Bridgeline Digital - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue was $3.846M, down 2% YoY (Q3’24: $3.936M) and slightly down sequentially (Q2’25: $3.875M); GAAP diluted EPS was $(0.07) (Q3’24: $(0.03)). Versus S&P Global consensus, revenue was below ($3.97M estimate*), while EPS was above (est. $(0.05)* vs Primary EPS actual of $(0.03)* per SPGI methodology; GAAP EPS $(0.07)).
• Mix continued to shift toward subscriptions: Subscription revenue rose to $3.122M (81% of total), while services fell to $0.724M (19%); gross margin compressed to 66% (from 69% YoY), with services gross margin at 50%.
• HawkSearch now contributes “over 60%” of revenue with double-digit growth; Core product NRR improved to 114%, and management highlighted #1 Gartner ranking in B2B search as a demand catalyst.
• Management is leaning into demand generation: lead-gen spend doubled to ~$500k per quarter, sales cycle shortened to 112 days, and 16 new subscription contracts ($1.7M TCV) added ~$0.6M ARR in the quarter.

What Went Well and What Went Wrong

• What Went Well

  • HawkSearch momentum: “HawkSearch is ranked #1 in the 2025 Gartner Critical Capabilities Report in the B2B Search Use Case,” and accounts for “over 60% of Bridgeline’s revenue” with double-digit growth.
  • Strong retention and cross-sell: Core product NRR was 114%; CEO noted customers “starting with a $25,000 ARR contract… then adding another $50,000 ARR… for advanced features”.
  • Go-to-market leverage improving: Lead-gen budget doubled to ~$500k/quarter with “qualified lead generation more than doubling,” and sales cycle contracted from 125 to 112 days.

• What Went Wrong

  • Revenue softness and margin pressure: Total revenue dipped to $3.846M (YoY down; QoQ down slightly), gross margin fell to 66% (from 69% YoY), and services gross margin declined to 50% (from 58% YoY).
  • Profitability weaker YoY: Operating loss increased to $(0.689)M (Q3’24: $(0.383)M) and net loss to $(0.789)M (Q3’24: $(0.305)M); Adjusted EBITDA was $(0.330)M (Q3’24: ~$0.003M).
  • Revenue miss vs consensus: Revenue of $3.846M came in below S&P Global consensus of $3.97M*, reflecting continued headwinds from legacy products despite HawkSearch strength.

Transcript

Speaker 1

Meetings, and welcome to the Bridgeline Digital Third Quarter 2025 earnings call. At this time, all participants are on a listen-only mode, and a question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Thomas Windhausen, Chief Financial Officer for Bridgeline Digital. Sir, the floor is yours.

Speaker 0

Great, thank you. Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhausen, and I'm the Chief Financial Officer at Bridgeline Digital Inc. I'm pleased to welcome you to our Fiscal 2025 Third Quarter Conference Call. On the call with us this afternoon 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 27(a) of the Securities Act of 1933 and Section 21(e) 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 reported today should not be considered as 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 detailed information about these factors and other risks that may have impact on our business, please review the reports and documents filed from time to time by Bridgeline Digital or the Securities and Exchange Commission. Also, please know that on the call this afternoon, we will discuss some non-GAAP financial measures when commenting on the company's performance. We provide a reconciliation of our GAAP financials to these non-GAAP measures in our earnings release. You can obtain a copy of the earnings release by visiting our website. I'd now like to turn the call over to Ari Kahn, Bridgeline's President and CEO. Ari?

Speaker 3

Thank you, Tom. Good afternoon, everybody. In our Q3 of FY2025, Fiscal Year 2025, we signed $1.7 million in contracts, which added $600,000 in ARR to our subscription revenue. Year to date, we have booked $6 million in contracts with over $2 million in ARR. This brings revenue from our core products to more than 60% of our total revenue, with double-digit growth from HawkSearch. This year, we have added more than 20 new customers in addition to more than 30 licenses sold to existing customers, primarily from customers adding HawkAI to their website. We do see some decline in our legacy products, which flattens our overall revenue, and we expect HawkSearch to continue to grow and outshine this dampening as early as Q1 of 2026. Our customers love HawkSearch. Our net revenue retention for HawkSearch is 114%.

