Intellinetics, Inc. (INLX) Q3 2023 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Intellinetics' Third Quarter 2023 Earnings Call. Our host for today's call is Tom Baumann with FNK IR. [Operator Instructions] I would now like to turn the call over to your host. Mr. Baumann, the floor is yours.

Thank you, and good afternoon, everyone. I am pleased to welcome you to Intellinetics' 2023 Third 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 Inc. 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 Operations 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. Our third quarter revenue was similar to our record-breaking second quarter and up 10% year-over-year, and we improved our profitability on a sequential basis, demonstrating the value of our business model. We grew our revenue by 10% year-over-year and our SaaS revenue by 7%, leading to sequential improvements in our profitability. Our core business is solid, growing and systematically profitable. We have a stable base for growth. In the near term, that growth will come from continued K-12 SaaS success paired with our new IntelliCloud payables automation solution or IPAS. As a reminder, IPAS is a new enterprise class software payables automation solution for financial platforms with a very complex cost accounting. To further explain where this solution fits, as organizations look to modernize manual accounts payable processes to free up time for higher-value activities, scale their business and to reduce audit and compliance risk exposure, building a digital first modern finance department becomes a top priority for CFOs. By pairing our IntelliCloud document management and our AI-driven payables automation system with an organization's existing line of business applications, the benefits became immediately apparent. The paper and ever prone tasks are eliminated, while real-time dashboard views provide transparency into important financial data. We are collaborating with Constellation homebuilders systems, part of the $5 billion Constellation software family to broaden awareness for IPAS starting in the homebuilder market. Two Constellation customers have gone wide. Based on the success of these 2 customers, we have now signed contracts with 7 additional customers that will go live over the next 2 to 3 months. In aggregate, these customers represent a combined annual recurring revenue of $465,000. We see IPAS as a growth catalyst for our business going forward. We have also recently introduced IPAS to our K-12 customer base and plan on cross-selling IPAS to our customers to contribute meaningfully to our growth in 2024. Importantly, these are SaaS agreements, expanding our recurring revenue well aligned with our overall strategy. Overall, we continue to see accelerating customer demand, suggesting an improving macroeconomic environment, and we remain on track to deliver a full year of improved growth and profitability. This sets us up well for the future. When we anticipate accelerated growth as IPAS becomes a catalyst on top of our existing SaaS business and our other services. Our SaaS maintenance and business process outsourcing professional services all grew in the quarter. We remain focused on growing recurring revenue, giving us significant visibility into our future results. Quarter-to-quarter fluctuations in nonrecurring revenue to be expected. 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 million in SG&A costs, down from $2.3 million in the second quarter, resulting in systematic profitability for our business. Our business is now sustainably profitable, irrespective of the quarter-to-quarter volatility in nonrecurring revenue. We continue to expand our market share as demand for our solutions is robust, and we deliver a tangible ROI for customers. We are also expanding our addressable market, specifically in payables automation solutions. Finally, our cross-selling initiatives are yielding results as we grow our wallet share with customers. On a sequential basis, we significantly grew our net income and adjusted EBITDA on similar revenue levels, we are on the right track. In Q3 2023, we closed 108 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 1 year or less. Since the April 2022 acquisition of the Yellow Folder, the Yellow Folder team sold new contracts worth $467,000 in SaaS and 271,000 in software-related professional service total contract value. These amounts exclude our success in cross-selling digital transformation. Our K-12 operations now have 584 K-12 districts generating significant SaaS revenue, which more than doubles our presence in this vertical market from before we acquired Yellow Folder. Importantly, each of these districts is a target for additional Intellinetics services. Since the Yellow Folder acquisition in April 2022, we have successfully sold 13 K-12 deals worth $634,000 in TCV. This reinforces our strategic acquisition of Yellow Folder and our ability to our digital transformation professional services into our K-12 customers. I am optimistic about our future performance. Recently enacted price increases for select engagements caused an increased contribution from IPAS and other organic growth to drive revenue acceleration and our business model results in systematic profitability. At this time, I would like to turn the call over to our Chief Financial Officer, Joe Spain, to talk about our future -- about our financials.

Thanks, Jim. I will now review our financial results for the third quarter of 2023. Total revenue for the quarter increased 10.1% to $4.2 million as compared to $3.9 million for the same period last year. The following are the components of our revenue presented on our statements of operations: Subscription software, which is comprised of both SaaS, including hosting revenue and software maintenance services revenue, increased 5.3% to $1.65 million for the quarter from $1.56 million for the same period last year, consistent. And as expected, our software maintenance services are growing more slowly, up less than 1%. Professional services revenue increased 16.2% to $2.3 million for the quarter from $2 million for the same period last year. As a percentage of total revenue, professional services revenue was 55% of total revenue for the quarter compared to 52% of total revenue for the same period last year. Year-to-date, our digital transformation business, primarily scanning customer-backed file images had a tremendous improvement over 2022 when, as you may recall, in the first half of last year, we had challenges finding staff to perform the work on our growing backlog of business. Storage and retrievable revenue was relatively flat at $259,000 for the third quarter of 2023, compared to $269,000 in the third quarter of 2022. Software revenue, which is comprised of perpetual license revenue was down for the quarter and continues to decline as a percentage of total revenue as we transition to SaaS offerings. We expect sales of on-premise software to continue to be a minor part of our revenue as we focus on SaaS. Consolidated gross margin decreased 36 basis points to 61.3% for Q3 this year, compared to 64.9% last year. The decrease was driven by a revenue mix shift toward professional services. I would note that sequentially, our gross margin improved slightly compared to the second quarter. Also, as noted in our earnings release and Jim's reference, we have price increases coming into effect in our document conversion segment, which we expect to drive further margin improvement. Operating expenses increased 10.3% to $2.26 million for Q3 2023 compared to $2.05 million in Q3 '22. The increase is largely due to investments in structure and scale. I'm pleased to share that we're on track with our NetSuite deployment. Sales and marketing expenses for the quarter increased slightly compared to the same period during 2022, which is largely a timing matter. We continue to invest in marketing and sales. Net income for Q3 was $209,000 compared to net income of $218,000 for the same period last year. Earnings per share was $0.05 per share for both periods. Our adjusted EBITDA for the quarter was $709,000 compared to an adjusted EBITDA of $811,000 for the same period in '22, which was a record-setting quarter for us, making a tough comparison. Our quarterly EBITDA has grown sequentially in 2023. I want to wrap up with a brief financial outlook. Based on our current plans and assumptions and subject to risks and uncertainties we described in our filings and this call, we expect to continue to grow revenues and adjusted EBITDA on a year-over-year basis for the fiscal year 2023. With that, we thank you all for listening. And at this time, we'd like to open the call up to Q&A.

