Good afternoon, everyone, and welcome to the Bridgeline Digital Second Quarter 2025 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Tom Windhausen, CFO. The floor is yours.

Excellent. Thank you. Good afternoon, everyone. Thanks for joining us today. My name is Tom Windhausen, and I'm the Chief Financial Officer of Bridgeline Digital. I'm pleased to welcome you to our fiscal 2025 second quarter conference call. On the call with us today is Ari Kahn, Bridgeline's President and CEO, who will begin the call with a discussion of our business highlights. I will then update you on our financial results for the quarter, and we will conclude by taking questions. Before we begin, I'd like to remind listeners that during this conference call, comments that we make regarding Bridgeline that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time, 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. We provide a reconciliation of our GAAP financials to these non-GAAP measures in our earnings release. You can obtain a copy of our earnings release by visiting our website. I'd now like to turn the call over to Ari Kahn, Bridgeline's President and CEO. Ari?

Thank you, Tom. Good afternoon, everyone. We continue to have strong sales for our HawkSearch products, Bridgeline is not only winning new customers, it is expanding within the Bridgeline existing customer base, thanks to Hawk AI. In Q2 FY '25, Bridgeline signed 20 licensed sales, adding $1.7 million in new contracts and $700,000 in annual recurring revenue. Our sales cycle is only 120 days with a 19% win rate on qualified leads. Year-to-date, we booked $4.2 million in contracts with $1.6 million in annual recurring revenue. We accomplished this with less than $250,000 per quarter in ad spend. Our high ROI and marketing proves strong demand for our Hawk AI products, a strong e-commerce 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 $2.2 million capital raise. Bridgeline executives, Board members and shareholders participated in the raise. 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 April 1, 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. We measure a 120-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…

Thanks, Ari. I'll provide an update of our financial results for the second quarter of fiscal 2025, which ended on March 31, 2025. Total revenue for the quarter ended March 31, 2025, was $3.9 million, an increase from $3.8 million in the prior-year period. Now looking at each component of revenue, our subscription and license revenue, which is comprised of SaaS licenses, maintenance and hosting revenue, for the quarter ended March 31, 2025, was $3.1 million as compared to $3.0 million in the prior-year period. As a percentage of total revenue, subscription and license revenue was 79% of total revenue for the quarter. Services revenue of $800,000 for the quarter ended March 31, 2025, increased 4% from $800,000 in the prior-year period. As a percentage of revenue, services revenue accounts for 21% of total revenue for the quarter ended March 2025. Cost of revenue was $1.3 million for the quarter ended March 2025, down 2% from $1.3 million in the prior-year period. And as a result, our gross profit was $2.6 million for the quarter ended March '25, an increase from the $2.5 million 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. Our subscription and license gross margins were 72% for the quarter ended March '25 compared to 71% in quarter ended 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 $3.4 million in the quarter ended March 31, 2025, compared to $3 million 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…

[Operator Instructions]

Thanks, 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?

Okay. Well, both product competitiveness and market conditions are making now the time to increase sales investments. The $2.2 million 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 nurture leads -- and nurture leads with AI agents and push them through the funnel without increasing labor. We'll hire people later after those leads mature if needed. This increase in spend started on April 1. So we have a 120-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 '26.

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

Yes, we modeled that actually fairly closely in a couple of different ways, both with CAC payback, but also with LTV to CAC as a ratio of, long-term value to customer acquisition cost as a ratio. And we are generally seeing around a 3x, 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% gross margin and an average customer retention rate of 5 years, a customer lifespan of 5 years. When we put this together with our 120-day sales cycle, we expect to see a significant increase in new customer acquisitions in the Q1 of FY '26. And historically, Q1 has been especially large. Q1 of FY '24 was the best quarter in the company's history and Q1 of FY '25 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, I'm excited about the prospects for the growth. And the market is moving in the direction that we want to be. So we're ready to go.

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?

Okay. So our AI-based product development has been internal. And we really have extensive expertise in AI, including me, I've got expertise as well, but our R&D team that have their hands on the keyboards too, which is the most important thing. And we're likely to continue internal R&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 and cross-sell HawkSearch and WooRank and other products into that customer base and sell that new product into ours. That said, we have nothing in our M&A pipeline to announce at this time. And M&A is not our primary focus. We have excellent momentum, and our number 1 focus is organic sales with M&A being an opportunistic thing.

