Intellinetics, Inc. (INLX) Q2 2023 Earnings Report, Transcript and Summary

Greetings, and welcome to Intellinetics Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Baumann, FNK IR. Please go ahead, sir.

Thank you, and good afternoon, everyone. I'm pleased to welcome you to Intellinetics 2023 second quarter conference call. Before we begin, I would like to remind listeners that during this conference call, comments made by management may include forward-looking statements regarding Intellinetics that are not historical facts. These forward-looking statements are based on the current expectations and beliefs of management, and they are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. Intellinetics Inc., undertakes no duty to update any forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release issued today as well as risks and uncertainties included in the section under the caption Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operation in Intellinetics quarterly report on Form 10-Q filed earlier today. Also, please note that on the call today, management will discuss non-GAAP financial measures, such as adjusted EBITDA, recurring revenue and total contract value. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and may be different from non-GAAP financial measures presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and their total contract value will be described on today's call. With all that said, I would now like to turn the call over to Jim DeSocio, Intellinetics President and CEO. Jim, the call is yours.

Thank you, Tom. This was another strong quarter for Intellinetics demonstrating our ability to consistently grow our top and bottom line results. We grew our revenue 25% and our SaaS revenue 10%, reducing our operating expenses even while delivering double-digit revenue growth, leading to significant improvements in our profitability. The double-digit growth rates were reinforced by strong second quarter sales and our growing backlog of business. We have already seen an acceleration in customer demand in the third quarter, as the recessionary concerns have begun to abate. We have not lost any meaningful opportunities, and we remain on track to surpass our full year results. Clearly, our business model is working. Growth in our SaaS, maintenance and business process outsourcing professional services were all eclipsed by the tremendous performance of our non-recurring revenue professional services in the period, shifting our mix temporarily with recurring revenue representing 58% of total revenue and nonrecurring comprising 42%. That said, our base of recurring revenue has reached a point where it exceeds our operating expenses. In other words, we generated $2.5 million in recurring revenue with $2.3 million in SG&A costs. This base gives us significant visibility makes it easier for us to plan investments and staffing levels and most importantly, ensures consistent profitability. We continue to expand our market share as demand for our solutions is robust and we deliver a tangible ROI for customers. Finally, our cross-selling initiatives are yielding results as we grow our wallet share with customers. We significantly grew our operating income and adjusted EBITDA, delivering positive net income and earnings per share, we are on the right track. In Q2 2023, we closed 96 contracts with an estimated total contract value of $2.1 million. As a reminder, the total contract value of these orders are generally recognizable in revenue over one year or less. Since the April 2022 acquisition of Yellow Folder, the Yellow Folder team sold new contracts worth $562,000 in SaaS and $140,000 in software-related professional services total contract value. These amounts exclude our success in cross-selling digital transformation, which I'll come to in a moment. Our K-12 operations now has 530 K-12 districts collectively generated significant SaaS revenue, which more than doubles our presence in this vertical market since we acquired Yellow Folder. Importantly, each of these districts is a target for additional Intellinetics services. Two examples of our cross-selling opportunities we recently sold, first, a large school district in Illinois, purchased a Yellow Folder special education solution and a digital transformation job worth $172,000. And second, a school district in New Mexico purchased our student record solution and a digital transformation project worth $154,000. The combined total contract value of $372,000 will be recognized over the next 12 months. Since the Yellow Folder acquisition in April 2022, we have successfully cross-sold 51 K-12 deals worth $1.6 million in total contract value. This reinforces our strategic acquisition of Yellow Folder and our ability to sell our digital transformation professional services into our K-12 customers. We have also been very successful selling K-12 customers our new employee onboarding form solution that expediates the hiring process for new teachers and public K-12 employees. Further, we are in the early days of testing our new payables automation solution at 2 K-12 districts. Simultaneously, we continue to broaden our portfolio of products in our addressable markets. As part of this, we continue to drive adoption of our core IntelliCloud Payables Automation Solution, or IPAS. As a reminder, IPAS is a new enterprise class software payables automation solution for financial platforms with very complex cost accounting. We are collaborating with Constellation homebuilder systems, part of the $5 billion Constellation software family to broaden awareness for IPAS, especially in the homebuilder market. Stepping back, I am extremely pleased with how we've integrated three acquisitions since March of 2020, while maintaining our focus on delivering solutions to our customers. These acquisitions have been instrumental in us achieving new performance levels, and I am confident our recipe for integration is working. I'm very excited about the future at Intellinetics. At this time, I would like to turn the call over to Chief Financial Officer, Joe Spain to talk to you about our financials.

