Bridgeline's Conflicting Strategies

Summary

• The stock is down 98% from its mid-2018 levels.
• The company has failed at selling expensive enterprise apps to big clients.
• It acquired two products, further complicating its product line and creating two customer tiers.
• Accord is holding onto its small stake, waiting for the company to decide which way to go.

Summary

This tiny company has been trying to sell big-ticket enterprise software to big clients. It has failed. Sales declined steadily from $23.7 million in 2014 to $10 million in 2019. Through Q319, the company was spending $4.0 million in operational expenses quarterly to win approximately $2.7 million in sales. The stock is down 98% from only two years ago. In the spring of 2019 it acquired two more products, which confused the product line even more and required the company to split its resources over three engineering platforms and two client segments. The germ of a resurrection is there, but it's unclear if the company can focus quickly enough to survive.

Description

Bridgeline Digital is an enterprise software company that sells marketing and sales applications for websites, intranets, and online stores. It includes marketing automation, content management, e-commerce, social media management, inter-site search, lead generation, and web analytics. Generically, this is referred to as “martech” (marketing technology). Bridgeline offers it as SaaS (software as a service) and self-hosted applications. The company’s internally-built “Unbound” products – marketing automation, content management, ecommerce, and insights – have been evolving since 2008, and are oriented to large clients doing $200 million to over $2 billion in revenues. In early 2019, the company acquired two new products, adding another content management system (OrchestraCMS) on the Salesforce.com platform and is oriented to large companies, and an in-site search product (Celebros) that runs on a third platform and is oriented to smaller clients. All this from a company with annual revenues of $10 million. See Timeline, Other Documents, People, and Cap Table.

Market and Competition

Martech is a large and still-growing market. Digital Commerce 360 concluded in a study on ecommerce, here, that “consumers spent $517.36 billion online with U.S. merchants in 2018, up 15.0% from $449.88 billion spent the year prior, according to a new Internet Retailer analysis of industry data and historical U.S. Commerce Department figures.” Someone has to sell the gold miners the shovels (the 50.9% that aren’t Amazon, anyway). The consulting firm Moore Stephens said in a study:

“Last year [in 2017] … the combined market size of martech in North America and UK using adspend as a proxy for total marketing budget … was $34.3 billion. This year, the same methodology produces a market sizing of $52 billion …. the results point to a conceivable global market size for martech of $99.9 billion.

Our takeaway: We think this estimate is high, but the worldwide market is still plenty big enough and the growth is real. The problem is that martech is not one market but a basket of sub-markets. Some target clients want some products, but rarely want all of them. Pitch the whole collection at once and the message becomes confusing. Pitch each feature individually and your marketing budget gets spread very thin. All enterprise software markets have this problem, which is why small companies are at a disadvantage: they can’t cover all the bases. See Competitors.

Analysis

Opportunities (External)

The overall worldwide market is indeed big and growing. And will, so long as people continue to buy things online.

There are a lot of small martech companies wanting to be acquired. This is good, if you are a public company and you want to grow by acquisition, as Bridgeline explicitly does. Ari Kahn, the CEO, said in the 12/31/18 earnings call that “there are over 5000 martech companies, many of which are too small to operate efficiently, but have excellent customer bases and technologies.”

Threats (External)

It is hard for a small company to compete in multiple submarkets all at once. A small company doesn’t have the engineering or support resources to keep up with evolving feature sets or the marketing dollars to compete in each submarket. There is a reason there are over 5,000 small martech companies wanting to be acquired.

It is hard for a company to compete for big clients and small clients at the same time. Small clients don’t need what larger clients need and can afford. The sales channels are different. The pricing models are different. The support systems are different.

Strengths (Internal)

The Celebros acquisition has tapped into smaller clients. Bridgeline bought Celebros in early 2019 for roughly $1 million in cash and stock. Celebros is oriented to small clients with revenues under $200 million. It is a license product with a relatively short sales cycle (two months vs the Unbound platform’s four to six months, with another six months for implementation), which dramatically reduces customer acquisition costs. According to Mr. Khan in his 12/31/2019 earnings call, the client renewal rate is “over 95%.” That’s a strong pulse. In that same call he said, “…strategically, we want Celebros to be our primary new logo leader…” We think what he means is that his small company will be selling martech to small clients.

The CEO has experience building through acquisitions. Mr. Kahn helped build FatWire through acquisitions. We also get the sense that he has an open mind and some good ideas of where to take the company, but needs more help than he’s getting.

