Intellinetics, Inc. (INLX) Q4 2022 Earnings Call Transcript

Intellinetics, Inc. (NYSE:INLX) Q4 2022 Earnings Conference Call March 27, 2023 4:30 PM ET

Company Participants

Tom Baumann - IR

Joe Spain - Chief Financial Officer

Jim DeSocio - President and Chief Executive Officer

Conference Call Participants

Howard Halpern - Taglich Brothers

Operator

Hello and welcome to the Intellinetics Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. [Operator Instructions]. 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 the host, Tom Baumann, Investor Relations. Please go ahead Tom.

Tom Baumann

Thank you and good afternoon everyone. I am pleased to welcome to you 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 risk 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 Operation 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 adjusted 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 DeSocio, Intellinetics President and CEO. Jim, the call is yours.

Jim DeSocio

Thank you, Tom. This was a strong end to end 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 SaaS revenue more than tripled. As a result, our net income increased 664% and our adjusted EBITDA more than doubled, 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 $300,000. This performance is due in large part to the tremendous success of the Yellow Folder acquisition, which we closed in April 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 enabled 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 TCP [ph]. 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 SaaS and $220,000 in professional services, total contract value. Our K-12 operations now has over 560 K-12 districts generating significant SaaS 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 and telematic services. This acquisition expands our SaaS 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 graphics 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 Intellinetics HR document management solution. We upgraded the city to our HR and IntelliCloud Solution, converted 4000 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 Intellinetics.

Simultaneously, we continue to broaden our portfolio of products and our addressable markets. As part of this, we continue to drive adoption of our core IntelliCloud payables automation or IPAS product. As a reminder, IPAS 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 IPAS, especially in the home builder market.

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.

Joe Spain

Thanks, Jim. I will now review our financial results for the fourth quarter of 2022. Total revenue for the quarter ended December 31, 2022 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. SaaS, 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 SaaS and software maintenance revenue growth without Yellow Folder was 20% year-over-year for Q4.

Professional Services revenue increased 22% to $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 Folder acquisition primarily added SaaS revenue.

Storage and retrieval services revenue increased 3% to $266,000 for the fourth quarter 2022 compared to $258,000 for the fourth quarter of 2021. Software revenue, which is comprised of perpetual license revenue increased to $65,000 from $4000 for the same period last year. We expect the sales of our on-premise software to continue to be a very small part of our total revenue as we focus on fast and changes a period of a 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 mix shift toward higher margin solutions, with SaaS growing at a faster pace than professional services. SaaS delivered 83% margin in Q4 this year, compared to 77% last year, underscoring the importance of SaaS to our profitable growth.

Operating expenses increased to $2.2 million for Q4 22 compared to $1.5 million for Q4 2021. The increase is largely due to the addition of Yellow Folder. Sales and marketing expenses for the quarter increased 60% compared to the same period during 2021. This increase reflects the addition of the Yellow Folder team and other investments and 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 $0.04 per diluted share compared to $0.01 per diluted share last year. Our adjusted EBITDA for the quarter was $691,000 or $0.17 for basic and $0.15 per diluted share, compared to an adjusted EBITDA of $338,000 or $0.12 per basic and $0.11 per diluted share for the same period in 2021.

As a quick reminder, our private placement offering in April one 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, 2022 were $14 million, up 22% compared to $11.5 million for the same period in 2021. SaaS revenue creased 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 $0.01 per basic and diluted share for the 12 months ended December 31, 2022 compared to net income of $1.4 million, or $0.48 per basic and $0.44 per diluted share for the same period in 2021.

Major impact items included an $845,000 gain on extinguishment of debt related to the PPP loan in 2021, as well as transaction costs of $355,000 in 2022 compared to none in 2021. 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 Intellinetics 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, 2022. In April 2022, we closed on our 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 2022, we prepaid $1 million in prior debt, leaving us with the $4 million in principal at year end. Also, deferred revenues were $2.7 million reflecting signed SaaS and software maintenance contracts.

I want to wrap up with a brief financial outlook. Based on our current plans and assumptions, and subject to risks 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.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Howard Halpern from Taglich Brothers. Your line is now live.

Howard Halpern

Congratulations guys, great quarter and great year, great finish to the year. First question is in regards to the growth that you're seeing. How is your sales team -- 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?

Jim DeSocio

Thanks, Howard. That is actually a great opportunity for us. We were fairly lean in sales over the last few years. And we were 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. So and we've now just really hired our first full time marketing person. So now we have two people in marketing and before we really only had half a person workup, our sales reps was doing the marketing job but at this point, we have two full marketing people and we have some 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 a strong sales and marketing position going forward.

Howard Halpern

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, into the Michigan, the Michigan Office?

Jim DeSocio

Yes. So, we at the end of 2021, Omnicom hit, so long ago, everybody forgets. But we had a little slow that slowdown that went, and a lot of our businesses in Michigan, and they shut down in the state of Michigan again, for the second time, I believe. And that went into the first quarter, and 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, into the second quarter that we'll start building that up. Since the middle of last year, we just continued to grow, we started the 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 where we'll help our revenue going forward.

Howard Halpern

Okay, turning back, I guess, to the SaaS in the Yellow Folder too. Are you seeing, constant geographic expansion of where your now customers are located?

Jim DeSocio

Yes, we were historically especially in the K-12 market in the Midwest, eight state and nine-state area to Midwest. Yellow Folder was out of Texas and they were in, I believe, 14,15 different states, if I'm not mistaken. And they had a handful of customers in each state, but, but actually, 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 Intellinetics Solutions into that customer base, we probably have half a dozen customers now. It's only been, we bought them in April, by the time we got, integrate and everything. So we've really only been selling with these numbers, look at net 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 Wharton School District for about $90,000 last year. So we're very, very bullish on continuing to cross sell into the K-12 space.

Howard Halpern

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

Jim DeSocio

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

Howard Halpern

Okay, well keep up the good work, guys.

Jim DeSocio

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

Operator

Thank you.

Jim DeSocio

Doesn’t looks like there's any other question?

Operator

Oh, yes. Let's 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.

Jim DeSocio

Thank you, Kevin. Yes, in summary, this has been a very strong year for us for growth, and especially in the SaaS area, enabling us solid 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 when 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.

Operator

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.

Jim DeSocio

Thank you.