Intellinetics, Inc.

Hello, and welcome to the IntelliNetics fourth quarter and full year 2022 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Tom Bauman, Investor Relations. Please go ahead, Tom.

Thank you, and good afternoon, everyone. I am pleased to welcome you to IntelliNetics 2022 fourth 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 earlier 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 adjust the EBITDA and 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 DiSocio, Intellinetics President and CEO. Jim, the call is yours.

Thank you, Tom. This was a strong end to a milestone year for Intellinetics as we delivered consistent growth and solid profitability, demonstrating that our evolution into a SaaS company has delivered improved financial results. Our quarterly revenue increased 47%, while our SAS revenue more than tripled. As a result, our net income increased 664% and our adjusted EBITDA more than bubbled, giving us significant optimism as we head into 2023. This marks the 12th consecutive quarter with positive adjusted EBITDA and the 10th consecutive quarter with adjusted EBITDA exceeding This performance is due in large part to the tremendous success of the Yellow Folder acquisition, which we closed in April of 2022. We are leveraging the success of Yellow Folder and working to cross-sell our services across our broader customer base. We are investing in our sales and marketing capabilities to bolster our cross-selling initiatives, which enable us to further penetrate existing as well as new markets. As a result of these investments, our bookings and our pipeline continue to grow. For 2022, we closed 466 contracts with an estimated total contract value of $7.7 million, an increase of 25% year-over-year in TCV. As a reminder, the total contract value of most of these orders are generally recognizable in revenue over one year or less. Since the April acquisition of Yellow Folder, the Yellow Folder team sold new contracts worth $162,000 in SAS and $220,000 in professional services total contract value. Our K-12 operations now has over 560 K-12 districts generating significant SAS revenue which more than doubles our presence in this vertical since we acquired Yellow Folder. Importantly, each of these districts is a target for additional Intellimatic services. This acquisition expanded our SAS revenue base and also enhanced our EBITDA with high margin business and provides opportunity for more revenue via cross-selling opportunities. Yellow Folder represents our third highly successful acquisition since 2020. In that time, we have successfully acquired and integrated graphic sciences and CEO imaging, as well as the April 2022 acquisition of Yellow Folder. After acquiring all three organizations, we have strategically integrated them into our consolidated marketing and sales efforts. Of our 466 new customer orders in 2022, 364 were to existing customers with new offerings and solutions. As an example, a school district in Michigan was spending $4,000 in annual subscription revenue on an old release of CEO Imaging. We converted the CEO Imaging release to our latest yellow folder K-12 product for a new annual subscription of $9,000 and also digitized all of their student records for $59,000. For another example, a large city in Georgia was using an old on-premise release of our Telenetics HR document management solution. We upgraded the city to our HR IntelliCloud solution, converted 4,000 boxes of city records, and also added the city police department as a customer for a total of $150,000 of net new revenue to IntelliNetX. Simultaneously, we continue to broaden our portfolio of products on our addressable markets. As part of this, we continue to drive adoption of our core IntelliCloud payables automation or IPaaS product. As a reminder, IPaaS is a new enterprise class software payables automation solution for financial platforms with very complex cost accounting. We are collaborating with Constellation Home Builder Systems, part of the $5 billion Constellation Software family, to broaden awareness for IPaaS, especially in the home builder market. At this time, I would like to turn the call over to our Chief Financial Officer, Joe Spain, to talk to you about our financials.

