Issuer Direct Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Issuer Direct Corporation's second quarter 2023 earnings conference call. My name is David Tadros, host of Issuer Direct's Hello, My Name Is, an employee-driven get to know each other series whereby we feature a new employee each week or something extremely cool happening at our company. Me doing this today is our way of ensuring our shareholders get to know all of us as well. Each quarter, we will feature one of our very own here at the company to introduce our executives and read the Safe Harbor language on each call. It's my pleasure to introduce the company's founder and chief executive officer, Brian Belberny, and its chief financial officer, Tim Petoniak. Before I turn the call over to Mr. Brian Belberny, I'd like to read you the company's abbreviated Safe Harbor statement. I'd like to remind you that the statements made in this conference call concerning future revenues, results from operations, financial positions, markets, economic conditions, product releases, partnerships, and any other statements that may be construed as a prediction of future performances or events are forward-looking statements which may involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from those expressed or implied by such statements. Non-GAAP results will also be discussed in the call. The company believes a presentation of non-GAAP information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. With that said, Mr. Valverni.

Greetings, everyone, and thank you, David, for today's introduction. Super cool for you to be doing this today and for all of your hard work on the Hello, My Name Is series. I know when we first started talking about doing this podcast, it was employees first, but we do have plans to expand it and our brand to include customers and partners at some point. So keep up the good work, sir. We are pleased to have everyone join us today to discuss our second quarter results. Our press release, which is accessible in our newsroom, has just been released and provides the key takeaways on our performance for the quarter and first half of 2023. We are pleased with the second quarter results. Total revenue is up 67% year over year to 9.7 million, driven by both our business lines, something Tim will discuss shortly. We also delivered solid performance on earnings for the quarter, something we spoke about in our last call and earlier in the year. EBITDA increased 7% year-over-year and 21% for the prior quarter. Customers subscribing to our products also grew over 5% for the quarter, and the average price per release in our core news business also increased. These results were a direct effort of our entire team's ability to deliver on our operating plan and strategy for 2023. We recognize that we still have work to do here. Customer growth is still our number one focus of our entire organization, and we're building up a strong quarter to deliver what will be continued success in the back half of the year. As always, there's a lot more to talk about, so I will turn the call over to Tim to cover the second quarter results. Tim.

