Intellinetics - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue grew 2.1% YoY to $4.28M, driven by 11.8% SaaS growth; GAAP EPS was $(0.01) vs $0.02 a year ago as stepped-up sales/marketing spend weighed on profitability. Gross margin improved to 65.8% (+90 bps YoY) on mix and pricing.
• Versus S&P Global consensus, INLX posted a small top-line beat and a significant EPS beat: Q4 revenue $4.28M vs $4.20M*; EPS $(0.01) vs $(0.08). FY24 revenue $18.02M vs $17.94M and EPS $(0.13) vs $(0.19)* (estimates from S&P Global).
• Management introduced FY25 qualitative guidance: revenue growth expected, but EBITDA to be reduced by “more than half” vs FY24 as INLX accelerates investments to scale Payables Automation (IPAS) and sales capacity; cash generation funded $1.65M in 2024 debt prepayments, ending FY24 with ~$2.49M cash and just over $1.3M of debt principal outstanding.
• Catalyst: Narrative centers on SaaS/IPAS traction (e.g., a large customer processing 11,000 invoices/month with zero touch) versus the near‑term EBITDA compression from growth investments; investors will weigh durable SaaS mix expansion and record cash generation against 2025 margin headwinds.

What Went Well and What Went Wrong

• What Went Well

  • SaaS momentum: Q4 SaaS revenue +11.8% YoY; management reiterated IPAS as the primary SaaS growth driver and cited strong customer ROI and expanding reference accounts.
  • Margin enhancement: Q4 consolidated gross margin rose to 65.8% vs 64.9% last year on mix shift to SaaS and pricing, with SaaS margins in the mid‑80s expected to hold within a narrow range.
  • Cash flow and deleveraging: FY24 operating cash flow was $3.86M; INLX prepaid $1.65M of debt in 2024 and ended FY with >$2.4M cash and just over $1.3M of debt.

• What Went Wrong

  • Profitability under pressure: Q4 adjusted EBITDA declined YoY to $600.8K (from $754.4K) and GAAP swung to a $53.7K net loss, reflecting higher sales/marketing and structural investments; full‑year adjusted EBITDA declined to $2.45M (from $2.74M).
  • 2025 margin headwinds: Management guided FY25 EBITDA to be “reduced by more than half” vs FY24 as it accelerates growth investments, implying near‑term earnings pressure despite expected revenue growth.
  • Project timing and pro services: Professional services growth in Q4 was muted (0.3% YoY) due to projects shifting into 2025; storage/retrieval continues to trend down YoY.

Transcript

Operator (participant)

Greetings and welcome to the Intellinetics Fourth Quarter and Full Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, CFO Joe Spain. Thank you. You may begin.

Joe Spain (CFO)

Thank you. Good afternoon, everyone. I'm covering the investor relations intro today, so I am pleased to welcome you to Intellinetics 2024 Fourth Quarter Conference Call. Before we begin, I'd 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 our annual report on Form 10-K filed earlier today. Also, please note that on the call today, management will discuss non-GAAP financial measures such as adjusted EBITDA and recurring revenue. 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.

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.

Jim DeSocio (President and CEO)

Thank you, Joe. 2024 was another solid year for us as we continue our mission. We are investing to exploit our opportunity to grow more rapidly as we transform into a predominantly SaaS-driven company with a diverse, growing suite of solutions for our customers in the digital transformation space. On top of that, we completed 2024 with another extremely strong year of cash flow generation. Our main story continues to be our payables automation solution. We are confident it will be the driver to take our business to the next level. As I've said in prior quarters, I've been in software my entire career, and this launch is going as well or better than any launch I've been involved with. Customer acceptance is high, and the ROI story for our customers is amazing. One of our largest customers is processing over 11,000 invoices a month with zero touch.

Let me say that one more time: over 11,000 invoices a month with zero human intervention. Those are significant results, and we're very proud of our solution. In last quarter's call, I referenced our presentation at the Build Smarter Conference, the annual user conference for home builders hosted by our ERP partner, Constellation HomeBuilder Systems, and the buzz around the customer ROI of our solution. Since that conference in October, we have closed four new payables automation orders for Constellation customers and have launched a pilot program with a leading North American home builder and land developer who is one of Constellation's largest customers. We're on schedule to release our new complementary purchase order solution at the end of this quarter.