Weaknesses (Internal)

The company is still pushing its losing products line. Bridgeline’s Unbound platform is a $400k recurring sale to large companies, but as mentioned it has a very long sales cycle, a long implementation cycle, and they are losing clients. One reason they are losing clients is because the clients don’t like the product. The software review site www.G2.com, which records and analyzes responses from actual users of products, gives the company’s Unbound platform – in their “Web Content Management and Website Builder” category – a satisfaction rating of only 3 in overall content, design, and platform. A primary competitor, HubSpot, has a satisfaction score of 99. Only 44% of Bridgeline users were likely to recommend, compared to the category average which was 80%. Bridgeline’s Net Promoter Score (NPS) is -73. This is really bad.

The company’s product line is too broad for its size. Using the terms employed by the software review site www.G2.com, Bridgeline’s products map to one or more of these submarkets: Marketing Automation, Web Content Management, eCommerce, Content Management System, LeadGen, Social Media Management, and Web Analytics. A $10 million company cannot possibly keep up with engineering for eight products on three different technology platforms.

The company’s acquisitions split their customer focus. The Unbound platform is for larger companies with more than $200 million in revenues. The newly acquired OrchestraCMS, bought for $5.2 million in cash in early 2019, is also aimed at larger customers (their showcase client for OrchestraCMS is $19 billion AstraZeneca). But according to Mr. Kahn in his 12/31/2018 earnings call, the Celebros product is aimed at a much smaller customer, $200 million and under. Clearly, Bridgeline was not thinking about client tiers when it made its two acquisitions. The company now has to sell in two different ways to two separate target clients.

The company’s acquisitions will not lead to cross-selling. Mr. Kahn says (in his 12/31/2018 call) there is little overlap between their client bases for their three products (Unbound, OrchestraCMS, and Celebros), and says this means there is a big cross-selling opportunity here. There isn’t. OrchestraCMS sells to clients that already have Salesforce and are unlikely to need Unbound. Unbound clients don’t need OrchestraCMS, unless they drop Unbound and go with Salesforce. Celebros clients are too small for either Unbound or OrchestraCMS. Bridgeline will pick up sales from OrchestraCMS, but there is no synergy between products, just more complexity and overhead.

The company is low on cash. As of the end of 2019, the company has $406,000 in cash, $1,086,000 in accounts receivable, and $1,963,000 in accounts payable. Mr. Kahn said, in his 12/31/2019 call, that he did not expect the company would have to do another equity raise, diluting shareholders. He also predicted that the company will reach breakeven by the end of 2020. We think this is optimistic.

Conclusion

Bridgeline is in a tough spot. It has been competing in the wrong end of their market for years, trying to wear big-company pants and falling flat. Its stock was in the $67 to $108 range in mid-2018, crashed in November 2018, and has slid to the price it is today. It’s now having success with its small company offering (Celebros), but if it switches its focus away from the big clients its legacy revenues will melt away all the more quickly, forcing massive dilution – or worse – on existing shareholders.

We think there is a way forward, but don’t see a clear plan from the company, yet.

Until we do, we’re going to hold onto our token investment in the company, and wait a bit longer before buying more or selling it off.

Engagement

The germ of resurrection is the company’s success with smaller clients. We recommend the company make the switch to products for smaller clients and make that switch as quickly as possible. This means:

• Repurpose what it can from Unbound for smaller clients (Mr. Kahn discussed moving features from Unbound into Celebros in his 12/31/19 earnings call) then sell off the Unbound product (unlikely), or simply shut it down and stop the bleeding.
• Spin off or sell off OrchestraCMS with its larger-client market and focus 100% on small clients. (We wish the company had held on to that $5.2 million in cash).
• Hire a chief revenue officer who has experience marketing and selling enterprise software to smaller companies.

• Refresh the board. No one on the board now has experience with small-company enterprise software. Mr. Kahn has a background in computer science and artificial intelligence. The other directors all have finance and big-company histories.
• The stock performance alone dictates changes on the board.

We will continue to give management our input as a shareholder. We’ll share that input here. Stay tuned.

If you support this course of action – or don’t – please let us know and tell us why.

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All information in this company profile is from Accord Partners’ research using public sources, including SEC filings, the company’s investor relations department, industry analysts, conversations with company competitors, and public online posts by customers and employees. This information is believed to be but is not warranted to be accurate. Nothing in this report is insider information as defined by Sections 16(B) and 10(B) of the United States Securities Exchange Act of 1934. Accord Partners welcomes any corrections, additions, or amplifications to facts or opinions expressed in this document. Accord Partners Fund LP may now or in the future have an equity interest in this company.

www.AccordPartners.com

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Analyst’s Disclosure: I am/we are long BLIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.