2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. I would now like to hand the call over to Tom Windhausen, CFO and Treasurer. Please go ahead.

Thank you, and good afternoon, everyone. I am Thomas Winhausen, the Chief Financial Officer of Bridgeline Digital. Pleased to welcome you to our fiscal 2024 fourth quarter conference call. On the call with us this afternoon is Ari Kahn, Bridgeline's President and CEO. We 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'll conclude by taking questions. Before we begin, I'd like to remind listeners that during this conference call, comments that are made regarding Bridgeline are not historical facts but are forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These statements are subject to risks and uncertainties that could cause actual future events or results to differ materially. 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, and 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 impact our business, please review reports and documents filed from time to time by Bridgeline Digital with the Securities and Exchange Commission. Also, please note 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 financial measures 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.

Thank you, Tom. Good afternoon, everyone. In fiscal 2024, Hawk Search took center stage for Bridgeline, and our AI-powered products became our growth engine. We delivered innovations in AI for several years with AI multiplier, natural language processing, and personalization. But this year, Paradigm released further advances by adding five new products to the Hawk Search AI suite, solidifying Hawk Search as the undisputed leader in AI-powered product discovery. Today, Hawk Search is the majority of Bridgeline's business, and it powers over 1,000 websites ranging from B2C enterprises like Hewlett Packard dot com that has more than $1 million per hour in sales online. The top B2B distributors, like Consolidated Electric Distributors, have more than 750 websites and top brands like Black Diamond and Oriental Trading Company are also powered by Hawk Search. In 2024, we launched a new Hawk Search site every week, and Gartner recognized Hawk Search as a leading B2B product discovery platform, highlighting our AI-driven solutions tailored for distributors and manufacturers. Net revenue retention for Hawk Search is 103%, demonstrating that we're not only retaining Hawk Search customers, but also expanding customer licensing with AI features like smart search and smart response. Fiscal year 2024 sales contracts nearly doubled in annual contract value compared to the FY23 results, totaling $2.1 million in ARR with initial contracts typically 24 to 36 months. This quarter, we sold 17 licenses for $360,000 in annual contract value, bringing us to 83 new for the year with $6.2 million in total contract value. Some new license sales in the year include NSI Industries, a prominent supplier in the construction materials testing equipment industry, who selected Hawk Search to enhance product discovery and customer experience. The supplier will leverage instant engage and autocomplete to display relevant content as soon as users interact with their search bar. Advanced B2B features will help customers quickly find the products they need for NSI industries. Similarly, Rainey's Truck Parts, an aftermarket automotive truck parts reseller, chose Hawk Search as AI powered smart search for its ecommerce site. Tacoma Screws, a leading wholesale distributor in hardware, selected Hawk Search to enhance product and content discovery for their optimizesly configured commerce site. And also another leader in fastener distribution selected Hawk Search to improve product discovery by incorporating a tailored industry-trained large language model across 15 countries and 12 languages. Colonial Electric Supply implemented Bridgeline's Hawk Search to optimize product discovery on its optimized ecommerce platform. The AI-powered search solution enhances the distributor site with advanced features like merchandising and personalized search experiences. Finally, Hewlett Packard chose Bridgeline's Hawk Search to meet its high-performance hosting needs and optimize on-site search capabilities. This partnership highlights Hawk Search's scalability, delivering fast, relevant search results through a huge product catalog with enhanced usability for large enterprise-level platforms. Hawk Search is not a single product, it's a suite that is central to our e360 strategy with separately licensed products that drive visitors to our customer sites, convert those visitors into buyers, and increase the average order value for each one of those buyers. As a suite, Hawk Search creates upselling opportunities within our customer base, enabling a highly efficient sales engine with a CAC payback period of less than 20 months and a net revenue retention rate of over 103%. In 2024, we released five products for Hawk Search that use AI language models to discover the products people want to buy, generate content to help people find websites, and to learn behavioral trends that drive sales for our customers. The Hawk Search Rapid UI framework allows our customers to launch in just days featuring a Gen AI component that seamlessly integrates smart response into search interfaces. It also enables the customization of AI agents to match brand tone, empowering merchandisers to fine-tune responses to meet specific customer needs. Additionally, we launched conversational search, which is powered by generative AI. Conversational search leverages natural language capabilities to transform ordinary searches into conversational interactions. Natural language processing, NLP, is used to understand the intent and phrasing to deliver accurate, meaningful search results and ask clarifying questions to further refine those results, so that customers can more quickly find the products they want to buy. This year, Hawk Search unveiled multi-site management, MSM. MSM allows organizations to centrally manage multiple websites while providing local sites the flexibility to tailor content for their markets. Hawk Search is the only product discovery platform with this capability, and MSN gives us strong competitive advantages with franchises, chains, and brand networks. MSN is ideal for scenarios where multiple teams oversee numerous local sites, providing streamlined and efficient management of both local and global merchandising campaigns. We also introduced smart facets, which allow users to ask detailed content-rich questions and then use a large language model and generative AI to automatically set facets on ecommerce sites to filter search results. We announced a new smart response feature that analyzes PDF content and delivers specific answers to user questions. This innovation includes tools for extracting content from large PDF repositories and using generative AI to create helpful search features such as thumbnails of PDFs, summaries of pages within each PDF, and extraction of other important metadata, including filenames and categorization. Finally, we announced an enhancement of integrating keywords and concept search into a unified intelligent search bar, which will be known as unified search. Unified search is part of Bridgeline's GenTek AI project, and its collaboration with salesforce dot com's agent force initiative emphasizes advanced automation and seamless integration with intelligent agents. This innovation combines Hawk Search's precise keyword search with the natural language processing capabilities of concept search, delivering faster and more relevant results to improve customer experiences and drive engagement. Two important platform partners that we expect to continue to generate new customers for Hawk Search are Optimizely and BigCommerce. BigCommerce is promoting Hawk Search ahead of all other search providers on the first page of its app store, providing tens of thousands of BigCommerce customers the ability to upgrade to Hawk Search's AI technology. Hawk Search offers a one-click install for Optimizely and is recognized by Optimizely as a top-paid app in their App Store. Hawk Search is now uniquely positioned to improve site search for more than a thousand optimizesly configured commerce customers with several already purchasing licenses. Hawk Search AI was showcased at Opticon 2024 in San Antonio, Texas just last month. We also partnered with the system integrator and optimize expert, XEngage for an optimize-lead connector, which leads to even more sales. At the end of the quarter, we announced a leading distributor of fasteners and industrial supplies had selected Hawk Search to enhance their on-site capabilities. This distributor, the first lead from our partner XEngage, will use the XEngage XConnect connector for Hawk Search to power their product discovery on the optimizing platform. Furthermore, Hawk Search was named MOBLECO partner of the year. Moblico's integration of Hawk Search's AI capabilities enhances mobile engagement for distributors, optimizing real-time shopping experiences, and increasing customer retention. This collaboration allows distributors to provide a personalized customer experience leading to increased revenue and a stronger market position. Also, partnered with Product Genius Technology, a leading provider of innovative solutions with decades of experience in the fastener industry. We'll partner with Hawk Search and provide patented search technology to enhance customer engagement and drive sales by simplifying the search, sort, and display of complex product catalogs, especially those in the fastener industry. Bridgeline has partnered with Human Element, a leading commerce services agency. We'll partner with Hawk Search to expand its offerings for B2B and B2C merchants to include AI-powered search technology, and the partnership gives Adobe Commerce, previously Magento, BigCommerce, and Shopify platform users easy access to Hawk Search AI-powered search. Our leadership in AI has resulted in record sales and given us a pipeline for a great 2025. At this time, I'd like to turn the call over to our Chief Financial Officer, Tom Winhausen.