Thanks, Jim. I will now review our financial results for the fourth quarter of 2022. Total revenue for the quarter ended December 31, 22 increased 47% to 4 million as compared to 2.7 million for the same period last year. The following are the components of our revenue. Fast, including hosting revenue increased 212% to 1.2 million for the quarter from 390,000 for the same period last year. Yellow folder contributed 700,000 of the increase without yellow folder. SaaS growth was still quite strong at 34%. Software maintenance services revenue grew 3%, with price increases and expansion offsetting a small amount of attrition and also certain 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. The combined SAS and software maintenance revenue growth without yellow folder was 20% year over year for Q4. Professional services revenue increased 22%, the 2.1 million for the quarter from 1.8 million for the same period last year. The increase is driven by a strong recovery from the COVID Omicron surge that began last year and lingered into early 2023. As a percentage of total revenue, Professional services revenue decreased to 53% of total revenue for the quarter compared to 64% of total revenue for the same period last year. This is as expected given the yellow quarter acquisition primarily added SAS revenue. Storage and retrieval services revenue increased 3% to $266,000 for the fourth quarter of 22 compared to $258,000 for the fourth quarter of 21. Software revenue, which is comprised of perpetual license revenue, increased to $65,000 from $4,000 for the same period last year. We expect these sales of our on-premise software to continue to be a very small part of our total revenue as we focus on SAS, and changes period over period will continue to be lumpy. Cost of revenue increased 28%, or $320,000, to a total of $1.5 million for the quarter compared to $1.1 million for the same period in 2021. As a result of total revenues increasing 47% and cost of revenues increasing 28%, gross profit was up. Gross profit percent was 64% for Q4 this year compared to 59% last year. The increase was driven by a mixed shift toward higher margin solutions, with SAS growing at a faster pace than professional services. SAS delivered 83% margin in Q4 this year compared to 77% last year, underscoring the importance of SAS to our profitable growth. Operating expenses increased to $2.2 million for Q4 22 compared to $1.5 million for Q4 21. The increase is largely due to the addition of yellow folders. Sales and marketing expenses for the quarter increased 60% compared to the same period during 21. This increase reflects the addition of the yellow folder team and other investment in marketing and sales, which Jim mentioned earlier. Net income for Q4 was 201,000 compared to 26,000 net income for the same period last year, an increase of 664%. Earnings per share for the quarter were 4 cents per diluted share compared to 1 cent per diluted share last year. Our adjusted EBITDA for the quarter was $691,000, or $17 per basic and $15 per diluted share, compared to an adjusted EBITDA of $338,000, or $0.12 per basic and $11 per diluted share for the same period in 2021. As a quick reminder, our private placement offering in April 1, we added 1.2 million outstanding shares, which increased our total number of outstanding shares by 44%. Turning briefly to the full year results, revenue for the year ended December 31-22 were $14 million, up 22% compared to $11.5 million for the same period in 21. SaaS revenue increased 179% for the year. Overall subscription-based revenue, that is SaaS and software maintenance combined, increased 94%. Gross margin was 64% for the year versus 61% last year. reflecting our shift towards subscription-based software revenue. Operating expenses increased approximately 2.1 million or 35% to 8.1 million. Net income was 24,000 or one cent per basic and diluted share for the 12 months ended December 31, 22 compared to net income of 1.4 million or 48 cents per basic and 44 per diluted share for the same period in 2021. Major impact items included an $845,000 gain on extinguishing of debt related to the PPP loan in 2021, as well as transaction costs of $355,000 in 22 compared to none in 21. These transaction costs were incurred in support of our acquisition on April 1. We also significantly increased amortization and stock-based compensation in 2022. You can see all of these items in our bridge from net income to adjusted EBITDA in our earnings release. Adjusted EBITDA increased 41% to 2.4 million compared to 1.7 million from the same period in 2021. Next, I'll turn to review of IntelliX balance sheet. At December 31, the company had cash of 2.7 million and accounts receivable net of 1.1 million. Our total assets, were $19.9 million, including an increase of $3.5 million in intangible assets and $3.5 million in goodwill as part of the yellow folder acquisition. Total liabilities were $11.4 million, including $4 million in debt principal as of December 31, 22. In April 22, we closed on a private offering where we added $3 million in debt due in 2025 as part of our total capital raise of $8.7 million. In December 22, we prepaid $1 million in prior debt, leaving us with the $4 million in principal year-end. Also, deferred revenues were $2.7 million, reflecting signed SAS and software maintenance contracts. I want to wrap up with a brief financial outlook. Based on our current plans and assumptions, and subject to risk 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. With that, we thank you all for listening, and at this time, we'd like to open the call up to Q&A.

Thank you. We'll now be conducting your question and answer session. If you'd like to be placed into question queue, please press star 1 at this time. Once again, that's star 1 to be placed into question queue. You may press star 2 if you'd like to remove your question from the queue. One moment, please, while we poll for questions. Our first question today is coming from Howard Halpern from Taglish Brothers. Your line is now live.

