Bridgeline Digital - Earnings Call - Q2 2025

Executive Summary

• Revenue was $3.88M, up ~2% YoY and ~2% QoQ; gross margin expanded to 68% (+200bps YoY, +100bps QoQ).
• GAAP diluted EPS was -$0.10, below Wall Street consensus Primary EPS of -$0.04; revenue was slightly below consensus at $3.88M vs $3.93M (miss ~1%). Consensus: Primary EPS -$0.04*, Revenue $3.93M*.
• Adjusted EBITDA was -$0.24M vs -$0.08M YoY and -$0.19M in Q1; operating loss widened to $0.75M as OpEx rose with higher sales & marketing and restructuring costs.
• Management executed a $2.2M equity financing in March to fund an aggressive increase in sales & marketing; expects the spend to start impacting bookings late Q4 FY25 and revenue in Q1 FY26.
• Near-term catalysts: partner-led pipeline expansion (Shopware, Salesforce, BigCommerce, Optimizely) and Hawk AI feature launches; watch Q4 bookings and Q1 FY26 revenue inflection.

What Went Well and What Went Wrong

What Went Well

• Core product momentum: 20 new subscription contracts in Q2 (~$1.7M TCV; +$0.7M ARR); Core product NRR reached 113%.
• Margin improvement: gross margin rose to 68% (subscription/license GM 72%, services GM 52%) on mix and cost control.
• Clear go-to-market acceleration funded by capital raise; CEO: “We expect an excellent return in this expansion of our sales and marketing budget”. CFO highlighted cash of $2.7M, low debt (~$0.41M), and no remaining earn-outs.

What Went Wrong

• Profitability: Net loss widened to $0.73M and GAAP EPS fell to -$0.10, pressured by higher OpEx and a preferred redemption line, while Adjusted EBITDA deteriorated to -$0.24M.
• Slight miss vs consensus: revenue of $3.88M came in below $3.93M, and Primary EPS below the -$0.04 estimate, signaling limited near-term operating leverage as S&M scales up. Consensus: Revenue $3.93M*, EPS -$0.04*.
• Non-core revenue declines offset core growth, keeping total revenue relatively flat sequentially; management noted this balance likely persists through H2 FY25.

Transcript

Operator (participant)

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

Tom Windhausen (CFO)

Excellent. Thank you. Good afternoon, everyone. Thanks for joining us today. My name is Tom Windhausen, and I'm the Chief Financial Officer at 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?

Ari Kahn (President and CEO)

Thank you, Tom. Good afternoon, everyone. We continue to have strong sales for HawkSearch products. Bridgeline is not only winning new customers, it is expanding within the Bridgeline existing customer base thanks to HawkAI. In Q2 FY2025, Bridgeline signed 20 license 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 in marketing proves strong demand for our HawkAI products, a strong e-commerce market in general, and suggests 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 1st, 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 the 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. HawkSearch is in a huge market, and 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 e-commerce search. We expect to increase our leadership with this marketing investment. Our revenue, which for the second quarter increased, can broadly be broken into two segments: core and non-core. Core revenue comes from our e-commerce 360 products led by HawkSearch and WooRank. Core revenue is more than 60% of our subscription revenue and has double-digit growth with net revenue retention of 113% and CAC payback better than 20 months.

Essentially, all of our new sales are core products. Our non-core products represent the balance of our revenue. Most of our services revenue is non-core. These products generate strong gross margins with minimal operating expenses and help fund growth for core. Some of our largest non-core customers have recently purchased core products. In recent quarters, non-core revenue has declined at nearly the same rate core revenue grew, leaving total revenue relatively flat. We expect this balance to continue through the second half of FY2025, with core revenue growth outpacing non-core impact in Q1 for FY2026. In addition to core being an even larger percentage of total revenue, in Q1 of FY2026, today's increased investments in marketing will further generate core revenue growth. This quarter, HawkSearch expanded its HawkAI 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 HawkAI agents to narrow down complex product needs. This allows HawkSearch to perform all the actions of a chatbot, including answering detailed questions about products and account history. We also released a RapidUI 2.0 product, which supports the latest HawkAI products, including Smart Response and Smart Conversion. The RapidUI 2.0 interface leverages a streaming API to enable real-time multi-turn interactions with HawkAI agents for fast and interactive search. HawkSearch 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 HawkSearch's capabilities within the BigCommerce customer base. Last quarter, we discussed how Q1 sales were the second-best sales quarter in company history.

