Intellinetics - Q3 2022

Transcript

Tom Baumann (VP of Investor Relations)

Good afternoon, everyone. My name is Tom Baumann from FNK IR, and we were recently retained by Intellinetics. I am pleased to welcome you to Intellinetics' 2022 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 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 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 annual report on Form 10-K filed March 24, 2022, and other risks and uncertainties discussed in our Form 10-Q filed today. Also, please note that on the call today, management will discuss non-GAAP financial measures such as adjusted EBITDA 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 the 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, Intelligenics' President and CEO. Jim, the call is yours.

Jim DeSocio (President and CEO)

Thank you, Tom. This was a strong quarter for Intellinetics, further demonstrating that we are on a sustainable path for profitable growth. We continue to drive year-over-year and sequential revenue growth, and our SaaS revenue growth is growing faster than our consolidated revenue due in large part to the tremendous success of the Yellow Folder acquisition, which we closed in April of this year. Our SaaS revenue grew 244% year-over-year with the acquisition of Yellow Folder. Organically alone, it grew 42%. We have successfully integrated Yellow Folder, and efforts to effectively cross-sell our services are expanding. We continue to invest in our sales, and marketing capabilities with the goal of enabling effective cross-selling, further penetrating our existing markets, and expanding into new markets.

As a result of these investments, our pipeline continues to grow, and this quarter was particularly strong from a bookings perspective, giving us momentum as we head into the end of the year and into 2023. Through just nine months of 2022, we have already closed 362 contracts with an estimated total contract value of $6.3 million, surpassing all of last year. The total contract value of these orders are generally recognizable in revenue over one year or less. Yellow Folder is contributing to the growth of our pipeline as well, and meeting our expectations. Since the April acquisition, the Yellow Folder team sold new contracts worth $138,000 in SaaS and $197,000 in professional services' total contract value.

Our K-12 operations now has over 530 K-12 districts, generating 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. It is increasingly clear that the Yellow Folder acquisition was an excellent transaction for Intellinetics and its shareholders, meaningfully expanding our scale and our addressable market. Not only does this acquisition expand our recurring SaaS revenue base, but it also enhanced our EBITDA with high margin business, and provides opportunity for more revenue via cross-selling opportunities. During the quarter, we cross-sold three Yellow Folder customers on document conversion for total contract value of $152,000. Another component of our growth strategy is to broaden our portfolio of products and 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. IPAS was launched earlier this year. We are collaborating with Constellation HomeBuilder Systems, part of the $5 billion Constellation Software family, to broaden awareness for IPAS, especially in the home builder market. As part of that, a new IPAS customer shared their success story speaking to the return on investment of this solution. In a minute, Joe will review the details on our financial results next, but I'd like to highlight our non-GAAP measure of Adjusted EBITDA.

In the third quarter of 2022, we reported Adjusted EBITDA of $799,000, up 48% from Q3 2021. This marks the 11th consecutive positive quarter and 9th consecutive quarter exceeding $300,000. Our organic and inorganic growth has made us a sustainably profitable company, and the entire team continues to deliver on the acquisition synergies. We are well-positioned for sustainable, profitable growth, and the market opportunities continue to expand. It's an exciting time at Intellinetics. At this time, I would like to turn the call over to our Chief Financial Officer, Joe Spain. Joe?

Joe Spain (CFO)

Thanks, Jim. I will now review our financial results for the third quarter of 2022. Total revenue for the quarter ended September 30, 2022 increased 22% to $3.9 million, as compared to $3.2 million for the same period last year. Following are the components of our revenue in the order presented on our statement of operations. Software revenue, which is comprised of perpetual license revenue, decreased 68% for the third quarter to $18,000 from $59,000 for the same period last year. The ongoing shift toward cloud solutions in lieu of on-premise solutions makes this a very small component of our overall revenue, increasingly inconsistent and can make comparisons swing significantly, as we noted last quarter.

Recurring revenue, which is comprised of SaaS, including hosting revenue plus software maintenance services revenue, increased 127% to $1.5 million for the quarter, from $689,000 for the same period last year. Yellow Folder contributed $710,000 of the increase. Without Yellow Folder, the organic growth was strong as well. Organically, SaaS grew more rapidly than software maintenance services at 42% versus 5%, as expected, given the continued shift toward cloud solutions. The differential is also partly attributable to customers migrating from our on-premise solution to our cloud solution, which shifts the revenue from maintenance to SaaS. Every migration case this year resulted in higher overall revenues. Professional services revenue decreased 7% to $2 million for the quarter, from $2.1 million for the same period last year.

As a percentage of total revenue, professional services revenue decreased to 52% of total revenue for the quarter, compared to 68% of total revenue for the same period last year. The decrease in professional services was driven by workforce challenges at our Graphic Sciences subsidiary and ramping up after Omicron reductions over the winter. We have a strong backlog, but couldn't get our production staff up to capacity nearly as quickly as in the past. Storage and retrieval services revenue increased 4% to $269,000 for the third quarter 2022, compared to $259,000 for the third quarter 2021. Overall, gross margin was up at 65% for Q3 this year, compared to 60% last year.

The increase was driven by a mix shift toward higher margin solutions, with SaaS and maintenance growing, and professional services lagging compared to the prior year. Cost of revenue increased 8% or $98,000 to a total of $1.4 million for the quarter, compared to $1.3 million for the same period in 2021. Operating expenses increased to $2 million for Q3 2022, compared to $1.5 million in Q3 2021. The increase is largely due to the addition of Yellow Folder. Sales and marketing expenses for the quarter increased 32% compared to the same period during 2021. This increase reflects the addition of Yellow Folder team and other investments in marketing sales, which Jim mentioned earlier. Interest expense for the quarter was $240,000, an increase of $127,000 from last year.