Thanks, Ari. I'll provide an update of our financial results for the fourth quarter of fiscal 2024, which ended September 30th, 2024. Total revenue for the quarter ended September 30th, 2024, was $3.9 million, compared to $3.8 million in the prior year period. Going into each component of revenue, our subscription license revenue, which comprises the SaaS licenses, maintenance, and hosting revenue for the quarter ended September 30th, 2024, was $3.0 million, compared to $3.1 million in the prior year period. As a percentage of total revenue, subscription license revenue was 78% of total revenue for the quarter ended September 30th, 2024. Services revenue was $800,000 for the quarter ended September 30th, 2024, as an increase from $700,000 in the prior year fourth quarter. As a percentage of total revenue, services revenue accounted for 22% of total revenue for the quarter ended September 30th, 2024. Our cost of revenue was $1.2 million for the quarter ended September 30th, 2024, remaining consistent with $1.2 million in the prior year period. As a result, our gross profit was $2.7 million for the quarter ended September 30th, 2024, as compared to $2.6 million in the prior year period. Our overall gross margin was 69% for the quarter ended September 30th, 2024, compared to 68% in the prior year period. Our subscription license gross margins were 72% for the quarter ended September 30th, 2024, compared to 73% in the prior year period, and our services gross margins were 58% for the quarter ended September 30th, 2024, compared to 46% for the same period in 2023. Moving to operating expenses, our operating expenses were $3.1 million for the quarter ended September 30th, 2024, compared to $10.8 million in the prior year period. The prior-year period operating expenses included $7.5 million for goodwill impairment. Moving below OPEX, a change in fair value of our liability classified warrants resulted in a non-cash loss of $5,000 for the quarter compared to a non-cash gain of $214,000 in the prior year period. Our GAAP net loss was $0.4 million for the fiscal year ended September 30th, 2024, compared to a net loss of $8.1 million in the prior year period, which is clearly impacted by $7.5 million of goodwill impairments. Our adjusted EBITDA for the quarter ended September 30th, 2024, was $5,000, compared to negative $192,000 for the prior year comparable period. Turning to our balance sheet, at September 30th, 2024, we had cash of $1.4 million, a $200,000 increase from June 30th, 2024. At September 30th, 2024, our accounts receivable was $1.3 million. Our total debt outstanding as of September 30th, 2024, was 471,000 euros or approximately $526,000 USD. The weighted average interest rate was approximately 4.4% with principal payments due through 2028. We have no other debt or remaining earnouts from any previous acquisitions. As of September 30th, 2024, our total assets were $15.6 million, and our total liabilities were $5.6 million. Finally, to give an update on our cap table as of September 30th, 2024, our cap table included 10.4 million outstanding shares, 39,000 shares of Series C preferred stock, 800,000 warrants, and 2.1 million options. In September 2024, nearly 900,000 warrants with an exercise price of $4 expired. The remaining 800,000 warrants consist primarily of 180,000 warrants with a $2.85 exercise price, which expire in May 2026, and 592,000 warrants with a $2.51 exercise price, which expire 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 shareholder value. Thank you for joining us on the call today. At this time, we'd like to open the call to questions and answers. Operator?