Purchase order will expand our opportunity base while also adding PO transaction volume to over half of our existing customers who are using only the accounts payable functionality today. This will add incremental revenue to our existing AP customers. We have also recently launched our payables automation solution into the K-12 market in coordination with our partner, Software Unlimited Incorporated. After a pilot program with Clear Creek Community Schools, we have closed two additional Iowa school districts and engaged our K-12 sales force and marketing team in February. Our K-12 pipeline is growing quickly. The K-12 customers can generally implement in less than half the time of the larger home builder entities. As a matter of fact, Independence Community School District went live in January and has already caught the attention of their school board.

According to their finance director, the school board likes the automated aspect of the system not only because it greatly reduces the opportunity for human error and speeds payment processing, but also because it allows them to spend their time on more meaningful tasks. To quote her, "Even though we are just beginning to take advantages of the features available in the system, we are already more efficient. If we stopped today and didn't implement any of the rest of the features, I would still be happy with what we've accomplished." Throughout the rest of the year, we will be co-presenting with Software Unlimited at numerous K-12 conferences and trade shows to drive deployment of our payables automation solution into an ecosystem of 1,300 school districts. Our first priority is to make significant inroads in these two populations.

We're not waiting on those alone, though, and we have resources focused on finding the next partners like Constellation and Software Unlimited. We have an opportunity with niche ERP providers where we can outperform and outsupport competing generic solutions. Further, unlike with many of the larger software solution providers who offer similar solutions as we do, we are not competitors with regard to our partners' core ERP systems. Accordingly, as we have been communicating, now is the time for us to invest in scaling our business. We began in earnest in the latter part of 2024, hiring more sales reps, implementation management, and additional help desk support. We've continued investing in 2025 with bringing on sales engineering resources and a VP of Sales to strengthen and institutionalize our sales tools and processes as we grow. We've also expanded our outbound sales efforts with internal and contracted resources.

Our marketing spend will include more frequency and a larger presence at select trade shows, as well as expanded campaigns. These investments will modestly, and we expect temporarily, reduce our EBITDA, but we also expect that they will bring revenue opportunities that should exceed the spend and be accretive at the same point in later 2025 and in 2026. I am greatly excited to be part of this mission. At this time, I'd like to turn the call over to our Chief Financial Officer, Joe Spain, to talk to you about our financials.

Joe Spain (CFO)

Thanks, Jim. I will now review our financial results for the Fourth Quarter of 2024. Total revenue for the quarter ended December 31, 2024, increased 2.1% to $4.3 million as compared to $4.2 million for the same period last year. The following are the components of our revenue presented on our statements of operations. SaaS, including hosting revenue, increased 11.8% to $1.5 million for the quarter from $1.3 million for the same period last year, primarily driven by early payables automation successes. Software maintenance services were down 2.5% from 2023, as expected, reporting $0.3 million in both periods. As a reminder, these revenues are from support agreements with customers continuing on our premise solution. Professional services revenue was flat at $2.2 million for the quarter each year. The Fourth Quarter of 2024 produced the lowest growth of the year due to timing of large scanning projects earlier in the year.

As a percentage of total revenue, professional services revenue was 52% of the total for the quarter, down from 53% last year. Year to date, this revenue line has been strong, delivering 8.9% growth and a record revenue year for us for this line item at $10 million compared to $9.2 million last year. Consolidated gross margin increased 88 basis points to 65.8% for Q4 this year compared to 64.9% last year. The increase was driven by both better revenue mix, meaning from more growth weighted towards SaaS revenue, and positive impact from price increases. Operating expenses increased 11% to $2.8 million for Q4 2024 compared to $2.5 million in Q4 2023. The increase was driven primarily by our investments in sales and marketing as part of our strategy to accelerate sales.

The sales and marketing expenses for the quarter increased 37% compared to the same period during 2023, which reflects all the investments in marketing and sales that Jim just noted. General and admin expense increased 4.2% quarter over quarter. Net loss for Q4 was $54,000 compared to net income of $62,000 for the same period last year, as our revenue and margin improvements were offset by increased sales and marketing expenses and an incremental $146,000 in share-based compensation expense for the quarter over the prior quarter, which is a non-cash expense. Net loss per share was one cent per share for basic and diluted shares compared to net income of two cents per basic share and one cent per diluted share last year.