Thank you, Brian, and good afternoon, everyone. As Brian mentioned, we were able to reach a new record high for quarterly revenue and generate increased cash flow and EBITDA over the prior year. I will now highlight some of the results we achieved during the quarter. Total revenue for the second quarter of 2023 was $9.7 million, an increase of 66%, compared to $5.8 million for the same period of 2022. For the six months ending June 30th of 2023, total revenue was $18.3 million, an increase of 65% from $11.1 million for the first half of 2022. The increase for both periods was primarily driven by our communications business, increasing 2.2 million, or 61%, and $5.4 million, or 77%, for the three and six months ending June 30th of 2023, respectively. Communication revenue represents 62% and 68% of total revenue during the three and six-month periods ending June 30th of 2023, compared to 64% for the same periods of 2022. The increase in revenue is driven by the acquisition of Newswire, for which all revenue is included in the communication revenue. For the first half of 2023, we also generated increased revenue from our AccessWire business, which increased 10% compared to the same period of the prior year, primarily due to an increase in average price per release. The increase for the three- and six-month ending period June 30th of 2023 was partially offset by a decrease in revenue from our webcasting and events business. Compliance revenue increased 76%, or $1.6 million, and 43%, or $1.7 million, during the three and six months ended June 30th of 2023, compared to the same periods of 2022. This increase was primarily related to an increase in revenue from our print and proxy fulfillment services business due to a few significant transactions which occurred during the period, as well as an increase in revenue from our transfer agent services due to an increase in corporate actions and directives during the period. Switching over to gross margins, our overall gross margin percentage was 76% and 77% for the second quarter and first half of 2023, respectively, compared to 77% for the same periods of 2022. Gross margins from our communications business were 76% and 77% for the three and six months ending June 30th of 2023, compared to 80% and 79%. in the same periods of 2022. The decrease in gross margin percentages for the periods is primarily due to an increase in distribution costs as we continue to expand our global footprint. Moving to operating income, we posted operating income of $1.7 million for Q2 of 2023 compared to $1.1 million in Q2 of 2022. Operating income was $2.3 million for the first half of 2023 compared to $1.8 million during the first half of 2022. The increase in operating income is primarily due to an increase in revenue partially offset by an increase in cost of revenue and operating expenses. I will now discuss the items impacting the change in operating expenses. General administrative costs increased 45% and 42% during the second quarter and first half of 2023, respectively. The increase is primarily driven by additional expenses associated with costs to operate the Newswire business, one-time transaction integration costs, employee-related expenses, and stock compensation expense. The increase for the first half of 2023 was partially offset by a reduction in recruiting fees. Moving on to sales and marketing. Sales and marketing costs increased 49% for the second quarter and 68% for the first half of 2023 compared to the same periods of 2022. This is due to the addition of the Newswire sales team. Finally, product development. Product development costs increased 149% and 167% during the three and six months ended June 30th of 2023, compared to the same periods of 2022. This increase is directly attributed to additional costs to operate the Newswire business as well as the hiring of our new chief technology officer. It's important to note that during the three and six months ended June 30th of 2023, we capitalized $167,000 in costs related to building our new artificial intelligent writer that you know as Amy, as well as upgrading our media database product. Operating expenses were also impacted by an increase in amortization expense attributed to intangible assets acquired in the newswire acquisition. On a GAAP basis, during Q2 of 2023, we generated net income of $1.4 million, or $0.36 per diluted share, compared to $841,000, or $0.22 per diluted share during Q2 of 2022. Net income for the first half of 2023 was $1.2 million, or $0.32 per diluted share, compared to $1.4 million, or $0.36 per diluted share during the first half of 2022. Net income for the three and six months ended June 30th of 2023 was impacted by operating expense items discussed previously, as well as additional interest expense associated with the Newswire acquisition. These increases were partially offset by income resulting from the change in the fair value of our interest rate swap and interest income. Additionally, the six months ended June 30th of 2023 was impacted by a payment to extinguish our note payable resulting from the Newswire transaction. Looking to some non-GAAP metrics, EBITDA for Q2 of 2023 was 2.9 million, or 30% of revenue, compared to 1.3 million, or 23% of revenue, in Q2 of 2022. For the first half of 2023, EBITDA was 3.6 million, or 20% of revenue, compared to 2.2 million, or 19% of revenue, during the first half of 2022. Adjusted EBITDA for Q2 of 2023 was $3 million, or 31% of revenue compared to $1.5 million or 26% of revenue for the same period of 2022. Adjusted EBITDA for the first half of 2023 was $4.9 million or 27% of revenue compared to $2.6 million or 24% of revenue for the first half of 2022. Non-GAAP net income for Q2 of 2023 was $2 million, or 53 cents per diluted chair, compared to $1.1 million, or 29 cents per diluted chair, during the same period of 2022. Non-GAAP net income for the first half of 2023 was $3.3 million, or 87 cents per diluted chair, compared to $1.9 million, or 50 cents per diluted chair, during the first half of 2022. The increase in our non-GAAP metrics for the three and six months ended June 30th of 2023 were driven by the positive results of the business as I discussed earlier in my remarks. Switching over the balance sheet and cash flow statements, our deferred revenue balance, which is revenue we expect to recognize over the next 12 months, increased to $5.7 million as of June 30th of 2023 compared to $5.4 million as of December 31st of 2022. On the cash flow statement, we generated cash flow from operations of $1.7 million and $2 million for the three and six months ended June 30th of 2023, respectively, compared to $1.1 million and $1.6 million during the same periods of 2022. Adjusted free cash flow was $1.8 million and $2.5 million for the three and six months ended June 30th of 2023, respectively, compared to $1.1 million and $1.7 million for the same periods of 2022. This is our 34th consecutive quarter of positive cash flow for the company. I will now hand it back to Brian, who will provide some updates on the business, new products in the pipeline, and everything else we have planned for the second half of the year. Brian? Brian?

