Intellinetics, Inc.

Greetings and welcome to the Intellinetics first 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. If anyone should require operator assistance during the conference, 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, Tom Bauman with FNK Investor Relations. Thank you, sir. You may begin.

Thank you, and good afternoon, everyone. I am pleased to welcome you to IntelliMedics' 2024 First 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 IntelliMedics, 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 Discussion and Analysis a financial condition, and results of operations in IntelliMedics' annual report on Form 10-K 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. 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 DiSocio, Intellinetics President and CEO. Jim, the call is yours.

Thank you, Tom. The transition of Intellinetics to a SaaS-centric company continues. Our recurring revenue continues to grow faster than our consolidated revenue, and the SaaS portion of our recurring revenue is an increasingly important part of our business. This progress comes even as our newest SaaS offering, IntelliCloud Payable Automation Solution, or IPaaS, has just started contributing to our results. Response for IPaaS has been very strong, and our pipeline of opportunities for IPaaS is growing rapidly. Demand for the Yellow Folder K-12 SaaS solution is also growing. And overall, Intellinetics is well positioned across all our SaaS offerings. Accordingly, we are accelerating our investment in marketing our SaaS offerings, not just to support iPaaS, but to support all of our SaaS solutions. SaaS revenue, as a percentage of our consolidated revenue, increased to 31% in the first quarter, up from approximately 29% in the first quarter last year. Our goal is to make recurring revenue the majority of our total revenue with as much contracted cash revenue as possible. This will make our business very easy to model, reduce earnings volatility, and benefit shareholders. It will also enable us to appropriately size fixed costs so that we are systematically profitable, creating a durable, sustainable, scalable platform for profitable growth. Our non-recurring software revenue continues to become less and less relevant to our story. Meanwhile, the document conversion portion of our digital transformation business, including business process outsourcing and document storage and retrieval, continues to generate positive contribution margin. As you may recall, we significantly expanded this business with the acquisition of Graphic Sciences in 2020. And since then, this business provided additional cash flow to create and acquire SAS offerings. However, over time, the organic growth opportunities in this business will become less consistent. Additionally, the non-recurring nature of this business makes budgeting and modeling more difficult. We have no plans to divest this business as it continues to generate cash. However, we plan to maximize our promotional activities around SAS, offerings rather than non-recurring revenue streams with the goal of accelerating our sas growth this strategy the non-revision is not a revision of our prior strategy those who have followed intellinetics recognize that we have been increasingly emphasizing our sas business lines over the past few years even more so since the yellow folder acquisition this is an acceleration of that strategy based on the success we have had over the past two years and the early response to IPaaS. We see a path to evolving into a nearly total SaaS company, a transformation which we strongly believe will benefit shareholders. As I said, our IPaaS solution has given us significant momentum. The lower end of our pipeline has increased by 50% over the past six months. We have signed nine customers and eight of the nine have already paid in full, which is uncommon for SaaS deployments where customers typically delay payment until deployment is fully complete. This data point reinforces our optimism regarding this solution, validating the customer support for IPaaS and demonstrating the tangible value IPaaS provides to users. In the aggregate, these nine customers represent an estimated combined annual revenue of $500,000. And we expect to more than double the customer count in this business over the next few quarters. As we move through 2024, we anticipate I-PASS becoming a larger and larger contributor to our consolidated revenue. As I previously said, our 2024 budget includes an incremental $400,000 of spend towards accelerating I-PASS. This includes sales and marketing dollars, as well as growing our development staff. Simultaneously, our K-12 operations now have 597 K-12 districts generating significant SAS 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 telemedic services, including IPAS. We anticipate launching a K-12 I-PASS pilot this summer to address this opportunity. 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. Thanks, Jim.

I will now review our financial results for the first quarter of 2024. Total revenue for the quarter ended March 31, 24, increased 7.7% to 4.5 million, as compared to 4.2 million for the same period last year. The following are the material components of our revenue presented on our statements of operation. Subscription software, which is comprised of SAS, including hosting revenue, and software maintenance service revenue, increased to 1.76 million for the quarter from 1.59 million for the same period last year. SAS grew 13.5% and consistent with history and as expected, our software maintenance services are growing more slowly at 2.4% over 2023. Professional services revenue increased 7.8% to 2.5 million for the quarter from 2.3 million for the same period last year. As a percent of total revenue, professional services revenue was 55% for the quarter, the same as last year. Consolidated gross margin increased 115 basis points to 64.3% for Q1 this year, compared to 63.2% last year. The increase was driven by both better revenue mix, more weighting towards recurring revenue, and positive impact from price increases. Operating expenses increased 24.2% to $2.9 million for Q1 2024, compared to $2.4 million in Q1 2023. The increase is largely due to investments in structure and scale, as well as timing of equity compensation expenses. Of note, we expensed a $398,000 charge for restricted stock awards to employees in the of which 328,000 was non-cash. Sales and marketing expense for the quarter decreased 7.8% compared to the same period in 23, which is largely a timing matter. We continue to invest in marketing and sales. For example, we hired an additional sales rep last quarter. We are also increasing our trade show activity in 2024, which is important to both our IPAS and K-12 acceleration. Net loss for Q1 was $175,000 compared to net income of $113,000 for the same period last year. The primary driver here was the $398,000 equity compensation expense I referenced a moment ago, which is also called out in the earnings release, including that $375,000 of it was one time. Loss per share was $0.04 per share compared to earnings per share of $0.03 last year. Our adjusted EBITDA for the quarter was $673,000 compared to an adjusted EBITDA of $630,000 for the same period in 23. Next, I'll turn to a brief overview of IntelliNetX balance sheet. At March 31, We had cash of $1.2 million and accounts receivable net of $1.9 million. Our total assets were $18.9 million, including $9.5 million in intangible assets and goodwill as part of acquisitions made since 2020. Total liabilities were $8.8 million, including $2.6 million in deferred revenues, reflecting signed SAS and maintenance contracts, and $2.46 million in debt principal as of March 31. As noted in our fourth quarter earnings call in March, we prepaid $500,000 of our long-term debt and we expect to have no net debt, meaning debt less cash, at the end of 2024. Further, we intend to prepay an additional $325,000 of our debt principal this month, which leaves the remaining debt principal of $2.1 million due December 1, 2025. I want to wrap up with our financial outlook. Based on our current plans and assumptions and subject to risk and uncertainties we described in our filings and this call, we are reiterating our expectations to grow revenues on a year-over-year basis for fiscal year 2024. Regarding adjusted EBITDA, we are revising our guidance and expectation that adjusted EBITDA for 2024 will be at or slightly less than 2023 levels. We have revised our guidance due to our expectation that a longstanding customer, our largest, will take steps to shift certain tasks performed by our document conversion business from one office location to another location in a way that could reduce annual revenue for our document conversion segment starting in Q4, 2024. Our management team believes the total value proposition which we provide our customer is substantial. that the customer understands that the timely and accurate execution of the tasks we perform are extremely important to it, and hence, we intend to educate and negotiate in good faith with the customer to have a mutually agreeable outcome.