Our adjusted EBITDA for the quarter was $601,000 compared to an adjusted EBITDA of $754,000 for the same period in 2023, which reflects, again, our sales and marketing initiatives. Turning to the full year results, total revenue for 2024 increased 6.7% to $18 million as compared to $16.9 million last year. SaaS revenue increased 10.8%, and professional services revenue increased 8.9%. Consolidated gross margin was 64% compared to 62.6% last year. We're very pleased to be able to improve these already strong margins. Operating expenses increased 23.7% to $11.7 million for 2024 compared to $9.5 million in 2023. This increase is driven by two primary factors. First, our share-based compensation increased $830,000 year over year to $1.5 million from $700,000. Our MD&A in the 10-K provides a table for more granularity to compare year over year.

The main takeaway for me to convey here today is that all but $70,000 of this increase is non-cash. Without the share-based compensation, operating expenses increased 14.9%, primarily driven by the annual sales and marketing expense increase of 18.6%. Full year net loss was $546,000 compared to net income of $519,000 last year. Net loss per share was $0.13 per share compared to net income per basic share of $0.13 and per diluted share of $0.11 last year. Full year adjusted EBITDA, which takes into account the share-based compensation, was $2.5 million compared to adjusted EBITDA of $2.7 million for 2023. Here, our sales and marketing investments had a modest impact on the year-end results. Next, I'll turn to a brief review of Intellinetics balance sheet. At December 31, 2024, we had cash of $2.5 million and accounts receivable net of $1.1 million.

Our total assets were $18.6 million, including $9.2 million in intangible assets and goodwill as part of acquisitions made since 2020. Total liabilities were $7.9 million, including $1.3 million in debt principal as of December 31, 2024, which is due December 31, 2025. Deferred revenues were $3.4 million, reflecting signed SaaS and maintenance contracts. Regarding cash flow, Jim mentioned it, we had a tremendous year. Our cash flow statement shows cash provided by operating activities was $3.9 million. From this, we prepaid $1.6 million of our debt and are able to fund our sales and marketing investments out of cash flow. 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 that we will grow revenues on a year-over-year basis for fiscal 2025.

We also expect our 2025 EBITDA to be reduced by more than half compared to fiscal 2024 due to increased investment in sales and marketing intended to provide returns on those investments in late 2025 and beyond. With that, we thank you all for listening, and at this time, we'd like to open up the call to Q&A.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the Star key. One moment, please, while we pull for questions. Our first question comes from the line of Howard Halpern with Taglich Brothers. Please proceed with your question.

Howard Halpern (Analyst)

Congratulations, guys, on the year and the smooth transition that you're making.

Jim DeSocio (President and CEO)

Thank you.

Howard Halpern (Analyst)

In terms of the number of customers, how many are actually live and how many would you expect or should we model for to go live in the second half of the year?

Jim DeSocio (President and CEO)

That is.

Joe Spain (CFO)

Jim.

Jim DeSocio (President and CEO)

Yeah, that's a good question, Howard. The majority of the customers, we had two customers go live last week or in the last two weeks, and we have five in the process of implementation right now. As I said a number of times, they're going very smoothly. The more that we get up and running, the more references we're going to have, and the faster the word is going to spread throughout the prospect and our pipeline.

Howard Halpern (Analyst)

Okay. Does that include the ones that are live? Does that include last call you talked about a large customer that you were anticipating getting live in the First Quarter. Does that include that customer live?

Jim DeSocio (President and CEO)

Yes. That was one of the larger Constellation customers, and I referenced it in my discussion around how many invoices that they see as throughput. Just a note, they're still coming up live, and as you're doing capture and it's educating itself, the more invoices you do every month, it just continues to educate. The system educates itself. That is only 75%, 11,000 of the total invoices they're doing. As the system continues to be used week after week, month after month, we hope to get up to 70-80-90% of throughput without any human intervention. That is probably industry standard of 85-90%, which is great.