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

Okay. Growth in top line revenue. So in recent quarters, noncore 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 and this leaves less room for the noncore revenue to have an impact. The additional sales and marketing spend, focus on -- is also focused on core products, which is going to further increase that gap. So you'll start seeing this growth really in our Q1 of FY '24 and for the second half of FY '25, the balance is still going to be similar with relatively flat growth. So that's where we're going with that.

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

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

Hi, Casey. How are you doing?

Hi, Ari. Very good quarter. Thanks for the update today. Just a few questions. I guess one of the questions -- you've touched on a lot of these things in your commentary in the Q&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 were adding marketing spend, whatever that looks like, digital. Just as we frame it around percentage of sales, do you think we should think about that rising as a percent of sales through the back half of the year?

Yes, you should -- you absolutely should. You're right. And so we're going to see sales and marketing increasing between $250,000 and $500,000 per quarter for the next few quarters.

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

Yes, 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, $1 million being spent over whatever, 2 or 3 quarters, but $1 million will be an even number. We talk about that 3 -- $1 million above and beyond what we currently have. And we talk about them 3:1 LTV-to-CAC ratio then that would produce about $3 million in LTV for us at a 75% gross margin. So $3 million divided by 75% is $4 million in revenue. And our average life span is -- with customers is 5 years, so that would turn into about $800,000 in annual recurring revenue from such an investment.

Okay. Good. And then that 5-year number is a good number to share with us and really helpful. But that's not really what contracts look like. What is the standard contract length currently? I understand that the net retention at 113% is a really great number. So people are renewing and adding. But what's the standard contract? Is it one year, multiyear month-to-month?

Yes. Yes. So our average initial contract is 30 months, so that's 2.5 years. Some people are starting off with the two years, 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 contracts. So if they kick up a contract with a -- let's say, that it's a $36,000 ARR initial contract. They're going to buy another $75,000 in ARR from us over the next few years in the future. So that's great.

That is great. That's a great metric, too. Okay. So the other thing I'm curious about is you mentioned that HawkSearch was sort of made -- was able to be made available to people in Arabic in terms of customers. How many languages can you do? Or can you do 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-wise in international?

Yes. So we have -- our default language model, our default large language model supports 50 language, 5-0, out of the gate. And our architecture allows our customers to plug in custom -- their own language models or just 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 less mainstream language that they're interested in. We have several customers that are using Asian languages, customers in Indonesia and Japan, simplified Chinese, we see in all of the major Romanic and in Germany.

Okay. Perfect. And then tell me about this, I guess, 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 French or something. Is that sort of a secondary -- that's a sort of a smaller add-on to sort of create that mirror site in like a different language?

Yes. 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. So 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. So they'll have an additional effort on their side in terms of displaying search results for their product catalog. So we do see that, that requires some effort from us sometimes but natively, our smart search, 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.

Okay. Good. That's helpful. I understand. And then the last question is sort of -- I suppose on my wish list, but maybe yours too, at some point. 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 -- to 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 -- it might not be the here and now yet?

Yes. It's not the here and now yet. I love AOV pricing. That's where the rubber hits the road and larger enterprise customers are not so open to that because their numbers are so big, and they swing a lot, the more of the mid-market 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 makes sense to their customers. We're not there.

Okay. All right. Fair enough. And then it was really a great quarter. One small administrative question. Tom, I think you mentioned total shares are 11.9 million, does that include everything? That's sort of the number -- I know the reported number was like 10.5 million, but that might be basic. I just want to make sure that the 11.9 million is accurate?

Yes. The 10.4 million, 10.5 million number is what we would have had at the end of last quarter, right? We did the $2.2 million capital raise. So the spread between the 10.4 million and 11.9 million is the 1.4 million shares of equity issued in March.

Okay. Got it. Perfect.

Well I know, not a diluted number.

Yes. Okay. Perfect. Really tremendous progress and a really good quarter. We’re excited to see how the rest of this year unfolds. Thanks for taking my questions.

Thank you Casey.

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.

Thank you, Jenny.

Thank you, everybody, for joining us today. We appreciate the continued support of all of our 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.

Thank 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.