Intellinetics Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 13, 2024

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Intelenetics Second Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Tom Baumann, Investor Relations.

Operator

Thank you, Tom. You may begin.

Speaker 1

Thank you, and good afternoon, everyone. I am pleased to welcome you to Intelimetics' 2024 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 Intelinetics 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. Intelenetics undertakes no duty to update any forward looking statements.

Speaker 1

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 the risks and uncertainties included in this section under the caption Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in Intelimetics' Annual Report on Form 10 ks or the Quarterly Report on 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 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 may be different from non GAAP financial measures presented by other companies. A reconciliation between GAAP and non GAAP can be found in the press release issued today. With all that said, I would now like to turn the call over to Jim D'Sosio, Intelenetics' President and CEO.

Speaker 1

Jim, the call is yours.

Speaker 2

Thank you, Tom. Intelenetics continues to generate solid financial results. While taking these steps to enable accelerated top and bottom line growth in the future, We delivered growth in SaaS and overall recurring revenue in line with our stated strategy. We also generated continued profitability even as we begin to invest significantly in sales and marketing to support a broader SaaS initiative. Yellow folder continues to grow and in response to our new IntelliCloud Payables Automation Solution or Ipass offering has been highly encouraging with deployments accelerating.

Speaker 2

We generated significant cash and continue to pay down debt. The pieces are in place for continued success for years to come. This progress comes even as our newest SaaS offering iPaaS has just started contributing to our results. As I said, the response to iPass has been very strong. Our pipeline of opportunities for Ipass is improving in terms of quality and quantity with each passing month.

Speaker 2

Demand for yellow folder solutions is also growing and overall Intelenetics is well positioned across all our SaaS offerings. As we have been communicating, we have been investing to scale our business and we are now pointing to accelerate our investment in marketing, our SaaS offerings. These investments will support all of our SaaS offerings, including YellowFolder and iPaaS. In the quarter, SaaS revenue as a percentage of our consolidated revenue remained at 30% even with a record contribution from our professional possible. This will reduce earnings volatility, make our business very easy to model and benefit shareholders through consistent profitability.

Speaker 2

Fast businesses are historically quite profitable. We invested in 2022 to acquire Yellowfolder as we are paying down the debt related to this acquisition, having already fully paid down the debt from the 2020 Graphic Sciences acquisition. We launched Ipass in 2023 and we are investing in capabilities to maximize the opportunity. Historically, our sales and marketing investments have been relatively modest. But with the inclusion of Ipass into our portfolio, we have been meaningfully expanded our addressable market.

Speaker 2

The number of potential customers has increased significantly. This means we need to add skilled and capable salespeople and we need to expand our presence at trade shows and similar events. For more specifics regarding sales personnel, we added 1 this March, plan for 2 more right now before the end of Q3 and we want to have 2 more on board in January. These investments will modestly and we expect temporarily reduce our EBITDA, but they will pull forward revenue opportunities that should exceed the spend and be accretive at some point in 2025. Once revenue from Ipass exceeds these investments, incremental revenue will disproportionately drop to the bottom line.

Speaker 2

Additionally, this model will enable us to appropriately size fixed costs so that we are systemically profitable, creating a durable, sustainable, scalable platform for profitable growth. As I said, our iPass solution has given us significant momentum. We have doubled the number of live reference accounts from 2 to 4 during the Q2. These accounts are all running smoothly. We have an additional 3 or 4 expected to go live in the 3rd quarter and our pipeline continues to grow.

Speaker 2

Again, this is with a pretty modest sales and marketing function. As we move through 2024, we anticipate Ipass becoming a larger and larger contributor to our consolidated revenue. Our K-twelve operations now have 6 19 K-twelve districts generating significant SaaS revenue, which more than doubles our presence in this vertical market since before we acquired Yellow Folder in April of 2022. Importantly, each of these districts is a target for additional and telematics services, including Ipass. We are launching a K-twelve Ipass pilot this week as we speak to address this opportunity.

Speaker 2

Meanwhile, the document conversion portion of our digital transformation business, including business process outsourcing, business and document storage and retrieval continues to generate positive contribution margin. As a reminder, last quarter we disclosed that our largest professional services customer plans to transition certain tasks performed by our document conversion business from one office location to another location in a way that could reduce annual revenue of our document conversion segment. The amount of the future revenue reduction is still uncertain and the transition has been delayed by the customer with no clear timeframe. We are continuing to negotiate with the customer to mitigate the impact of this future revenue reduction. For Q2, I want to congratulate the entire document conversion team for delivering a record revenue quarter.