Howard Halpern (Analyst)

Okay. That's the enterprise side. Do you expect the same type of throughput on the K-12 side?

Jim DeSocio (President and CEO)

They're not doing the same amount of volume, but as we've learned from our early beta sites and our first couple of customers, extremely happy. As you saw from the Independence Community School District, where the VP of finance is just ecstatic with how she's able to take—I don't want to say it's one full headcount or two full headcounts, but it certainly reduced the amount of touch, human touch substantially. With school districts, the COVID money's dried up in school districts. They all have to start finding better ways to invest their money. This bodes very, very well for us. We're continuously working with Software Unlimited. In the future, we plan to integrate into their system, tightly integrate to their system as well, which will provide more value to their customer base also.

Howard Halpern (Analyst)

Now, as part of expanding beyond, I know you still have a long runway with Constellation and Software Unlimited, but what type of verticals maybe you can get into? And does getting into the school districts, could that bleed over to county or local governments wanting your system?

Jim DeSocio (President and CEO)

Yeah. Yeah. As a matter of fact, we're talking to a number of different ERP players. Another rather large school ERP who have about 2,300 customers. We're also talking—we had a press release a couple of months ago with someone who provides ERP systems to counties and municipalities. That is a big area for us. It is an underserved area for the marketplace as well because of being able to cost-effectively sell into those marketplaces.

Howard Halpern (Analyst)

In the Constellation universe, are you seeing any kind of hesitation from the customers in terms of how they want to deploy their budgets, or is this just an easier sell to get it up and running because of the ROI?

Jim DeSocio (President and CEO)

We found that there's a tremendous ROI. A lot of the customers are waiting for a release of purchase order, which is imminent. Obviously, the housing market with interest rates up and some of the other challenges they've had are being cautious. My experience in selling business software is when companies are doing really, really well, they don't really focus on the spend side, but when it gets tight, they go, "Oh, we need to save money." This should be a good opportunity for us to come in and show a great ROI on the spend side of their budgets. We think we're well positioned for that. Yep.

Howard Halpern (Analyst)

One final one, because in Q4, the SaaS line margin actually got up above that 85% level. Is that driven by these new SaaS customers, and should we see it maintained probably at that 85-plus level?

Jim DeSocio (President and CEO)

Joe, you want to handle that one? I would say it is because a lot of the customers coming up live, yes. Yep. Yeah. And some of it, I mean, there could be some timing. I think it's not an unreasonable range. That mid-80s, it's not going to be static. It's going to move depending on the nature of the customer and the level of effort. Some are easier than others. It is going to move a little, but it's going to move within that narrow mid-80s range. Yep.

Howard Halpern (Analyst)

Okay. Okay. Thank you.

Jim DeSocio (President and CEO)

If you remember, because of, yeah, Software Unlimited does all their selling and implementation, and our margins on the document management side is about 90% selling with Software Unlimited, so that should maintain itself on that selling into their customer base. Yep.

Howard Halpern (Analyst)

Okay. That sounds great. Keep up the good work, guys.

Jim DeSocio (President and CEO)

Thank you.

Howard Halpern (Analyst)

Thank you.

Jim DeSocio (President and CEO)

Thank you, Howard. Okay. I think we'll wrap it up. Let me just do my closing statements. Intellinetics is well positioned for continued success. We have significant momentum, a strong competitive position in a growing market, and a diverse set of solutions with ample cross-selling opportunities. Our business model structured around recurring revenue and aggressively growing our SaaS revenue is working. Our payables automation solutions provide an extremely quick return on investment for our customers and offers our company a clear organic growth opportunity to rapidly grow our SaaS revenue over the next four to five years, just with continuing a successful rollout with existing partners. We view payables automation as a transformative opportunity for our company, and we plan to continue to make investments to position the product for as rapid an adoption as we can drive.

In addition to sales and marketing initiatives, we plan to enhance our development capabilities to bring features to market more quickly and to bring our solutions to new ERP partnerships, which become additional ecosystems for happy customers. We appreciate the continued support of our long-time shareholders and aim to attract new investors as well by delivering strong and consistent financial results. Thank you all for joining our call, and we look forward to a great 2025. Thank you. Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.