Bridgeline Digital, Inc. (BLIN) Q1 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Bridgeline Digital, Inc. First Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that this call is being recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Thomas Windhausen, Chief Financial Officer. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhausen, and I'm the Chief Financial Officer for Bridgeline Digital. I'm pleased to welcome you to our fiscal 2022 first quarter conference call. On the call this afternoon is Ari Kahn, Bridgeline Digital's President and CEO, who will begin with a discussion of our business highlights. I'll then update you on our financial results for the quarter, and we'll 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. Results that 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, our President and CEO. Ari?

Thank you, Tom, and good afternoon, everyone. We had another great quarter that laid the foundation for continued growth. Subscription and license revenue increased by 71% to $3.1 million, which makes up 80% of our total revenue now. Subscription and license revenues have a 76% gross margin, and customers generally signed 3-year initial engagements that automatically renew annually thereafter. We ended the quarter with $6.4 million in cash, and that was after paying $2.5 million in deferred acquisition costs for WooRank and HawkSearch. Our cash balance and the fact that we delivered positive adjusted EBITDA positions us well to continue our investments in sales and marketing and product innovation. HawkSearch and Celebros are leading our organic growth with several new customers, cross-sales into our existing customer base and outstanding partner-led deals. WooRank is winning new customers and cross-selling across our customer base as well. We expect our sales momentum to grow. And in the first half of our second quarter, we've already exceeded the new customer sales made in our first quarter. We made substantial investments in our partner network last year that are delivering new customers every month. Salesforce, BigCommerce and Optimizely are generating great sales as well as leads for future sales. Our presence in their marketplace exposes us to thousands of prospective customers at a much more efficient marketing cost than we could otherwise achieve. We've built a dedicated partner team with 3 full-time channel managers who are responsible for strengthening our relationships and expanding output with partners. ISV partnerships, in addition to agency partnerships like Americaneagle.com, are bringing us into opportunities with faster sales cycles and stronger close rates than ever before. In the quarter, this quarter, we won sales with multiple major hospitals, technology companies, pharmaceuticals, gaming businesses, distributors and associations. All our sales have additional upsell opportunities to generate even greater revenue as we move forward. Our new DataBravo product has been a hit, and we signed a long-term license with the sales intelligence company to help them provide web intelligence to their customers. The DataBravo mines SEO content accumulated by WooRank to identify trends and competitive differentiators related to websites. An online marketing promotional product company with over 40,000 customers chose HawkSearch to power their e-commerce site. We're quickly becoming the preferred search solution in the promotional product sector with a string of recent wins, including another market leader selecting our natural language processing search. Natural language is a crucial solution for customizable products as it allows users to search for specific and unique product feature. We're also gaining traction with multiple customers in the B2B distributor vertical, especially electrical and plumbing. Our customers organize their large online product offerings and help drive sales and increase order size. We have several differentiating capabilities in this area, and we have excellent references from leading B2B distributors to continue to bring us new deals. Bridgeline is expanding our presence in the multi-location sector, including franchises and other multi-location businesses. Our reputation and experience in this sector are significant and continue to drive new business. We will present at the International Franchise Association Conference later this month, and there, we'll release our newest product line, TruPresence. TruPresence is a suite of e-commerce apps, specifically tuned for multi-location companies. We are committed to innovation for franchises and expect to continue winning new customers in this sector. Last year, we made 2 acquisitions, and we'll continue to evaluate strategic opportunities. We only consider acquisitions that are accretive, offer a customer base to whom we can cross-sell our existing products and which have products that can be sold into our customer base in addition to new customers. We look at companies globally, with an emphasis on North America and Europe. The marketing technology sector has many acquisition opportunities, which allows us to be selective and find great matches just as we did in 2021 with WooRank and HawkSearch. Bridgeline is a healthy company with organic growth, positive adjusted EBITDA and cash. We'll continue to invest in sales and marketing as well as product innovation to further increase shareholder value. At this time, I'd like to turn the call over to our Chief Financial Officer, Thomas Windhausen. Tom?