In fact, our average sale of expansion products from existing customers is double the size of our initial sale to new customers. On average, customers are starting with a $25,000 ARR contract for HawkSearch and then adding another $50,000 ARR above and beyond the $25,000 for advanced features such as our AI-powered SmartSearch after they are live. There's no greater demonstration of value that we deliver to our customers than them buying additional products from us. HawkSearch has an outstanding position in the market with huge customer successes as well as accolades from partners and analysts. This quarter, Gartner ranked HawkSearch as the number one B2B search software provider above all of our competitors.

Our number one ranking in B2B is driven by a number of factors, including our quantity of live customers using HawkAI, our ability to solve complex sites at scale, and the out-of-the-box value Hawk delivers to B2B customers. This week, we launched Do It Best hardware. Do It Best is using HawkSearch to power over 3,000 stores with real-time inventory and AI-enhanced search results. Only HawkSearch offers multi-site management, so franchises and chains with a large number of sites can centrally manage search results, which can be set up to be impacted by live inventory. Our sales success has been driven by a modest marketing budget, and in March, we made a small capital raise to expand that budget for lead generation. We doubled our ad spend from $250,000 a quarter to $500,000 a quarter. We're seeing excellent results from this investment, with qualified lead generation more than doubling.

Our sales cycle is also contracting and has reduced from 125 days down to 112 days, with three sales this quarter having less than 60 days between the initial introduction to signing a contract. The increased marketing budget, faster sales cycle, and analyst recognition are expected to fuel even stronger growth in upcoming quarters. As part of our investment in lead generation, this quarter, we have expanded our lead gen programs through strategic partnerships. Insight 25, our first HawkSearch virtual summit, drew 400 registrants and featured partners including Hewlett Packard, BigCommerce, Xngage, and Crescent Electric. At B2B Online in Chicago, we hosted a live river cruise dinner with Pemberley, CHRONICS, and DDS. These co-hosted events generate more leads per marketing dollar and produce more qualified leads with faster sales cycles than we could do by ourselves.

HawkSearch leads the market in AI-powered product discovery with new capabilities that give customers more control and insight than ever before. This quarter, we added Model Context Protocol, also known as MCP. We added MCP to HawkSearch, which allows AI agents to help manage HawkSearch alongside the human merchandising team that typically runs a website. Our tailored AI approach expands our customers' existing teams so they can leverage AI agents today without having to blindly assume the AI is going to do everything for them correctly, which happens with many of the other AI products. In essence, we are treating AI as a team member, not a replacement to our customers' marketing program. MCP also allows merchandisers and developers to control search results with natural language to boost key products, prioritize categories, and target campaigns with precision.

In fact, they can even ask complex questions to the MCP component of HawkSearch and get visual results, graphs, tables, and other information to help them understand the performance of their own website and their sales processes. Together with advanced analytics, these enhancements provide deeper performance insights, integrate with business intelligence tools, and make enterprise-grade AI more accessible and impactful. A few examples of this quarter's business development successes include a Fortune 100 tech company signing a HawkSearch agreement to optimize global e-commerce search across high-volume multi-region sites. One of the nation's largest electrical distributors selected HawkSearch to power AI-driven search across more than 70 storefronts. The implementation integrates with both Sitecore and Salesforce Commerce Cloud to unify product and content discovery. A top five U.S. electrical distributor expanded its HawkSearch license to support hundreds of e-commerce portals using our multi-engine management to launch test personalized experiences.

Ivy Stone Group deployed HawkSearch across five e-commerce sites with multi-site management, concept search recommendations, and merchandising to improve intent matching and buyer engagement. A leading Jansen distributor renewed and expanded its partnership to leverage semantic search and personalized e-commerce, boosting both conversion rates and average order value. HawkSearch is fueling Bridgeline Digital's growth. As of this quarter, HawkSearch is more than 60% of our total quarterly revenue, is growing at a double-digit pace, is being recognized by top analysts as a number one solution, and has outstanding customer satisfaction with 114% net revenue retention. Our constant development and introduction of new features into HawkSearch is resulting in customers tripling their initial investment by adding new features like our AI capabilities and SmartSearch. We have doubled our lead budget to capitalize on this momentum and are already seeing economies of scale.

