Intellinetics, Inc.

And welcome to the Intellinetics Third Quarter 2023 Earnings Call. Our host for today's call is Tom Bauman with FNK IR. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to your host. Mr. Bauman, the floor is yours.

Thank you. 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 10Q filed earlier today. Also, please note 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 in 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 a 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. 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 in TeleCloud Payables Automation Solution, or IPaaS. As a reminder, IPaaS is a new enterprise-class software payables automation solution for financial platforms with 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 error-prone tasks are eliminated, while real-time dashboard views provide transparency into important financial data. We are collaborating with Constellation Home Builder Systems, part of the $5 billion Constellation software family, to broaden awareness for IPaaS starting in the home builder market. Two Constellation customers have gone live. Based on the success of these two customers, we have now signed contracts with seven additional customers that will go live over the next two to three months. In aggregate, these customers represent a combined annual recurring revenue of $465,000. We see iPass as a growth catalyst for our business going forward. We have also recently introduced iPass to our K-12 customer base and plan on cross-selling iPass to our customers to contribute meaningfully to our growth in 2024. Importantly, these are SAS 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 I-PASS 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 non-recurring revenue to be expected, 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 non-recurring revenues. We continue to expand our market share as demand for our solutions is robust and we deliver a tangible ROI for customers. We're 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 one year or less. Since the April 2022 acquisition of Yellow Folder, the Yellow Folder team sold new contracts worth $467,000 in SAS, 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 SAS 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 and telenetics 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, plus 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 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. Following are the components of our revenue presented on our statements of operations. Subscription software, which is comprised of both SAS, 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 with history 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 back 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 perform the work on our growing backlog of business. Storage and retrieval revenue was relatively flat at $259,000 for the third quarter of 2023 compared to $269,000 for 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. 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 2022. 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 5 cents 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 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 for the fiscal year 2023. With that, we thank you all for listening and at this time would like to open the call up to Q&A.

At this time, we will conduct the question and answer session. If you would like to ask a question, please press star, then the number one on your telephone keypad now, and you will be placed in the queue in the order received. Once again, to ask a question, press star, then the number one on your telephone keypad now. Your first question comes from Howard Halpern with Taglik Brothers. Your line is open.

Congratulations, guys. Another great quarter. In terms of iPaaS, which, you know, is an exciting product, are you, and based on the latest announcements, are you integrating that within the larger, you know, software of Constellation to, you know, 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 their product development team, product management team as well, and that was the first iteration of it and 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 that we could sell this product to anybody now because we also developed a standalone 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 through 12 customer base?

Most definitely, because although we have our partner, Software Unlimited, that has 2,000 K-12 financial customers, we can now sell 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, as my point before, opens up our ability to to sell that product to other back-end ERP financial systems.

So looking forward, the primary focus for I-PASS for this upcoming year will be, you know, the homebuilders, homebuilder base, cross-selling to your established, you know, K-12 customer base. And is there – are you looking to broaden into maybe one or two reference customers in another – Vertical or you have enough business with the home builders and your current?

Well, there's never enough business, Howard. Okay. Our goal is to really find the next ERP vendor we can partner with and work with. We can also sell to individuals. 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, Um, we're actually at the home builders, um, uh, annual show this week in California, but constellation has a thousand, uh, technology companies that they, uh, manage under their $5 billion umbrella. Um, we're really hammering them now to start introducing us to the next, um, home builders, um, uh, partner.

Okay. Uh, and in terms of, you know, you talk about the cross selling opportunities, uh, not only for iPads, 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 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. You know, we can, you have the relationships, you most definitely can. School districts are a little different. Usually, you know, you've got a board of ed, you have to go through approval. But certainly it is an opportunity for us to go forward. And as you know, we 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. Okay.

So, yeah, we're busy, Howard. We're constantly busy, you know, whether it's a dearth of activity, which you've clearly seen, you know, in the last year plus since April 22 when we bought Yellow Folder. But that doesn't mean, you know, that we've stopped. You know, 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.

Okay, and one last one. We've done three, just a side note, we've done three 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 know, you pay down debt in a 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, You know, we would like, you know, obviously have a certain size. We're going to have to go to debt and or equity, depending on, you know, what that, you know, looks like critical mass relative to us. Something very small we'd like to do out of cash. So that would, you know, we're kind of keeping our eye on that as we look forward. Obviously, we've got 25, you know, 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.

Okay. Okay, sounds good. Keep up the great work, guys. Thank you, Howard. Thanks, Howard.

Once again, to ask a question, please press star, then the number one on your telephone keypad now. 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're focused on effectively cross-selling and broadening our addressable markets, and we are excited to learn telemedics is in our future opportunities. 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 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.