Thank you, Tim. Our second quarter was another record quarter of revenues and consistent gross margins, customer growth, and sustained subscribers to the most important products in our product lineup. We could not be more pleased with the progress we're making and look forward to what is shaping up to be an amazing year for Issuer Direct. As Tim and I both mentioned, revenues for the quarter were $9.7 million up year over year, partially because of the Newswire acquisition, and up sequentially by 13% or $1.1 million. This sequential increase was driven by our compliance business for the quarter. Conversely, our news distribution business drove just over 5 million revenues for the quarter, or 51% of our entire revenues. Conversely, up 2.3 million over the prior year, while still maintaining gross margins in the product range of 80%. Our news distribution business represents 84% of our communications business and 51% of our total revenues for the quarter. Conversely, we also saw gains in our compliance business up 76% year-over-year for the quarter. Absent of one-time projects associated with these results, our compliance business would have been in line with historical year-over-year and prior quarter results. We have messaged and continue to feel our compliance business is not the growth driver for our business, whereas communications is. For almost the last year, we have been seeing industry-wide slowdowns in news volume, something we talked about last quarter. I would tell you that at the end of Q2, we are seeing this turnaround and continue in our collective brands, and Q2 year-over-year news distribution growth was 14% and 15% sequentially over Q1 of this year. This continued success is something we should be continuing to see, and we believe we will be well back on track to our double-digit growth in our news business. We could not be happier to see this growth, along with the synergies and the business combinations that are showing in our results on the bottom line. Our product pipeline is maturing at a swift pace, and we're looking forward to seeing several new products come to market here in the coming months. In our last quarterly call, we mentioned these products extensively to you, media database, pitching, monitoring, and, of course, Amy. So I don't want to bother you today to go through all of that one more time, but I would like to share some updates with you. Amy has been in production just for a couple of weeks, and almost 20% of our customers have used it. Pretty impressive, as we have only launched it to one of our product platforms to date, with plans to hit our entire 10,000-customer database by year's end. To summarize, Amy is our AI writer and recommendation engine that helps our customers create, improve, and control the tonality of their stories. Our next step is to continue to grow customer usage, get the necessary feedback, and lastly measure the analytics that come from Amy-assisted releases to illustrate the engagement benefits. This ultimately will lead us to a paid version coming next year. You will find Amy also sprinkled in other products coming to market in the coming months. The first will be our pitching platform, whereby our customers will be able to send campaigns to their lists or our media lists. Ask Amy to help improve their pitch to journalists, shareholders, and other key constituents. This pitching component on our platform will be part of our new annual subscription solution here in Q4. This is a feature we did not foresee coming in our first release and are happy to see the hard work of our development teams delivering what we believe will be a sticky component to our ecosystem. As we have said before, one of the benefits we received from the Newswire acquisition was some amazing technology, of which one component was the media database. We have invested heavily in people and process and interfaces to move this product to the top of our R&D team's focus this year, and in fact have built an entire data curation team of 14 people that are hard at work analyzing and updating records at almost near real time now. As we all should know and expect, a good pitch starts with the database. of curated, accurate, and up-to-date contacts. Our media database will be just that, with live curation support coming in early Q4. Along with monitoring, these subscribable products will help drive our ARR from our mid-8,000 range to over 12,000 and beyond. Speaking of subscriptions, we ended the quarter with 1,015 customers subscribing to our products, with an average spend of $8,523, up from 966 subscribers and 7,165 in revenue. This is a 90% revenue expansion and 5% customer growth on a year-over-year basis. We firmly believe our new products will continue to help drive these metrics in the future. We also have a good bit of headway in the market, not only by continually taking share from the incumbents, but also winning new business and, of course, having a more comprehensive subscription platform will give our sales organization the ability to sell into the full TAM of the communication space. Moving along to customers, total customers grew to 10,449 from 7,440 last year. This total includes customers from the Newswire platform acquired. This 40% year-over-year customer growth, another goal that we set when we talked last year of getting our customer accounts to 10,000 and beyond. As always, it was nice spending time with you today and discussing the results for our second quarter. We look forward to talking to you on our follow-up calls. We remain confident in the business, our teams, and our product platforms. our revenue margins and customer wins, as well as average revenue per subscriber growing. Our brands continue to serve us well in the market, and we look forward to sharing more updates with you next quarter. Operator, can we please begin the Q&A portion of the call?

Absolutely. Thank you. At this time, we will 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 your line is in the question queue. You may press star two if you would 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 keys.

One moment please while we poll for questions. Our first question comes from Mike Grandal from Northland Securities.

Mike, please proceed.

Hey guys, good afternoon. What's sort of your outlook in the back half of the year for newswire and access wire? Sort of how do you see that trending?

Definitely, Mike. This is Brian. I'll answer that for you if you'd like. Look, like we talked about in the prepared remarks, there is an indicator here that we're seeing over the last few months that volumes are beginning to bounce back to normal levels with growth like we experienced last year in the prior years. So for our combined news businesses, with our added and expanded distribution and our sales teams focused on that product with its new add-ons, we're very confident that volume will continue to expand both internationally as well as domestically.