That, along with the sales cycle of only 112 days, will soon make HawkSearch growth shine into our consolidated financials so that you can see overall growth for the whole company at the level in which HawkSearch is growing today. Now, I'll turn the call over to our Chief Financial Officer, Thomas Windhausen, so he can share some additional details with you. Tom?

Speaker 0

Thanks, Ari. I'll provide an update on our financial results for the third quarter of Fiscal 2025, which ended June 30, 2025. Total revenue for the quarter ended June 30, 2025, was $3.8 million, as compared to $3.9 million in the prior year period. Looking at each component of revenue, our subscription license revenue, which is comprised of SaaS licenses, maintenance, and hosting revenue, for the quarter ended June 30, 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 81% of total revenue for the quarter ended June 30, 2025. Services revenue was $700,000 for the quarter ended June 30, 2025, compared to $900,000 in the prior year period. As a percentage of total revenue, services revenue accounted for 19% of total revenue for the quarter ended June 30, 2025.

Our cost of revenue was $1.3 million for the quarter ended June 30, 2025, compared to $1.2 million in the prior year period. As a result, our gross profit was $2.5 million for the quarter ended June 30, 2025. Our overall gross profit margin was 66% for the quarter ended June 30, 2025, with our subscription license gross margins of 70% for the quarter ended June 30, 2025, compared to 72% in the prior year period. Our services margins were 50% for the quarter ended June 30, 2025, compared to 58% in the same period in 2024. Our operating expenses were $3.2 million for the quarter ended June 30, 2025, compared to $3.1 million in the prior year period. Our net loss was $800,000 for the fiscal quarter ended June 30, 2025, compared to a net loss of $300,000 in the prior year period.

Our adjusted EBITDA for the quarter ended June 30, 2025, was negative $330,000, compared to positive $3,000 in the prior year comparable three-month period. Moving to our balance sheet, on June 30, 2025, we had cash of over $2.1 million and accounts receivable of $1.4 million. Our total debt outstanding as of June 30, 2025, was under $300,000, approximately $348,000, with a weighted average interest rate of 3.4% and principal payments due through 2028. We have no other debt or remaining earnouts from any other previous acquisitions. At June 30, 2025, our total assets were $16.1 million with total liabilities of $6.2 million. Finally, with an update of our cap table, at June 30, it included 12.1 million shares outstanding, 862,000 warrants, and 1.8 million options.

The 862,000 warrants consist primarily of 167,000 warrants with a $2.85 exercise price expiring in May 2026, and 592,000 warrants with a $2.51 exercise price, which expire in November 2026. Bridgeline Digital 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 shareholder value. Thank you for joining us on the call today. At this time, I'd like to open the call to questions and answers. Moderator?

Speaker 1

Thank you. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. One moment, please, while we poll for questions.

Speaker 0

While we do that and get that set up, I do have a couple of questions that were sent in advance. We'll go through those. We got some questions from Howard Halperin at Taglitch Brothers. Ari, got three questions here from Howard. Number one, how has your customer acquisition strategy evolved? We lose a lot. Can you guys hear me all right?

Speaker 3

Sorry, I was on mute. I'm back.

Speaker 0

All right.

Speaker 3

Okay, the question was, how has our customer acquisition?

Speaker 0

How has our customer acquisition strategy evolved?

Speaker 3

Great. We're very analytical in marketing, and we track all of our leads so that we know which marketing event was the lead's first touchpoint, and that we also know which marketing campaigns were follow-on influencing touchpoints. With this information, we're able to increase investments in campaigns that generate the best leads or have the biggest impact on lead conversion. Today, we have sufficient history and analytics to know where most of our new customers are coming from. A year ago, we were experimenting with two-thirds of our budget and investing one-third towards known lead sources. Today, I'd say that that ratio has really flipped, where we are experimenting with a third. You always want to experiment in the marketing world. Then investing two-thirds of our budget towards known campaigns, campaigns that we know win or influence. These can be conferences, online ad sources, partnerships, and other events.

