of displaying search results for their product catalogs. We do see that that requires some effort from sometimes. But natively, our SmartSearch, our AI powered products, support multiple language. And our, non AI products, the keyword search is dependent upon matching the underlying data set. So that really just depends on their localization there.

Speaker 3

Okay. Good. That's helpful. I understand. And then the last question is sort of I saw it's on my wish list, but maybe yours too at some point.

Speaker 3

Have you had any conversations and this may not be the right time to do any of this, but sort of AOV pricing and sort of being tied into the uptick that like you're providing to customers. Has that been discussed or have customers mentioned it to you and proposed it or it's something nice that we've talked about could be achievable at some point. It might not be the here and now yet.

Speaker 2

Yeah. Yeah. It's not the here and now yet. I love AOB pricing. That's where the, you know, the rubber hits the road.

Speaker 2

And larger enterprise customers are not so open to that because their numbers are so big and they swing a lot. More mid month customers are more. But in our space that has not been the standard, so we haven't been able to do that. I think Shopify is an example where they're really, their payment gateway is like a credit card almost taking a few percentage is an example that really did a great job in terms of integrating that and having it make sense to their customers. We're not there.

Speaker 3

Okay. All right. Fair enough. And then it was really a great quarter. One small administrative question.

Speaker 3

Tom, I think you mentioned total shares are 11,900,000.0. Does that include everything? That's sort of the like number. I know the reported number was like 10.5, but that might be basic. I just want to make sure that that 11.9 is accurate.

Speaker 1

Yes. So the 10.4, 10 point five number is what we would

Speaker 2

have had in the last quarter, right?

Speaker 1

We did the $2,200,000 capital raise. So the spread between the 10.4 and the 11.9 is the 1,400,000.0 shares of equity issued in March.

Speaker 3

Okay. Got it. Got it. Perfect.

Speaker 1

Well, not a limited number.

Speaker 3

Yeah. Okay. Perfect. Really tremendous progress, and a really good quarter. We're to see how the rest of this year unfolds.

Speaker 3

Thanks for taking my questions.

Speaker 2

Thank you, Casey. Of course. Thanks.

Operator

Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now hand back over to the management team for their closing comments.

Speaker 2

Thank you, Jenny. Thank you, everybody, for joining us today. Appreciate the continued support of all of

Speaker 1

our

Speaker 2

customers, partners and our shareholders. We're excited about our business, the ongoing growth prospects. We look forward to speaking with you again on our third quarter fiscal call this August. Be well. Thank you.

Operator

You very much. This does conclude today's conference. You may now disconnect your phone lines at this time, and have a wonderful afternoon. We thank you for your participation.

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Key Takeaways

  • Bridgeline delivered strong Q2 FY25 license sales with 20 new deals adding $1.7 M in contracts and $0.7 M in ARR, achieving a 120-day sales cycle and 19% win rate on qualified leads.
  • The company completed a $2.2 M capital raise via common stock to double its marketing spend, expecting uplift in deal flow starting Q4 FY25 and revenue impact in Q1 FY26 due to its 120-day sales cycle.
  • Core products (Hawk Search & WooRank) now represent over 60% of subscription revenue with double-digit growth, 13% net revenue retention and sub-20-month CAC payback, offsetting a decline in non-core services.
  • In Q2 the Hawk Search platform launched new AI features—Smart Conversion, Smart Response and Rapid UI 2.0 with real-time streaming APIs—plus a BigCommerce Catalyst SDK to boost interactive, multilingual ecommerce search.
  • Key partnerships with Shopware and Groove Commerce and major customer wins—including Do It Best, a Fortune 500 tech firm, and global B2B distributors—are expanding Bridgeline’s reach in AI-powered ecommerce search.
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Earnings Conference Call
Bridgeline Digital Q2 2025
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