Thanks, Ari. I'm excited to further share with you our positive financial results for the first quarter of fiscal 2022, which ended December 31, 2021, with you this afternoon. Our total revenue for the quarter ended December 31, 2021, which is comprised of both subscription and license revenue and services revenue, was $4.3 million versus $2.8 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, increased 71% for the quarter ended December 31, 2021, to $3.4 million from $2 million in the prior year period. As a percentage of total revenue, that subscription and license revenue increased by 10 percentage points to be 80% of total revenue for the quarter ended December 31, 2021, compared to 70% in the prior year period. This increase in subscription and license revenue as a percent of total revenue was driven by the prior acquisitions of WooRank and HawkSearch, which have a high percentage of subscription revenue. Services revenue increased also to $0.9 million for the quarter ended December 31, 2021, as compared to $0.8 million in the prior year period. As a percentage of total revenue, services revenue accounted for 20% of total revenue for the quarter. Cost of revenue increased 34% or $0.3 million to be $1.3 million for the quarter ended December 31, 2021, compared to $1 million in the prior year period. As a result, gross profit increased 60% or $1.1 million to be $3 million for the quarter ended December 31, 2021, as compared to $1.9 million in the prior year period. Our gross profit margin increased to 70% for the quarter ended December 31, 2021, compared to 66% in the prior year period. That was a 76% margin for subscription and licenses in -- for the 3 months ended December versus 71% in the prior year and 48% margins for services revenue for the 3 months ended December 31, 2021, as compared to 55% in the prior year. Moving on to operating expenses. They increased to $3.5 million for the quarter ended December 31, 2021, or $1.7 million in the prior year period. The increase in operating expenses includes the operating costs from last year's acquisitions. Income from operations was a loss of $0.5 million for the quarter as compared to income from operations of $0.2 million for the prior year period. For the quarter ended December 31, we had a change in fair value of our liability classified warrants, which resulted in noncash income of $2.4 million as compared to a $1.4 million noncash loss for the prior year period. Our change in share price is the primary driver of the changes in fair value of the warrants. As a result, net income was $0.9 million for the fiscal quarter ended December 31, 2021, or $0.18 a share per basic EPS as compared to a net loss of $1.2 million or a loss of $0.26 a share per basic EPS in the prior year. The change in net income was primarily driven by the fair value adjustments for the warrants. That resulted in adjusted EBITDA for the quarter of $0.1 million compared to $0.7 million in the prior year period. Moving to our balance sheet. As already mentioned, we have cash of $6.4 million and accounts receivable of $1.3 million at September -- at December 31, 2021, compared to September 30, 2021, when we had cash of $8.9 million and accounts receivable of $1.4 million. At December 31, 2021, our total assets were $32.2 million and our total liabilities were $12.6 million. We look forward to continued success in 2022 and beyond as we continue to focus on revenue growth, expanding customer success, technical innovation and delivering shareholder value. Thank you for joining us on the call today. And at this time, we'd like to open up the call to questions and answers. Operator?

[Operator Instructions] And our first question comes from Howard Halpern from Taglich Brothers.

Great quarter, guys.

Thank you, Howard.

First question really relates to the development of your partner or partner networks. How do you envision that growing? And how is that helping you drive sales growth?

It's really great. So we've got 3 full-time people focused on our partners. And there's 2 classes of partners: there are the ISVs, independent software vendors; and there are the agencies. They're very different. They both help us in great ways. The ISVs, which include Salesforce, Optimizely, BigCommerce, they generally are selling platform software like content management solutions that our software runs on top of. And they generally have marketplaces. With Optimizely and BigCommerce, we've been hosting webinars to their customer base in conjunction with them, explain to their customers how our software can help drive more revenue for them. This results in a rather quick sales cycle because the customers don't need to buy a platform, they already have one; this is just an add-on to the platform that they've already invested in. In addition to that, we fit in their marketplaces, so that even customers who don't attend the webinar can browse the marketplace, find us and buy our software. And the agencies, these are digital agencies who are reselling platforms like Optimizely, for example, doing a full implementation of it and our trusted advisers to their customers as to all the different technologies that are needed for success, and they include us in their recommendations. Both sides have opportunities to -- for huge growth for us. We're relatively small in a more than $6 billion market. And I can see just with any one of these: Salesforce, Optimizely, BigCommerce, the ability for us to grow tremendously. And we've got great relationships.

Okay. And can you talk about a little bit more about the cross-selling program that you have? And what kind of penetration have you gained from customers that you achieved a year or 2 ago?