Thanks, Jim. Jim, do you want to add to that? As a reminder, yes, as a reminder, our document conversion business has multiple contracts with the customer beneath the overall master contract. These contracts assign different prices in different locations for the same or similar work and have done so for many years. If you cherry picked locations strictly on price without understanding that these contracts are economically linked, a customer could save for a short period of time until contract renegotiation, which for us is May 2025. Further, Graphic Sciences, our subsidiary, has been performing this specific work since 2017 and is quite good at it, and we have many incumbent advantages. Aside from high change costs, a new provider would have to be willing to accept same-day service level agreements and financial fines for every single error made in processing, which I'm very happy to say we rarely incur. Perhaps once every two years, which is just about error-free for 5 million images processed annually, we expect We can work out a mutually acceptable solution with this customer, but there are no guarantees in these sorts of negotiations. So we're doing our duty to advise you on this developing situation. I'm proud that this business can withstand potential revenue reductions from our largest customer and still anticipate delivering adjusted EBITDA for 2024 in a similar range as 2023. With that said, we thank you all for listening. And at this time, I'd like to open the call up to Q&A.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. And you may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Howard Halpern with Taglich Brothers. Please proceed with your question.

Congratulations on Q1 results, guys. In terms of the total number of sales reps, you said you added one. How many do you have, and are they structured in a way where you're developing an IPaaS team, or are they integrated with the K through 12 operation?

Right, so we have five direct sales reps and then our management team are sales reps too and carry quotas. And yes, we hired the new sales rep into our IPAS team who will handle finding new partners to resell our IPAS product through and also reselling to our K-12 customer base where our other two sales reps, one being the executive in charge of that, are selling iPass to one of our existing partners. And that's where the great successes come from, Howard.

Okay, and is the implementation process going to be simpler for the K-12 than it is for the larger customer of Constellation customers?

We believe so. We just inked our first data site customer out of our K-12 customer base. And it's going to be a little bit different to start, not as complex as some of our commercial businesses that are using the product. Certainly with multi-state, multi-tax, multi-country situations with our commercial product, K-12 is a little bit more straightforward. So we think it will be simpler. And the other great news is this is a fairly new release. And over the last year or so, our people have gotten much better. The product has matured more, and we've gotten much better at implementing it, et cetera. I've been doing this for a couple of years. And when all of your SaaS customers pay, that means you've got a pretty darn good product and a pretty good implementation. And I've never really seen that before. Usually people are holding money till you go live, or they say you got a bug, or you say you got this. they've all paid, which is a great metric for us to track how our business is going, how the product is doing.

And is that why some of the incremental spend that you have is on, I guess, support or implementation type of people also?

Exactly, exactly. We're a little concerned that we oversell the product and don't have the support staff to get it up and running as quickly as we like. So we're investing in the support staff as well.

And you anticipate, if you were to sign eight or nine new contracts, do you think, you know, from the commercial side, do you think you could get them all up and running before the end of the year?

It depends on when we sign them. If we sign them in the next couple of weeks, most definitely. We're looking at probably conservatively a 60-day implementation. And it's usually not us that slows it down. It's usually, you know, they have to get, you know, their systems ready. We need to do integration into their system, so they have to have a developer available to work with us. So there's a couple things out of our control, but we've been very successful once signed getting people up pretty consistently in 60 to 90 days.

Okay, and one last one. We should see incremental increases in G&A expense from that 1.8 level if you take out the The one-time stock compensation expense?

Yes. Joe, do you want to elaborate on that? Yes. Yes. That's what I did.

Okay. Okay. Okay. Thanks, guys, and keep up the great work.

Thank you, Howard. Going forward, any questions, please feel free to contact us directly, Joe or myself. or you can contact Tom Bauman at FNK IR and we'd be happy to have a conversation and answer any additional questions that you might have. So with that, I'd like to wrap up. Intellinetics is well positioned for continued success. We have significant momentum, 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 longtime shareholders and aim to attract new investors as well by delivering strong, consistent financial results. Thank you for joining us today, and we look forward to speaking again on our next conference call. Thank you all.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.