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. Our first question comes from the line of Howard Halpern of Taglich Brothers. Please go ahead, Howard.

Congratulations on the quarter and finishing up on a strong note for the year.

Thank you, Howard.

I guess now with all the different partnerships in place that, you know, agencies and such, where would you imagine you are on the runway for Hawk Search? Is it really just you're beginning to tap into a potentially huge customer base? If you could give some color for that over the next couple of years.

Right. Yeah. So Hawk Search is, I would say, well over half our revenue. A lot of that revenue is partner-driven. Most of the sales are on the B2B side, and I think that we differentiate most strongly in B2B. Although we have, you know, Hewlett Packard dot com is a great example of the B2C enterprise. So we're going to continue to see a lot of growth there. The big thing that's going to happen is that because of all the investments that we've made in artificial intelligence and the recognition from analysts like Gartner and partners like Optimize and BigCommerce in our leadership in the AI area, we expect to start seeing continued acceleration in growth. We nearly doubled our sales volume year over year in terms of annual contract value. And the size of each of the contracts nearly doubled as well in terms of, like, monthly recurring revenue. So that's going to continue. The biggest challenge that we have on the growth side is overall sales and marketing budget. We need to find ways to put more and more dollars into lead generation because the return on investment that we're seeing in marketing is outstanding with less than a 20 months CAC payback. I think that's world-class. And we're really limited primarily by our ability to inject more dollars into that form.

Okay. And for Hawk Search being, you know, one of the big leaders, are you, and let me try to phrase this correctly, are your customers seeing increased satisfaction when they go to, I guess, your customers' websites that are powered by Hawk Search? Is there some sort of measurable that you're seeing out there that benefits your customers?

We are. We are. So a big part of our strategy is to focus specifically on driving our customers' revenue. That's the most meaningful metric for them. It's one that they are all monitoring very carefully and is part of our strategy also because it results in the fastest sales cycle when we can demonstrate improvement. We are seeing customers that are better than doubling their own conversion rates and are also increasing their average order value significantly. One of the great things about the B2B space for us is that there's a lot of turnover right now in terms of the technical generation embracing online purchases as opposed to telephonic or fax, which still happens in the B2B world, especially manufacturing. And because they're now willing to make that investment, they are comparing us with competitors, taking a hard look at all search products in that space and requiring us to really demonstrate that value. So we're increasing revenue significantly. And Gartner, in particular, is promoting us to a lot of manufacturers and distributors that we're winning. Our subscribers to Gartner are reading that report and seeing the return on investment. Okay.