Speaker 2

We continue to work on initiatives to improve efficiencies and margins there, but our new investments in sales and marketing are focused on growing our recurring revenue, in particular, our SaaS subscription revenue. At this time, I'd like to turn the call over to our Chief Financial Officer, Joe Spain.

Speaker 3

Thanks, Jim. I will now review our financial results for the Q2 of 2024, the period ending June 30, 2024 compared to the prior year 'twenty three. Total revenue for the quarter increased 9% to $4,600,000 as compared to 4 point $3,000,000 for the same period last year. The following are the material components of our revenue. 1st, subscription software, which is comprised of SaaS including hosting revenue and software maintenance services revenue increased to $1,750,000 for the quarter from 1.6 $3,000,000 for the same period last year.

Speaker 3

SaaS grew 9.6% and consistent with history and as expected, our software maintenance services are growing more slowly at 1.4% over 2023. Secondly, professional services. Revenue increased 15.8 percent to $2,660,000 from $2,300,000 for the same period last year. As a percentage of total revenue, professional services revenue was 57% of total revenue for the quarter, up from 54% last year. Consolidated gross margin increased 387 basis points to 64.7% for Q2 compared to 60.8% last year.

Speaker 3

The increase was driven by both better revenue mix, slightly weighted towards subscription revenue plus higher margin professional service projects and also positive impact from price increases. Operating expenses increased 23.4 percent to $2,800,000 compared to $2,300,000 in Q2 '23. The increase is largely due to the $500,000 in non cash stock based compensation expense for restricted stock awards to employees as well as investments in structure and scale. A subset of operating expenses, sales and marketing expenses for the quarter increased 7.7% compared to the same period in 2023. As Jim mentioned, we continue to invest in marketing and sales and these prior period comparatives will continue to shift as we increase the sales and marketing investment compared to historical levels.

Speaker 3

This includes the sales rep additions Jim talked about plus increasing our trade show activity in 2024, which is important to both our Ipass and K-twelve revenue acceleration. Net income for Q2 was $75,000 compared to net income of $136,000 for the same period last year. Earnings per share was $0.02 per share compared to earnings per share of $0.03 last year. Our adjusted EBITDA for the quarter was $698,000 compared to an adjusted EBITDA of $651,000 for the same period in 2023. Next, a brief overview of the balance sheet.

Speaker 3

At June 30, 2024, we had cash of 1,700,000 dollars and accounts receivable net of $1,400,000 Our total assets were $18,900,000 including 9.4 $1,000,000 in intangible assets and goodwill as part of acquisitions made since 2020. Total liabilities were 8 $500,000 including $2,800,000 in deferred revenues reflecting signed SaaS and maintenance contracts and $2,100,000 in debt principal as of June 30. In the 1st 6 months of 'twenty four, we have prepaid $825,000 of our long term debt, including $325,000 at the end of the second quarter. We expect to continue to pay down our debt, including another $800,000 this month and expect to have no net debt, meaning debt less cash at the end of 2024. I want to wrap up with our financial outlook.

Speaker 3

Based on our current plans and assumptions and subject to risks and uncertainties we described in our filings and this call, we are reiterating our expectation to grow revenues on a year over year basis for the fiscal year 2024. As Jim mentioned, we'll be increasing our investment in sales and marketing including adding 4 sales people to support our SaaS offerings over the next several quarters. These investments will have a modest short term impact on our EBITDA margins.

Speaker 1

To be clear, we continue

Speaker 3

to expect to generate positive adjusted EBITDA, enabling us to continue to pay down our debt and bolster our balance sheet. However, as noted in our earnings release, we are revising our guidance as we expect our adjusted EBITDA to decrease modestly year over year. As these sales and marketing investments begin to bear fruit, we expect accelerated top and bottom line growth in 2025 beyond. With that, we thank you all for listening. And at this time, we'd like to open the call up to Q and A.

Operator

Thank you. We'll now be conducting a question and answer Our first question is from Howard Halpern with Taglich Brothers. Please proceed with your question.

Speaker 4

Congratulations guys. Great quarter. Good morning, guys. In terms of Ipass, how many customers are actually live right now?

Speaker 2

4 are actively live and we're expecting the 3 to go live sometime this quarter.

Speaker 4

And in general though, when we're entering 2025, what do you expect with the live implementations? What could the potential annualized revenue recurring revenue run rate be for these Ipass customers?