We had another great and strong sales quarter in Q2, and our first-half license sales increased year over year by 24% to $1.6 million in annual recurring revenue, from $1.3 million in ARR in the first half of 2024, 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 U.S. HawkSearch 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 HawkSearch to power its e-commerce search in the Americas and Asia. The technology company has licensed HybridSearch, which bundles HawkSearch Keyword and HawkSearch Concept Search to deliver faster, more accurate results for complex, long-tail queries. A B2B North American distributor selected HawkSearch to power four of its e-commerce websites.

The multi-site engagement leverages HawkSearch's native Optimizely XConnect 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 HawkSearch to deliver AI-personalized results in both English and Arabic. Built on HawkSearch's flexible API and SaaS hybrid infrastructure, the mobile-first implementation is engineered for high-speed performance and scalability. This continued momentum positions us for growth in 2026 as we expand our reach in B2B e-commerce, providing cutting-edge AI search solutions that drive revenue and enhance customer engagement. Our recent investments in R&D have opened the door to partners whose customers need the latest AI-powered e-commerce tools. Partner-led sales have faster sales cycles, a higher win rate, and lower marketing costs. HawkSearch partnered with Shopware, a global open-source e-commerce platform serving over 100,000 merchants.

Known for its flexibility, AI-first architecture, and strong mid-market and enterprise presence, Shopware empowers brands to create immersive shopping experiences. This quarter, HawkSearch also partnered with GrooveCommerce, a leading B2B e-commerce agency, to integrate Bridgeline's AI-powered search technology into their solution for B2B 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 e-commerce at Groove's Customer Summit last month. Over the past year, we have launched eight AI-powered products. In Q2, 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. 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. At this time, I'd like to turn the call back over to our Chief Financial Officer, Tom Windhausen.

Tom Windhausen (CFO)

Thanks, Ari. I'll provide an update of our financial results for the second quarter of fiscal 2025, which ended on March 31st, 2025. Total revenue for the quarter ended March 31st, 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 license revenue, which is comprised of SaaS licenses, maintenance, and hosting revenue. For the quarter ended March 31st, 2025, was $3.1 million as compared to $3.0 million in the prior year period. As a percentage of total revenue, subscription license revenue was 79% of total revenue for the quarter. Services revenue of $800,000 for the quarter ended March 31st, 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 $1.3 million for the quarter ended March 2025, down 2% from $1.3 million in the prior year period. As a result, our gross profit was $2.6 million for the quarter ended March 2025, an increase from the $2.5 million in the prior year period. Overall gross profit margin was 68% for the quarter ended March 2025, compared to 66% in the prior year period. Our subscription license gross margins were 72% for the quarter ended March 2025, compared to 71% in the quarter ended March 2024. Our services gross margins were 52% for the quarter ended March 2025, compared to 47% in the prior year period. Moving to operating expenses, our operating expenses were $3.4 million in the quarter ended March 31st, 2025, compared to $3 million in the prior year period.

The current year period includes additional sales and marketing spend and some restrictionary 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. Our adjusted EBITDA for the quarter ended March 25 was -$239,000, compared to -$83,000 in March of 2024. Moving to the balance sheet, on March 31, 2025, we had cash of over $2.7 million and accounts receivable of $1.4 million. Our total debt outstanding was EUR 374,000, or approximately $406,000. The weighted average interest rate was 3.8% with principal payments due through 2028. We have no other debt or remaining earnings from any prior acquisitions. As of March 31st, 2025, we had total assets of $17 million and total liabilities of $6.4 million. Next, moving on to the cap table.

As of March 2025, our cap table included 11.9 million outstanding shares, 862,000 warrants, and 2.1 million options. As a reminder, in September of 2024, nearly 900,000 warrants whose exercise price was $4 expired. The remaining 861,000 warrants consist primarily of 167,000 warrants with a $2.85 exercise price expiring in May 2026, and another 592,000 warrants at $2.51 expiring in November 2026. Bridgeline looks forward to continued growth and success in fiscal 2025 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. At this time, we'd like to open the call up to questions and answers. Moderator.

Operator (participant)

Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment while we poll for questions.

Tom Windhausen (CFO)

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

Ari Kahn (President and CEO)

Okay. 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. 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 FY2026.

Tom Windhausen (CFO)

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?

Ari Kahn (President and CEO)

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. We are generally seeing around a 3X, 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. The long-term value is based on a 75% gross margin and an average customer retention rate of five years, a customer lifespan of five 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 FY2026. Historically, Q1 has been especially large.

Q1 of FY24 was the best quarter in the company's history, and Q1 of FY25 was the second-best quarter in the company's history. 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. The market is moving in the direction that we want it to be, so we're ready to go.

Tom Windhausen (CFO)

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?