And just one last one because I did see it in the press release, and you had a press release on it. You know, I know it's not as big as Hawk Search, but is WooRank still an important tool out there and beneficial to your future?

Well, WooRank is very tightly integrated with Hawk Search now. So you see consolidated Hawk Search and WooRank sales where WooRank is actually powering the interface for Hawk Search, powering the landing pages that Hawk Search is automatically able to generate, and becomes an add-on to the license when we make a Hawk Search sale. So we're often talking about Hawk Search deals, but they actually have WooRank as part of the license that are inside that sale itself. Certainly, if you were to line item highlight WooRank on its own, it would be significantly smaller than if you were to line item all the other technologies inside of Hawk Search. However, we have strategically broken Hawk Search into being really a suite of products as opposed to a single product. That allows us to quickly get into customers and upsell them along the way with WooRank, with smart search, with smart response, conversational search, smart facets, and so forth. This a la carte model is allowing us to reduce our sales cycle. Our sales cycle is now around 105 days from the first point in which we receive an email through the whole marketing stage and the sales cycle, and then closing and winning or losing a deal, and the CAC payback is much lower. So selling into our own customer base is part of strategy, and it reduces our overall marketing spend.

Okay. I'm just going to the last one because, you know, the search and AI part of it is very important. Have you seen your customers, I know it's powered, you know, for their customers, but have you seen them try to use it internally to help their own Salesforce or their own productivity with your AI search capabilities?

Yeah. That's not our primary use case, but we do have that. We have, as an example, a pharmaceutical company that is using Hawk Search in order to manage internal documents about drugs that are going through different review processes and finding pretty unstructured and scattered data in PDF files. We have a hospital that has patient information that is searched through Hawk Search. So we do have those, but our target from a marketing perspective is where we have a direct impact on top-line revenue. So although our search can do that, that's not where we're focused.

Okay. Okay. Well, great. Keep up the great work, and I look forward to 2025. Have a Happy New Year.

Happy New Year, Howard. Thank you.

Thank you. Once again, to ask a question, please press star one. Our next question comes from the line of Per Jacobsen. Your question, please, Per.

Sorry. Is this me?

Yeah.

Hey, happy holidays, guys. Thank you. This has been terrific. A couple of questions. The line cut out when Tom was giving the cash on hand number. Can you repeat that, Tom, please?

Yeah. Absolutely. At September 30th, we had cash on hand of $1.4 million, and that was approximately a $200,000 increase from that at June 30th. So $1.4 million.

Alrighty. And we are comfortable that that will take us to the foreseeable future, right?

Correct.

Thank you. Can we get some color on the backlog? I mean, you know, what does it look like and, you know, how is that gonna play out over the foreseeable period?

You're referring to the backlog in terms of signed contracts and forward-going revenue from those contracts?

No. Actually, we're talking about opportunity backlog, I guess. You know, what we have is to help...

So on the opportunity backlog, so we ended fiscal 2024 with nearly double the sales pipeline from what we started FY2024 with. And that includes 186 opportunities that are sales qualified leads, which means that the prospective customer has shared budget, they've shared needs, and they are communicating regularly back and forth with us. That's more than $3.6 million in annual contract value. You can multiply that by three, approximately $10 million in total contract value, and that's how we're kicking the year off. Most of those prospective customers are in manufacturing and distribution. They're B2B customers. We are extremely strong in electrical and plumbing distributors, which is a larger space than I would have thought before. In fact, nine of the top 50 electrical distributors are currently customers of ours, are all referenceable customers, and that pipeline is pretty, has some pretty big names in the electrical distribution space. So we're expecting to continue to dominate that space.

Do you expect that the 186 qualified leads, that will sort of be the measure going forward, or do you expect that that number will dip or go up or whatever over time?

Right. It'll go up. As leads come out of our pipeline, either because we win them or lose them, we have new leads coming in at a faster rate, and we're very much focused on what we call top-of-funnel marketing. So we're making some investments right now in terms of being able to create a more targeted ideal customer profile, having automated outreach to that ICP, and automated nurturing for the first few stages because this will allow us to just touch more people. We're seeing a good close rate. We just want to expand that, and then we'll get our humans involved after the first few touches. So we'll continue to grow that pipeline. But in terms of the overall total addressable market, we're really not even scratching the surface. And if you look at our two biggest partners, Optimizely, which has $400 million in ARR, and BigCommerce, which has $300 million in ARR... those two platforms, we could... for Optimizely, they have 20% of their ARR in sales, and that would result in $80 million plus $60 million in sales, and that's just those two partners. Of course, we're selling a lot with Salesforce, and we're selling with Adobe, Magento. And staying inside of those ecosystems is part of how we generate lots of leads at the top of the funnel, keep our own marketing expenses low, and build a reputation for references to help increase our close rate.