[Operator Instructions] Your first question comes from Howard Halpern with Taglich Brothers.

Congratulations, guys, another great quarter. In terms of IPAS, which is an exciting product, are you -- and based on the latest announcements, are you integrating that within the larger software of Constellation to go active with their clients?

Thanks, Howard. I appreciate the question. So we started with a tight integration to Constellation, which was great news. They worked very closely with us. We worked with a product development team, product management team as well. And that was the first iteration of it in the first release of it. That's why we're doing so well there. One of their customers recently asked to not integrate because they're upgrading to Constellation's new release of their new product, which in the future, we've got a commitment that we'll also integrate to. But the great thing about that is, is that we could sell this product to anybody now because we also developed a stand-alone product that doesn't necessarily need to be completely tightly integrated to a financial system. So that will open up additional markets for us as we go forward with this. And that's new news as of last week as well. So a lot of great things happening in that area.

And does that help in selling -- cross-selling to your established K-12 customer base?

Most definitely because we -- although we have our partners, Software Unlimited, that has 2,000 financial -- K-12 financial customers, we can now sell it to them without actually getting the integration done. So we already have a couple of early adopters that we're talking to and working with, and you'll hear more about that in the future as well. So that really, again, that's my point before, it opens up our ability to sell that product to other back-end ERP financial systems.

So looking forward, the primary focus for IPAS for this upcoming year will be the homebuilders, homeowner base, cross-selling to your established K-12 customer base? And is there -- are you looking to broaden into maybe 1 or 2 reference customers in another vertical? Or you have enough business with the homebuilders and your current...

Never enough business, Howard. Our goal is to really find the next ERP vendor we can partner with and work with. We can also sell to individual. We started a marketing campaign. We're just kicking off around this product. And the really good news is we have a great relation with Constellation. We're actually at the homebuilders annual show this week in California. But Constellation has 1,000 technology companies that they manage under their $5 billion umbrella. We're really hammering them now to start introducing us to the next homebuilders partner.

Okay. And in terms of -- you talk about the cross-selling opportunities not only for IPAS but for your data conversion. In addition to that, I was just wondering if there's an opportunity in your established K-12 school districts to broaden beyond the school districts into like the local government, the local library. Is that something that you're able to do?

Most definitely. And as you know, as you get into, as an example, Savannah, we started in the Savannah Police Department, but then got into the Savannah municipal offices. We can -- you have the relationships, you most definitely can. School districts are a little different. Usually, you've got a Board of it, you have to go through approval, but certainly, it is an opportunity for us to go forward. And as you know, we did do a lot of government business at this point, a lot of municipalities and county governments as well.

Right. And I mean, I know it's a crazy environment out there. Is there anything to talk about on the acquisition landscape? Or is it sort of on the quiet side right now?

I think you need to stand by, and we're always looking. We're always looking for acquisitions.

So we're busy, Howard, we're constantly busy, whether it's a dearth of activity, which you've clearly seen in the last year plus since April '22, when we bought Yellow Folder, but that doesn't mean that we've stopped. We've been actively engaged in a number of things. Several have not eventuated largely centered around valuation differences of perspective. But we've not pressed the pause button on our side.

We've done -- just in side, we've done 3 very successful acquisitions at the right price. So we are very diligent and -- we're looking at companies all the time, but we're very diligent on the price we pay and to make sure that we have the cross-selling synergies that we look for.

Okay. And just one last question on the balance sheet. You paid down debt in the quarter and continuing consideration. Is there going to be a continual constant cadence to the pay down of debt in the coming year?

So that's going to depend, Howard, really on the M&A answer. So if we find the right company at the right price, we would like -- obviously, you have a certain size, we're going to have to go to debt and/or equity depending on what that looks like critical mass relative to us, something very small, we'd like to do out of cash. So that would -- we're kind of keeping our eye on that as we look forward. Obviously, we've got 25%, a little bit ahead, but not that far out. So we've kind of got our eye on all options to see what makes the most sense, but we're probably not going to pull the trigger immediately.

[Operator Instructions] At this time, it appears there are no further questions. I'd like to turn the call back to management for any further remarks.

Thank you. Thank you. In summary, I am very, very encouraged with our results. Our business model structured around recurring revenue is clearly working. We are focused on effectively cross-selling and broadening our addressable markets, and we are excited where Intellinetics is in our future opportunities. We appreciate the continued support of our long-term shareholders and aim to attract new investors as well by delivering strong and consistent financial results. Thank you for joining us today, and we look forward to speaking again on our next conference call. Thank you again.

This concludes today's Intellinetics Third Quarter 2023 Earnings Call. Thank you for attending, and have a wonderful rest of your day.