Because of the outstanding recognition that we've gotten from analysts like Gartner and Softwarereviews.com and G2 Crowd and customer satisfaction, we're also now bringing both customers and analysts to the sales cycle to provide references and other details that help our prospective customers more quickly make their decisions.

Speaker 0

Great. Thanks, Ari. Another question. Where does our pipeline stand in regards to reaching new customers or expanding within existing customers?

Speaker 3

This year, we have more bookings to existing customers than to new customers, both in quantity and in booking size. About 60% of our sales have been to existing customers. This is a healthy and great thing. This tells us that we have a product line that delivers tremendous value to our customers. We need to increase awareness with a larger marketing megaphone, so to speak, a larger ad spend budget, so that the rest of the world can find out why customers are staying with Bridgeline and doubling down and increasing their investment in Bridgeline, 114% net revenue retention. We expect existing customers to continue to represent probably 60% of license, even though we're expanding our marketing budget.

We're going to win more customers with a larger budget, but our existing customers are even more rapidly expanding their investment by buying products like our SmartSearch, the AI-driven products, and advanced analytics. We have hundreds of customers who still have products that they can buy from Bridgeline. This is a great trend. It reduces our overall customer acquisition costs. These sales make Bridgeline a healthier company, less marketing dollars, produce longer customer lifetimes, and they often result in innovations with new features coming from customers and driving additional sales into our customer base.

Speaker 0

Excellent. I do have one more. Are you getting any customer feedback about the new technology enhancements, and how could they be deployed to expand revenue?

Speaker 3

Most, nearly all of our product releases in 2024 and 2025 were driven by customers. Structurally, we've got a Professional Services division that helps our customers both implement our products and provide consultative advice to them as to how to better run their own websites. We've also got a Sales team, our Customer Success team, which is helping our customers understand what other products we have and figure out when the right time is for them to buy one of our other products. These two teams are always getting feedback, bringing that into our Product Management department run by John Murcott and several other people on the team. A lot of times, those are producing ideas as to products that we should have and we don't have. We'll see two or three or four of our customers asking for something that's very similar.

We figure out what the generalizations are between all of those customers. Rather than our customer having to build and maintain a bespoke implementation, something custom just to themselves, they get to just buy a license for something that we maintain and, of course, sell to our other customers. Multi-site management platform, an example that was driven by customers, our advanced analytics was driven by customers. Of course, all of the SmartSearch AI stuff was driven both by huge advances in large language models and neural nets and by customers as well.

Speaker 0

Excellent. Thanks. Moderator, do we have anyone who is on the phone line for Q&A?

Speaker 1

Yes, sir. We have questions on the line from Casey Ryan of Westpac Capital. Casey, your line is live.

Speaker 2

Sorry, Thomas. Thanks for the update today. It's encouraging.

Speaker 3

Thank you, Casey Ryan.

Speaker 2

Yeah, you bet. I had a few questions. Sales and marketing has sort of ticked up over the last couple of quarters, which I think has been encouraging. I think you're speaking to the fact that, you know, conversions are going well and that you're working in that area. Should we continue that absolute dollar level to kind of continue to tick up as we go through the end of the fiscal year and into FY2026 is my first question.

Speaker 3

Yeah, the way that we, okay, great, great. That's a very important question that really drives our momentum. For the previous six quarters, our lead gen spend, this is non-personnel, lead gen spend was budgeted at $250,000 per quarter, $1 million a year. We did a $2 million capital raise at the end of March, and those funds are almost all dedicated towards increasing that marketing spend. Right now, we've increased it from $250,000 to $500,000. Our third quarter was at a solid $500,000. Fourth quarter is at a solid $500,000. We expect our first quarter, which will be October to December, to continue at the $500,000 level. We'll reevaluate it along the way. We've got enough gas in the tank to stay at that level for a long time, and it is producing results.

Speaker 2

That's excellent. I'm really happy to hear that you guys are actually pegging that at the high end. I think previously we talked about you were targeting kind of $250 to $500, but the fact that you're committing $500 suggests that results are pretty good in terms of what you're seeing in terms of pipeline development. Tell me, I'm curious, and it's hard to get information about this from our side all the time. As HawkSearch is having success, what are competitors doing who may not have the same technology or the same ability as HawkSearch? Are they cutting prices? Are they trying to bundle new services? What are you seeing in response to that? Maybe there isn't a consistent organized response from the competition?