And when we engage with these prospects, and I assume that almost all of them is a competitive situation, right? So when we engage, what is sort of our win rate at this point?

Right. So from what we call a sales qualified lead, and that's where we have had multiple inbound inquiries from a customer and they stated a need and budget, we're actually seeing a 20%, close rate on those, and that's really driving our mentality of pushing lots and lots of leads into the funnel itself. Because I almost feel like that close rate is too high. I mean, I want to win every single deal, but I want to have so many leads in there that we're having more at-bats, so to speak. So we've got a very strong close rate. We need more leads into the top of the funnel. And the reality is every lead does cost money, and we don't have a ton of money. So we need to find good ways to be able to generate more leads, generate more money to buy more leads, but to also work through those partner ecosystems and other low-hanging fruit to feed that funnel without having to invest money that we don't have.

That's terrific. I really appreciate that. And can you give sort of a sense, just sort of a general direction of how many of the sales are coming direct now? How many are flowing through to partnership? What's the sort of the... I don't know, by some measure, what's the breakdown there?

Yeah. So in terms of flowing from the partner itself, the partner actually providing us with the contact, that's about 25%. So one-fourth of our deals are the result of us being at a conference like Opticon that we were in San Antonio last month or maybe it was October, actually, at a customer conference or them providing leads directly to us. The other 75% always have a partner attached to them because all of our customers need one of our partners' platforms as part of their website. But that 75% is happening through a lot of them come from our website itself, from hawksearch dot com. So Hawk is a brand name. It's really where we're investing, and we're seeing leads come in through there. And we're also buying data lists and having outreach, including just invites to YouTube videos that we create, webinars, PDFs of case studies, and things like that.

Thank you. Look, I think we are twelve to eighteen months into the great Hawk Search AI experiment here, and it looks like it's going really well. So it's a bit of a mystery. I mean, we look at the company valuation relative to the healthy results and, you know, and the potential. Do you have any ideas what it is that is not liked about the company from a market perspective because market, of course, equals capital, right?

Of course. Yeah. Exactly. If we had a different stock price, I would not be hesitating to promote injecting capital to feed the sales funnel, but with today's stock price, I think that would be dilutive and not the right thing to do. And our stock has... we have a poor history with the stock. I think that that has, and a capital raise back in 2019, produced a bunch of warrants and shorting and other things that may have created structural problems. But probably also our overall size is a challenge for our stock as well, just overall revenue. We're only a $16 million company. เรา are the AI leader in product search, we've been doing AI for a long time, and we've added a ton of innovation. We have to get the word out there and rectify that multiple, and it's a great buy. I'm confident that this company is worth a lot more than where it's trading at today.

Yeah. I mean, obviously, I agree.

You're in.

Me too. Tom, can you tell me of the remaining warrants, what is the strike pricing, or what's the expiry dates on those?

Yep. So there are 800,000 remaining, 180,000 of those have a $2.85 exercise price expiring in May 2026. And 592,000 at a $2.51 exercise price expiring in November 2026. So those 800,000 are between $2.51 and $2.85 and between May 2026 and November 2026.

Okay. Thank you. So realistically, I mean, these are gonna trigger for sure. Okay? Oh, I really appreciate it, and I want to thank everybody for what they have done over the last year. It has been impressive to watch. I really appreciate it. And, again, happy holidays.

Happy holidays. Thank you, Phil. I really appreciate your support.

Thank you.

Thank you. I would now like to turn the conference back to management for closing remarks.

Great. Okay. Perfect. Well, everybody, happy holidays. Thank you for joining us today. Really appreciate the continued support of all of our customers, our partners, and, of course, our shareholders. We're excited about the business. Everything that we're doing with AI... I mean, I'm custom built for this stuff. I have a Ph.D. in AI. I've been living it most of my life, and things are getting real. And we're adding tangible value for our customers with this. It's a very exciting time. We look forward to speaking with you again on our first quarter fiscal 25 conference call. It will be in February of 2025. Until then, be well. Happy holidays.

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