Got it. And then what are sort of like the next steps we should watch or listen for with aiming your AI product? And if you could just also sort of address the cost side, maybe repeat what costs were capitalized and how you think about that investment going forward.

Yeah. So as a product summary, right, from a capitalization perspective, we wanted to build the product to a very mature MVP, right? Minimum viable product, get it to market to a segment of our clients. And what we're looking for now is to gather analytic upon the benefits of using AI written content compared to, you know, natural processing done by, you know, PR professionals and company professionals. So that's the indicator of getting 20% of our customers using it. They did releases in this measurement period, right? So the number of releases actually gives us comfort that there's going to be a baseline to sample against. And so what we'll look for is what were the benefits of engagement from articles written by Amy compared to not by industry and sector. so that we could break it out to provide customers a more premium level service. So at some point, we can then suggest to them, based on the tonality, if you make these changes, you could very well see an increased benefit in these industries and sectors, and here's how, and that's what you'll pay for. So that will be the paid version, if you want to think of it as a premium product. That's what that will be. Today, there is no cost for any, for customers. We capitalized about $160,000, $170,000 during the period. We've probably got about another 75 to 100 left here in this third quarter to complete that product. And the reason for the additional is because our developers were working late or just burning the midnight oil and figured out how to integrate Amy much quicker than we thought into our other products like we talked about today. So it will go into pitching next, giving our customers the ability to license and subscribe to the pitching product and media database. and then have a plug-in from Amy to be able to help them write or recommend a better way of their tonality to help their writing and engagement with media, journalists, shareholders, and everybody else.

Got it. And maybe lastly, what are sort of early thoughts on monetization? I know it's early. I know it's not until 24, but how are you thinking about it?

Yeah, I'm looking at it in two ways. So we're going to go to market in Q4, and I don't want this to be a leading indicator that we're suggesting revenue here. We're going to go to market in Q4 to build a pipeline for a new subscription product that will be media database, analytics monitoring product, pitching product, newsroom, and news distribution, powered by Amy, all for one flat fee. But let's say it's $1,500 to $2,000 a month. we then believe that additional customers that don't subscribe will be able to take AMI and we can monetize it on a per-release basis. So if you sign up for your contracted press releases for U.S. National at $7.95 a release, you do 10 releases a year, you're pretty close to their average revenue per customer. We hope to then get another 10% to 15% to 20% lift on revenue in the customer by having them buy some of these add-ons. And we've done this successfully in the past because, remember, we used to sell – media targeting back very early on the access fire days. And we were able to get double digit, 20, 30% of our customers paying for upgrades on some of those things. And so that's where we can move those customers into the database product, which will mean more revenue for us. And we will look to then monetize Amy as a, as a, as a per unit benefit to the customer. And obviously to us.

Got it. Got it. Helpful. Okay. Hey, thank you.

Thank you, Mike. Once again, if you have a question or a comment, please press star 1 on your touchtone phone. The next question comes from Walter Ramsley with R Squared. Please proceed.

Hey, thanks. Brian, pretty awesome report. No matter what metric you want to use, the profitability of the company is zooming. 31% adjusted EBITDA for starters. I mean, is that a sustainable number, you think?

Well, I mean, Walter, first, thank you, right? And we talked about this in the last couple quarters, that we believe the full Synergy savings for our Newswire and AccessWire and IntraDirect combined entities would truly show through in 2.2. And look, to be fair, right, we live to that commitment, and the numbers printed are our illustration of that. It's a great question to suggest, you know, are you providing guidance to suggest that this is going to be your new baseline going forward? And look, I would tell you, absence of investments made, absence of one-time charges, or absence of something bad happening in the market, as long as our revenue continues to grow the way it has, we feel comfortable that we're going to be in the high-end 20s and then some quarters hit into the 30s. So it's an EBITDA machine. It's a cash flow machine. And it's all dependent on what I said in the call, right? Our number one focus is customers. As long as we continue to get the new customers that we want to get, yes, the answer is yes.

Okay. That's all I have. Congratulations.

Thank you, Walter.

If there are any final questions, please indicate so now by pressing star 1. We have no further questions in queue.

We've reached the end of the question and answer session. I would now like to turn the call over to management for closing remarks.

Thank you. We appreciate everybody's time. Under 30 minutes may be a record for us today, but as always, we welcome the follow-up calls. We welcome seeing you at the next couple of conferences we'll be at here in September, and have yourself a safe and good evening.

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