Speaker 3

The one thing that we do consistently see, especially from a couple of competitors, is them throwing in free professional services to make up the difference between their capabilities and ours. Maybe they don't have something that's as out-of-box as us or doesn't connect to underlying product information management system or something, and they'll just send a team of people in there to try to make up that difference, and they'll eat that cost. I don't think that's sustainable. I think they should just figure it out and put those things out of the box. We see that, and we have to answer it because they can say yes to anything if they're going to basically buy the customer.

We've got to explain that if you build a custom solution, sooner or later, the honeymoon's over, and that custom solution is not going to be managed for free as opposed to if it was strictly part of a product. That's our response there. That's the most common thing we see.

Speaker 2

Okay. People have competitors that have some ability to sort of offer that, but that's not infinite, basically, because they're basically losing money on those tactics, I guess.

Speaker 3

Right. Yep.

Speaker 2

Okay. Terrific. I think this is part of the long-term shift in terms of revenue mix as well. I think in terms of digital engagement services, that number is kind of slowly ticking down. It certainly is a percentage of total revenue, but even in terms of absolute dollars. I think that's intentional on your part as you drive the company forward. Should we expect sort of the pace that we've seen to be continued in that, or would there be something dramatic where you guys might exit a certain line or do something that's sort of bigger, you know, in terms of magnitude to that revenue line at some point in 2026?

Speaker 3

Yeah. I think that throughout the rest of 2026, from now all the way through 2026, people should expect us to be at around $750,000, $750,000 per quarter in professional services revenue with a 50% gross margin. Our partners, our agency partners like to do the professional services, and we partner with them, and they do a lot of the services with our guys really just coming in as the subject matter experts to do the really hard stuff, which is why we're at a higher margin. Our customers also like to see things out of the box, and we try to provide that for them, which is very valuable. That's where you don't see that area expected to grow. We're going to focus on growing the license and let our partners have some of that and us do the most complex components of an implementation.

Speaker 2

Okay. Super. Potentially consistent dollar contribution, but as we expect growth from HawkSearch and kind of your core growth engines shrinking as a percentage of the total.

Speaker 3

That's right. That's right.

Speaker 2

Okay. That's terrific. The last question, and again, I suspect maybe this is too granular, but within HawkSearch, do you guys have significant customers, I guess, or customer concentration? I'm just trying to get a sense of if anyone's even contributing 5% of revenues in a given quarter or if everyone is sort of down lower towards 1% or sub-1% in terms of contribution.

Speaker 3

Right. We do not have any 5% customers in HawkSearch, but we do have some guys that are significantly larger than other ones. We speak about them a lot. I'll tell you that Hewlett Packard is a partner, not just a customer, and has driven a lot of innovation with us. We've got an outstanding relationship with them, they participate in our conferences, and it's a very important relationship. Also, Consolidated Electrical Distributors, same thing. We've brought a lot of innovation, have made great suggestions to us, but nobody is at 5%.

Speaker 2

Great. That's all really helpful. You know, it feels like the execution is really good, and I appreciate you taking my questions, and I appreciate the update. Thank you.

Speaker 3

Thank you, Casey. Nice speaking.

Speaker 1

Thank you. Once again, if you have any questions, please indicate so now by pressing *1 on your telephone keypad. Okay. As we have no further questions in line at this time, I would like to hand it back over to management for any closing remarks.

Speaker 3

Thank you. Thank you, everybody, for joining us today. We very much appreciate your continued support of all of our investors, our customers, and our partners. We're excited about our business and ongoing growth prospects. We think that we are in the sweet spot right now with respect to B2B companies coming online and us being the number one B2B search platform. We're in the sweet spot with respect to artificial intelligence and how the large language models that are driving this revolution really are tailored very well for the type of product that we have. We're seeing HawkSearch grow. I know that everyone is anxious to see that growth shine through, and we expect to see that in 2026. This is an exciting time for the company. Thank you all. Our next conference call will be in December 2025. Until then, be well.

Speaker 1

Thank you, ladies and gentlemen. This does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.