Ari Kahn (President and CEO)

Okay. Our AI-based product development has been internal, and we really have extensive expertise in AI, including me. I've got expertise as well. Our R&D team has had their hands on the keyboards too, which is the most important thing. We are 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. 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. M&A is not our primary focus. We have excellent momentum, and our number one focus is organic sales, with M&A being an opportunistic thing.

Thomas Windhausen (CFO)

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

Ari Kahn (President and CEO)

Okay. Growth in top-line revenue. In 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. This leaves less room for the non-core revenue to have an impact. The additional sales and marketing spend is also focused on core products, which is going to further increase that gap. You will start seeing this growth really in our Q1 of FY2024. For the second half of FY2025, the balance is still going to be similar with relatively flat growth. That is where we are going with that.

Thomas Windhausen (CFO)

Great. Jane, do we have any callers in on the line? Questions.

Operator (participant)

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

Ari Kahn (President and CEO)

Hey, Casey. How are you doing?

Casey Ryan (Director of Research)

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 and 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 we're 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?

Ari Kahn (President and CEO)

Yeah. You should think about rising. You absolutely should. You're right. We're going to see sales and marketing increasing between $250,000 and $500,000 per quarter for the next few quarters.

Casey Ryan (Director of Research)

Okay. Great. That's very helpful. 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. Potentially, hopefully, we'll sort of see that.

Ari Kahn (President and CEO)

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, $1 million being spent over whatever, two or three quarters, but $1 million being an even number. We talk about that $1 million above and beyond what we currently have. And we talk about that 3 to 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. Our average lifespan with customers is five years. That would turn into about $800,000 annual recurring revenue from such an investment.

Casey Ryan (Director of Research)

Okay. Good. That five-year number is a good number to share with us and really helpful. That is 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. People are renewing and adding. What is a standard contract? Is it one year, multi-year, month-to-month?

Ari Kahn (President and CEO)

Yeah. Yeah. Our average initial contract is 30 months. That is two and a half years. Some people are starting off with a two-year. Some are starting with a three-year. That is generally what we see. Here is 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. If they kick off a contract with a, let's say that it is a $36,000 ARR initial contract, they are going to buy another $75,000 in ARR from us over the next few years in the future. That is great.

Casey Ryan (Director of Research)

That is great. That's a great metric too. Okay. The other thing I'm curious about is you mentioned that HawkSearch was sort of 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? Is it easy to sort of translate the software? I'd be curious about where you're strongest language-wise and internationally.

Ari Kahn (President and CEO)

Right. Yeah. Our default language model, our default large language model supports 50 languages out of the gate. Our architecture allows our customers to plug in their own language models or to switch to different ones. A lot of times, switching language models involves bringing in 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, and all of the major Romanic and German.

Casey Ryan (Director of Research)

Okay. Okay. Perfect. Tell me about this, I guess. Is someone like HP—and I do not 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? Is that just sort of a smaller add-on to sort of create that mirror site in a different language?

Ari Kahn (President and CEO)

Yeah. Actually, adding a second language will not cost the customer anything if it is supported by our—it is one of the 50 languages in our foundation model. They will get that out of the gate. Now, they will get that from us. Their own product catalog may not be localized in different languages. They will have an additional effort on their side in terms of displaying search results for their product catalog. We do see that that requires some effort from them sometimes. Natively, our Smart Search, our AI-powered products, support multiple languages. Our non-AI products, the keyword search, is dependent upon matching the underlying data set. That really just depends on their localization there.

Casey Ryan (Director of Research)

Okay. Good. That's helpful to understand. The last question is sort of—I saw it was 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 uptick that 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.

Ari Kahn (President and CEO)

Yeah. Yeah. It's not the here and now yet. I love AOV pricing. That's where the rubber hits the road. Larger enterprise customers are not so open to that because their numbers are so big and they swing a lot. The mid-market customers are more. In our space, that has not been the standard. We haven't been able to do that. I think Shopify is an example where their payment gateway is like a credit card almost, taking a few %, 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.

Casey Ryan (Director of Research)

Okay. All right. Fair enough. One small administrative question. Tom, I think you mentioned total shares are 11.9 million. Does that include everything? That's sort of the followed 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.

Tom Windhausen (CFO)

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

Casey Ryan (Director of Research)

Okay. Got it. Got it. Perfect.

Tom Windhausen (CFO)

I know a number. Not a deluded number.

Casey Ryan (Director of Research)

Yeah. 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.

Ari Kahn (President and CEO)

Thank you, Casey. Of course. Thanks.

Operator (participant)

Thank you very much. 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.

Tom Windhausen (CFO)

Thank you, Janie.

Ari Kahn (President and CEO)

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.

Operator (participant)

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.