Speaker 2

Well, that's forward looking.

Speaker 1

Yes.

Speaker 3

Yes. I think Howard, yes, we're I mean, it's a little bit in the box to have us be that specific that's time bound because then we don't want to get too crazy within the bounds of what we're supposed to be able to say. But I mean we can say certainly qualitatively it's going to be significant relative to our

Speaker 2

path, very significant. Yes.

Speaker 4

Okay. And so with 7 customers expected to be online entering the Q4 and new salespeople coming online, what and your pipeline, could you give a little color as to the cadence you hope to achieve in not only signing customers, but then once you sign implementing those customers? What should I know it's relative Ipass is relatively new for you, but what should the cadence be or what do you hope the cadence to be?

Speaker 2

Well, we can I talk about our budget? We're planning on 15 to 18 customers this year. We've already closed sold 11 to 12. So we're another 5 or 6 this year we're counting. And then next year with them coming on live, we plan to grow substantially over the next year.

Speaker 4

Okay. And that's still all just from that one vertical, the homebuilding vertical?

Speaker 2

That's all from the one vertical. So we are in beta with our K-twelve beta site and we've got some good things there and we're also working on a new product. All these customers were sold with just AP, payables automation. We are coming out with PO in the future as well. Okay.

Speaker 2

And how it will be towards

Speaker 3

the end of the year? I would say, I

Speaker 1

mean, I

Speaker 3

would say, I mean, definitely it's going to accelerate, right? This is a brand new product released in 2023. Obviously, we've got some early adopters, but there's momentum to be had here. And the old buzzword a few years ago, the flywheel, right? I mean, it just hasn't even started spinning yet.

Speaker 3

So we definitely expect acceleration.

Speaker 2

Okay. And what I've said in the past too Howard, the 11 customers we paid, I think Joe were up to 9 have paid in full already as they're coming up going live. So, people believe in the product, the implementations are going well and they're paying us, which is in my experience in the software business is that is a phenomenal metric, right, that people are paying.

Speaker 4

So the deferred revenue will be a leading indicator of hopefully, the satisfaction in the future results. Okay.

Speaker 2

Exactly. Yes.

Speaker 4

You talked about the document conversion. What actually drove the increase there? Was it just in Michigan or was there some conversions of K-twelve customers?

Speaker 2

Well, we actually have up the facility in Columbus, Ohio and they're actually working and doing scanning business as well. We've closed a number of microfilm, microfiche deals which is a different revenue line than the basic scanning business. So everything came together this last quarter. And we've owned the business for a few years and when we bought the business, the infrastructure was 40 years old, 30 years old. We've really invested in better systems.

Speaker 2

We've gotten better at running the business. We know how to do it much more effectively and efficiently now. So everything's come together, Howard, over the last year and a half or so.

Speaker 4

And does it seem like there's a pipeline, there will be pent up demand for that service out there from existing customers and new customers?

Speaker 2

Yes. Well, keep in mind that we're getting a lot of K-twelve business. So, we're doing a good job of cross selling into our K-twelve business. And keep in mind that school districts have to keep student records for 99 years. And it's generated by someone who needs a new building.

Speaker 2

They're consolidating building. They're trying to get rid of all their paper documents, etcetera. So there's a lot of things that drive people to say, let me digitize all of my back records and back file all my back records. Recently, we've also been successful of the original vision was, we've been in the document management business for a number of years and people would say how do I get my old files into your system. Well now we're doing a much better job of actually integrating the sales team.

Speaker 2

So as they sell a document management system we'll sell a scanning project as well at the same time.

Operator

Thank you. There are no further questions at this time. I would like to hand the call back over to Jim Spain for any closing comments.

Speaker 2

Jim Spain, Jim DiSocio. Yes, thank you all for joining us. I'm very optimistic about the future of TeleMedics. We have exciting SaaS assets supported by project oriented business that is expected to continue to generate cash. We are paying down our debt and investing in our sales and marketing function to drive future growth.

Speaker 2

We have a strong competitive position in growing markets and a diverse set of solutions with ample cross selling opportunities. Our business model structured around recurring revenue is working. We appreciate the continued support of our long time shareholders. Thank you for joining us today and we look forward to speaking again on our next conference call. Thank you very much.

Speaker 2

Appreciate everybody coming and joining.

Operator

This concludes today's conference call. You may now disconnect your lines. Thank you for your participation.

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Earnings Conference Call
Intellinetics Q2 2024
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