Yes. Yes. So today, we have 4. Wait, 1, 2 -- 5, 5 full-time people dedicated to cross-selling within our customer base. We sold more software to our existing customers this quarter than we did to new quarters -- so that's -- or to new customers, and that's great. That's exactly what we want because you don't have to spend any marketing dollars running ads or anything to get the attention of your existing customers. So your customer acquisition cost is much lower. Our team, we call them customer success, they're responsible for selling licenses, and they have one pipeline for that. They're responsible for also selling professional services, so that's where they further customize our software. They have another pipeline. And then finally, they're responsible for renewals of existing customers. So they exceeded their goals for the quarter. They've got a great pipeline going forward. And a strategic part of our inorganic growth will be to acquire companies that both have products that our customer success team can sell into our current customer base and also have customers that our customer success team can sell our current products into.

Okay. And in terms of continuing to upgrade and integrate and expand the technology that you have, are you also getting customer feedback on what they want or need and seeing how that might fit into future product offerings?

Absolutely. So our team that's responsible for that is called product management. There are 2 people in product management. They have -- their directive is to collect information from existing customers, from competitors, from analysts and also from our own engineering team; compile that information and present it to executive management and to customers for prioritization and then to set our road map and our deadlines. We have briefing meetings with key customers regularly to show them where they fit on that road map. And sometimes, our customers want a particular feature that perhaps is not a high priority from a broader market perspective. And in those instances, our customers pay us. They pay for the R&D to accelerate that feature on the road map. And that's been going on for years now. We pretty much always have a paid for feature coming into our product set. Now we're going to announce -- well, we're announcing right now, TruPresence. What TruPresence is, and we're debuting at the International Franchise Association Conference in 2 weeks, is all of our technology that is related to franchise is now being packaged into a consistent suite of software for our customers like 7-Eleven, like CVS Alpha Graphics, Sport Clips, the UPS store. We've got a very strong foothold in franchise space today. Those customers have very specific needs. They bring them to us all the time. We've responded to those. And this is a chance where we can expand in a market that has very little competition. No one's focused on that space. We've got features. We've got customers. So the barrier of entry for us is almost nothing.

Okay. And just one last one. Over the next couple of years, do you anticipate getting to maybe a 90-10 split in the revenue mix? Or where you are now is where you might stay?

Yes. I actually think that we are going to increase our license as a percentage of revenue. I don't know that it will be 90-10. I think we're close, and I think that 85-15 is a healthy number. Let me expand on that. So first of all, we believe that making our software more and more out of the box increases the return on investment for our customers. Not only is there implementation costs in terms of consulting dollars for our customers, but a lot of time on theirs if they have to customize. So we have a big prioritization of out of the box. Now that said, every customer has some unique needs, and we learn a tremendous amount from our customers when we're deeply engaged with them to implement those needs. So although we've got products like WooRank, for example, which is completely hands-off, point and click and buy, we'll continue to have products like many of our TruPresence products, like TruPresence Pages, that require some implementation. And 85-15 in the marketing technology space is a ratio that we think is healthy.

And our next question comes from Orin Hirschman from AIGH Investment Partners.

In terms of TruPresence, a lot of the customers that are existing customers, is there an upsell opportunity as well as they were to expand? And some of the existing customers, some of the bigger ones, were they site licenses a few years ago and now the chance to be able to convert some of it to SaaS?

That's exactly right. So the TruPresence customers, we've already begun, not under the TruPresence brand, but we've already begun cross-selling into them, and now everything is being packaged and customized specifically for franchise under TruPresence brand. One of the biggest products that have been selling into our franchise customers is WooRank. WooRank allows companies to increase the traffic for the website by giving them a view of their website from Google's perspective, so that they can tune it and make it more visible. In the franchise space, each individual franchisee has local competition. You can imagine Sport Clips, the barbershop customer of ours, that they're really competing with a barber shop across the street, not so much the national barbershop chain. And WooRank allows them to compare themselves to their local competition. So that's very big. The second one is DataBravo. DataBravo collects information about groups of sites and advises competitively as to what the opportunities are to beat everybody in that group. Again, a great franchise space. So we're seeing a lot of cross-sell demand from the franchise customers. Out of the gate, we're coming really strong in franchise. And some of these customers are not exactly franchised, but they operate like a franchise. We've got AstraZeneca. We've got Bristol Myers Squibb, Allergan, Sanofi, MRC Global, Triumph Motorcycles, Sears, big brands with big needs. They've been feeding us a lot of information, and we're going to be very strong in this space.

You mentioned a product that I'm not familiar with before, the product -- DataBravo product that you just mentioned. Could you tell us -- just refresh us on that. If it's a new product, tells more about it. And have you sold any of it yet?