Congratulations, guys. Great quarter, great year. Great finish to the year. First question is in regards to, you know, the growth that you're seeing. How is your sales team doing? You know, how is that forming and are you going to need to increase either the top sales professionals or the support staff underneath? How should we look at that going forward to drive further SaaS growth?

Thanks, Howard. That is actually a great opportunity for us. You know, we were fairly lean in sales over the last few years and we were, you know, over, we were excelling in sales, but we were fairly lean. This year we have budgeted to hire three new salespeople. So that will actually add to our ability to grow the business going forward. The last few quarters have been very good in sales and we continue to execute creating a pretty strong backlog of total contract value. And we've now just really hired our first full-time marketing person. So now we have two people in marketing before We really only had half a person. One of our sales reps was doing the marketing job. But at this point, we have two full marketing people, and we have some, you know, a pretty good budget to invest in our marketing going forward as well. So we are finally in a position after a number of years of getting in a strong sales and marketing position going forward.

Okay. And in terms of the professional services, do you feel that, It's now back on track, and what type of capacity do you have to funnel stuff into the Michigan office?

Yep. So, you know, at the end of 2021, Omnicron hit. You know, it was so long ago, everybody forgets. But we had a little slowdown that went and, you know, a lot of our business was in Michigan. And they shut down the state of Michigan again for the second time, I believe. And that, you know, went into the first quarter of 2022. So we had a slow first quarter, but then slowly grew back from there. Now, sales was still good. We still were creating the backlog, but just getting people in to do the production side of the revenue stream took us, you know, into the second quarter that we'll start building that up. Since the middle of last year, we just continued to grow. We started a second shift. We have 18 people now on our second shift, which obviously allows for more production as well. So we're in a pretty good position to continue to grow, and we do have a strong backlog in-house of work that will help our revenue going forward.

Okay. Turning back, I guess, to the SAS and the yellow folder too, Are you seeing, you know, constant geographic expansion of where your now customers are located?

Yeah, we were historically, especially in the K-12 market in the Midwest, you know, eight state, nine state area in the Midwest. Yellow Folder was out of Texas and they were in, I believe, 14, 15 different states. If I'm not mistaken and you know they had a handful of customers in each state But quite honestly the hardest thing to do is break into a new state So now we do have a foothold in quite a few states and allow us to really start expanding and that's why we had that great success and The whole idea of selling additional and telematics solutions into that customer base Probably have half a dozen customers now, you know, it's only been a You know, we bought them in April by the time we got, you know, integrated and everything. You know, so we've really only been selling with these numbers looking at here three solid months of selling into the yellow folder customer base. And we've gotten quite a few customers that are doing digital transformation. A couple that we mentioned in Michigan, and then we also got the Lawton School District for about $90,000 last year. So we're very, very bullish on continuing to cross into the K-12 space.

Okay. One last one about IPAS. How many customer engagements are there currently, and what does the pipeline look like?

We've got six customer engagements right now that we're implementing. We've got two that we're implementing a demo environment for them, and the pipeline is very strong at this point.

Okay. Well, keep up the good work, guys.

Thank you, Howard. It's been exciting. It's been a great last year. Yep.

Thank you.

It doesn't look like there's any other questions.

Yeah, I was just going to say we reached the end of our question and answer session. I'll turn the floor back over to you for any further closing comments.

Thank you, Kevin. Yeah, in summary, this has been a very strong year for us, for growth, especially in the SaaS area. enabling us solid and sustainable profitability. That's what we're all looking for. The pieces we have strategically assembled over the last few years have come together as we've anticipated, enabling us to shift to a more predictable SaaS model. We're focused on effectively cross-selling and broadening our addressable markets. We are excited about where Intellinetics is and our future opportunities. It's great to be at Intellinetics right now. We appreciate the continued support of our longtime shareholders and aim to attract new investors as well by delivering strong and consistent financial results. Thank you, everybody, for joining. If you have questions, please follow up with us in the future. Thank you again.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.