Interest expense has grown as expected as a result of the private placement offering on April 1, 2022, which added $3 million in term debt. Net income for Q3 was $218,000, compared to $296,000 net income for the same period last year. A key factor in the modest decrease in net income was the incremental $127,000 in interest expense I just mentioned. Earnings per share for the quarter were $0.05 per share compared to $0.10 per diluted share last year.

To reiterate Jim's preview earlier, our adjusted EBITDA for the quarter was $799,000, or $0.20 per basic share, and $0.17 per diluted share, compared to an adjusted EBITDA of $539,000 or $0.19 per basic share, and $0.17 per diluted share for the same period in 2021. I'd like to point out that in our private placement offer in April 1, we added 1.2 million outstanding shares, which increased our total number of outstanding shares by 44%. Next, I'll turn to review of Intellinetics' balance sheet. At September 30, 2022, the company had cash of $3.8 million and accounts receivable net of $854,000.

Our total assets were $20.8 million, including an increase of $3.8 million in intangible assets and $3.5 million in goodwill as part of the Yellow Folder acquisition. All other assets acquired totaled about $137,000. Total liabilities were $12.5 million, including $5 million in debt principal as of September third.

As I mentioned earlier, we closed on our private offering on April 1, 2022, where we added $3 million in debt due in 2025 as part of our total capital raise of $8.7 million. Also, in deferred revenues, we added $655,000 from Yellow Folder, stemming from their SaaS contracts we assumed. I wanna 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 on 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, would like to open up the call to Q&A. Tom?

Tom Baumann (VP of Investor Relations)

Thanks, Joe. The call is now open for your questions. If you'd like to ask a question, please use the Q&A widget at the bottom of your screen to submit a question, or use the Raise Your Hand icon to alert us that you'd like to speak on today's call. Please note if you use the Raise Your Hand icon, we'll need to open your line, so just wait for us to call on you to begin asking your question. Again, ladies and gentlemen, if you wanna ask a question, please use the Q&A icon or Raise Your Hand icon. Okay, there are no questions at this time, so I'll hand the call back over to Jim.

Jim DeSocio (President and CEO)

Thank you again, Tom. In summary, this was a strong quarter. The pieces we have strategically assembled over the past few years have come together as we anticipated, enabling us to shift to a more predictable SaaS model. That shift is helping us grow revenue, more effectively cross-sell, and drive sustainable profitability. We are excited about where Intellinetics is and our future opportunities. We appreciate the continuous support of our longtime shareholders and aim to attract new investors as well by delivering strong and consistent financial results. Following our up-listing to the NYSE American, and subsequent to the end of the third quarter, we engaged FNK IR to help us enhance our visibility within the capital markets. Over the coming weeks and months, we'll be working to increase our transparency and engagement with the investment community.

It is our goal to continue to grow recurring revenues and create value for our shareholders. Thank you for joining us today, and we look forward to speaking again on our next conference call. Thank you.

Tom Baumann (VP of Investor Relations)

Jim?

Jim DeSocio (President and CEO)

Yes.

Tom Baumann (VP of Investor Relations)

Jim, before we hang up, we did get a question while you were reading your closing remarks.

Jim DeSocio (President and CEO)

Okay.

Tom Baumann (VP of Investor Relations)

It comes from Taglich. Mike would like to discuss 2023 internal growth and sort of what your visibility is going forward.

Jim DeSocio (President and CEO)

Okay. Well, we don't usually give forward-looking visibility. We haven't in the past. Things look very good for next year. As you see in the earnings release, we're very bullish on next year and our continued growth.

Tom Baumann (VP of Investor Relations)

Thanks, Jim. Let's give it one more minute here because it does look like some questions are coming in while you were reading your closing statement.

Jim DeSocio (President and CEO)

Okay.

Tom Baumann (VP of Investor Relations)

Todd Blue has a question. Can you give some more color on IPAS?

Jim DeSocio (President and CEO)

Yes, I certainly can. IPAS is a very exciting product, and most exciting that we're working with Constellation Software. Constellation Software, if you don't know, is a $5 billion company out of Canada that has hundreds of different software companies, ERP software companies, that they purchase in individual niche markets. We are working with one of those organizations which is in their construction building or home building marketplace, and we've worked very closely with them to launch one of the IPAS products. What it does is automates the accounts payable life cycle end to end. It actually reduces the number of people you have to do, you know, a very large reduction in headcount to process those invoices.

Close to 75% we've recognized with some of the IPAS with some of the Constellation HomeBuilder Systems customers. It increases visibility into invoices, supporting documents and status, and it just streamlines the entire automated processing to improve service levels. It is a very nice product and we're just at the Constellation HomeBuilder Systems annual meeting last week, meeting hundreds of potential customers going forward.

Tom Baumann (VP of Investor Relations)

Okay. Well, thank you, Jim. That does wrap up the Q&A session, and that will conclude the call. Thank you, everybody, for dialing in.

Jim DeSocio (President and CEO)

Thank you, everybody.

Tom Baumann (VP of Investor Relations)

Thank you.

Jim DeSocio (President and CEO)

We'll look forward to a great year. Look for a great year in 2023.