Yes, we have sold. In fact, this quarter, we had a very strong sale of DataBravo. So DataBravo is a -- was a minor product within the WooRank company that wasn't really being marketed. In fact, it wasn't even launched at the time that we did the acquisition. And we finished it up with the WooRank team and launched it. DataBravo reflects all the -- so WooRank collects information about an individual website. DataBravo combines the information from all WooRank customers, identifies trends and makes broader recommendations on an industry basis. DataBravo can be licensed as a data set for companies that are selling, for instance, sales intelligent information. We've got a pharmaceutical company that is using it to collect competitive information from competitor websites. We've got a fintech company that's using it to evaluate actual acquisition opportunities from online information. So it's a very powerful and unique set of data. I don't know anyone that has data even close to DataBravo, and it was a hidden gem that we got for free inside of WooRank.

It sounds like it's early on, though, because -- by WooRank, how long does this -- how long was this officially launched?

It was officially launched in July. And right now, we have, I believe, 6 customers, something around there. And the customers are generally paying between $2,000 and $10,000 a month for access to the data.

Okay. So this is a SaaS offering, multiyear SaaS offering as well.

Yes. Yes. Subscription.

Is the idea to be able to sell this product, it sounds like a very difficult product that people can understand the use very quickly, to the WooRank customers? Or it's possible to move it into HawkSearch and other customers? I'm not sure...

It is possible to move it into the other customers. And in fact, this quarter that we just closed, we sold it to new customers that were not in the WooRank group at all. So it's got demand. And another thing that's going to be interesting with DataBravo is it's going to allow us for TruPresence to have a data set that no one else has in that industry. Some of that data will give away in order to generate a stronger brand inside a franchise, and then we'll be able to license the different additional information to franchises after they get a taste of the free stuff.

Okay. And final question. What percent of the sales in Q4 were related to search?

In Q4, the related license sales were approximately 75%. I don't have the exact number. So search is driving our organic growth. That is very strong. And on the M&A front, we see search opportunities. It's a little bit of a crowded space. We think we can accumulate businesses in that space. It's a growth area for us.

And is it growing double digits?

Yes. It's growing at nearly 20%.

Organically?

Organic growth, yes.

Is there opportunity to accelerate that further? And if so, what do you do? Because, obviously, without that having a big name or brand, it's growing real fast, it must be off of the capability. What can you do further? Can you make it easier to install, like you said, out of the box, so to speak, as opposed to the customization aspect?

Yes. So a couple of things there. So making it easier to install is important. The partnership is very important. BigCommerce, Salesforce, these guys can drive a ton of leads for us. And you should take a look at Coveo, C-O-V-E-O, and their ticker is CVO.TO. They just went public in November on the Toronto Exchange. And they're trading really healthily. They've been growing. They are a competitor. But there's a lot -- nobody in this space owns a majority of it. So we've got an opportunity to grow as fast or faster than anybody else, and it gives you an example of what other companies can do when they're focused purely on search.

And my final question is just, obviously, a partner like BigCommerce is a marquee name and also yet still small enough or maybe you don't get lost in the shuffle. So I guess -- so a partner like that, have they come online yet with meaningful sales? Have they come online yet with the first sales? When does that really begin and earn?

So we had sales with BigCommerce this last quarter. We had sales with them prior to that but in a less organized way, without formal contract. And we've got a joint webinar, I think, next week with them. And we're already jointly reaching out to their customers, and they've provided a pipeline for us. So they're going right now. And Optimizely is basically in the same position. Salesforce is huge, a little harder to keep -- to get their attention and less organized in terms of the relationship but, nevertheless, generates sales for us as well. So from all of these partners, we have several existing customers today.

Right. But what you're saying is it's early on in the relationships.

That's right. It's early on. And I am expecting the partnerships to be attached to almost every Hawk sale. Last quarter, every Hawk sale had a partner attached to it; the quarter before that, all but 1 or 2. So it's a very important part of our lead gen.

[Operator Instructions] I would now like to go ahead -- and I'm showing no further questions. I would now like to go ahead and turn the call back over to Ari Kahn for closing remarks.

Thank you, everybody, for joining us today. We appreciate the continued support of our customers and our shareholders. We're excited about our business model and the ongoing growth opportunities, and look forward to speaking with you again on our Q2 fiscal '22 conference call. Stay healthy and well. Thank you.

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