Thanks, Jim. I will now review our financial results for the second quarter of 2023. Total revenue for the quarter ended June 30, 2023, increased 25% to $4.3 million as compared to $3.4 million for the same period last year. The following are the components of our revenue. Subscription software, which is comprised of SaaS, including hosting revenue and software maintenance services revenue increased 8.3% to $1.6 million for the quarter from $1.5 million for the same period last year. Our software maintenance services are growing more slowly than SaaS at 2%, which is consistent with history and as expected. Professional services revenue increased 41.4% to $2.3 million for the quarter from $1.6 million for the same period last year. As a percentage of total revenues, professional services revenue was 54% of total revenue for the quarter compared to 48% of total revenue for the same period last year. Our digital transformation business, primarily scanning customer backfile images had a tremendous improvement over 2022 when, as you may recall, we had challenges finding staff to perform the work on our growing backlog of business. Storage and retrievable services revenue was relatively flat at $269,000 for the second quarter 2023 compared to $276,000 for the second quarter '22. Software revenue, which is comprised of perpetual license revenue was up for the quarter but remains a small portion of total revenue. We expect sales of this on-premise software to continue to be a minor part of our revenue as we focus on SaaS. Consolidated gross margin decreased 327 basis points to 60.8% for Q2 this year compared to 64.1% last year. The decrease was driven by a revenue mix shift towards professional services. Operating expenses decreased 1.2% to $2.29 million for Q2 '23 compared to $2.32 million for Q1 '22. The decrease is largely due to the absence of costs related to the acquisition of Yellow Folder more than offsetting investments in structure and scale, including, among other things, our uplifting in Q3 '22 to NYSE American, increase in investor relations spend and our project to convert from multiple QuickBooks ledgers to a single NetSuite instance. Regarding NetSuite, I'm pleased to share that we're on track with two legacy ledgers fully converted in the final currently running in parallel. Sales and marketing expenses for the quarter decreased 7% compared to the same period during 2022, which is largely a timing matter. We continue to invest in marketing and sales. Net income for Q2 was $136,000 compared to $374,000 net loss for the same period last year. Earnings per share for the quarter were $0.03 per fully diluted share compared to a loss of $0.09 per diluted share last year. Our adjusted EBITDA for the quarter was $651,000 or $0.16 per basic and diluted share compared to an adjusted EBITDA of $508,000 or $0.12 per basic and diluted share for the same period in '22. Next, I'll turn to a brief review of our balance sheet. At June 30, 2023, the company had cash of $1.1 million and accounts receivable net of $1.3 million. Our total assets were $18.6 million, including nearly $10 million in intangible assets and goodwill as part of acquisitions made since 2020. Total liabilities were $9.5 million, including $3.7 million in debt principal as of June 30, 2023. Also, deferred revenues were $2.1 million, reflecting signed SaaS and maintenance contracts. I want to wrap up with a brief financial outlook. Based on our current plans and assumptions and subject to risks and uncertainties, as we described in our filings in this call, we expect to continue to grow revenues and adjusted EBITDA on a year-over-year basis. With that, we thank you all for listening. And at this time, we'd like to open the call up to Q&A. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from Howard Halpern with Taglich Brothers. Do you see that IPAS offering continued to gain traction. How many deployments have occurred? How many are in the process of being deployed?

Yes. This is Jim. We're doing -- we're very happy with how our IPAS solution implementations are going. We actually have two people -- two customers live. We're implementing another four. We've sold another one that is probably starting -- not probably we'll start that project, October 1. We have a very healthy pipeline and we also have a great relationship with our partner, Constellation Software, which we've agreed to the next phase of our development cycle with that product as well. We are also starting to reach out now that we've proven that it is a very viable product and it works very well. It's getting very high marks from our current customers; we are now starting to reach out to additional partners to create relationships with and we have some big plans for growing the IPAS business unit going forward in the years to come.

Next question is still from Howard. As a customer base for IPS growth, could we see a positive impact on gross or operating margins?

We believe it will because it's going to raise our average deal size well into $40,000, $50,000 per deal, which I think is very conservative of SaaS (ph) revenue. So we are looking forward to selling more of the IPAS product because of the size of those deals as compared to our other IntelliCloud products. So it does raise the average fuel price quite a bit.

Third question from Howard. What does the acquisition landscape look like? Are there any holder type deals to be had?

Yeah. It's a two phase. We are continuing to look. As you heard from our call today and seen from our results over the last few years, we've done a very, very good job of finding a strategic acquisitions for the right price and have done a very good job of integrating those acquisitions into our company and our ability to cross-sell back into those acquisitions customer base. So we are continuing to look for the right acquisition at the right price. And when we find the right one, we'll be able to announce it, and everybody will know that we've closed the deal.

Howard Halpern follow-up question is, even with the uneven economy, what are you seeing in terms of demand for your SaaS, IPAS professional service offered?

Well, I believe as you heard, we continue to sell. Our backlog is continuing to grow. We had our second best quarter ever in sales in the second quarter $2.1 million and that's on top of a $1.8 million first quarter. So we continue to sell our products and services and we continue to build on our backlog that, as you know, that's -- what I'm talking about is total contract value. And that total contract value was recognized over the next -- usually the next 12 months going forward. So very bullish on our ability to continue to sell and recognize the revenue as we go forward.

[Operator Instructions] There are no further questions. I would like to turn the floor back over to Jim DeSocio, CEO for closing comments.

Thank you very much. In summary, I'm encouraged with our results. Our business model is definitely working. We significantly grew revenue in the quarter and we significantly improved our net income. We are focused on effectively cross-selling and broadening our addressable markets. We're excited about Intellinetics and our future opportunities. We certainly appreciate the continued support of our long-term shareholders and aim to attract new investors as well by delivering strong, consistent financial results. Thank you for joining us today and we look forward to speaking again on our next conference call. Thank you all very much.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.