Q2 2024 Intellinetics Inc Earnings Call

Participants

Tom Baumann; Investor Relations; Intellinetics Inc

Jim DeSocio; President, Chief Executive Officer; Intellinetics Inc

Joe Spain; Chief Financial Officer; Intellinetics Inc

Howard Halpern; Analyst; Taglich Brothers, Inc.

Presentation

Operator

Greetings and welcome to the Intellinetics second quarter 2024 earnings call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to turn the call over to Tom Baumann, Investor Relations. Thank you, Tom. You may begin.

Tom Baumann

Thank you and good afternoon, everyone. I am pleased to welcome you to Intellinetics 2024 second 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 the risks and uncertainties included in this section under the caption risk factors and management’s discussion and analysis of financial condition and results of operations and Intellinetics 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. It 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 DeSocio, Intellinetics’ President and CEO. Jim, the call is yours.

Jim DeSocio

Thank you, Tom. Intellinetics continues to generate solid financial results. While taking these steps to enable accelerated top and bottom line growth in the future, we delivered growth in SaaS and overall recurring revenue in line with our stated strategy.
We also generated continued profitability even as we began to invest significantly in sales and marketing to support a broader SaaS initiative. Yellow Folder continues to grow and the response to our new IntelliCloud Payables Automation System, or IPAS offering has been highly encouraging with deployments accelerating. We generated significant cash and continue to pay down debt.
The pieces are in place for continued success for years to come. This progress comes even as our new SaaS offering, IPAS has just started contributing to our results. As I said, the response to IPAS has been very strong. Our pipeline of opportunities for IPAS is improving in terms of quality and in quantity with each passing month.
Demand for Yellow Folder solutions is also growing and overall Intellinetics is well positioned across our SaaS offerings. As we have been communicating, we have been investing to scale our business, and we are now pointing to accelerate our investment in marketing, our SaaS offerings.
These investments will support all of our SaaS offerings, including Yellow Folder and IPAS. In the quarter, SaaS revenue as a percentage of our consolidated revenue remained at 30%, even with a record contribution from our professional services business.
Once again, our goal is to make recurring revenue the majority of our total revenue with as much contracted SaaS revenue as possible. This will reduce earnings volatility, make our business very easy to model, and benefit shareholders through consistent profitability.
SaaS businesses are historically quite profitable. We invested in 2022 to acquire Yellow Folder. As we are paying down the debt related to this acquisition, having already fully paid down the debt from the 2020 Graphics Sciences acquisition.
We launched IPAS in 2023, and we are investing in capabilities to maximize the opportunity. Historically, our sales and marketing investments have been relatively modest, but with the inclusion of IPAS into our portfolio, we have been meaningfully expanded our addressable market.
The number of potential customers has increased significantly. This means we need to add skilled and capable salespeople, and we need to expand our presence at tradeshows and similar events. For more specifics regarding sales personnel, we added one this March, we’re up two more right now before the end of the third quarter, and we want to have two more on board in January.
These investments will modestly and we expect to temporarily reduce our EBITDA, but they will pull forward revenue opportunities that should exceed the spend and be accretive at some point in 2025. Once revenue from IPAS exceeds these investments, incremental revenue will disproportionately drop to the bottom line.
Additionally, this model will enable us to appropriately size fixed costs so that we are systemically profitable, creating a durable, sustainable, scalable platform for profitable growth. As I said, IPAS solution has given us significant momentum.
We have doubled the number of live referenced accounts from two to four during the second quarter. These accounts are all running smoothly. We have an additional three or four expected to go live in the third quarter and our pipeline continues to grow.
Again, this is with a pretty modest sales and marketing function. As we move through 2024, we anticipate IPAS becoming a larger and larger contributor to our consolidated revenue. Our K-12 operations now have 619 K-12 districts, generating significant SaaS revenue, which more than doubles our presence in this vertical market since briefly before we acquired Yellow Folder in April of 2022.
Importantly, each of these districts is a target for additional Intellinetics services, including IPAS. We are launching a K-12 IPAS pilot this week as we speak to address this opportunity. Meanwhile, the document conversion portion of our digital transformation business, including business process outsourcing, business in document storage and retrieval continues to generate positive contribution margin.
As a reminder, last quarter we disclosed that our largest professional services customer plans to transition certain tasks performed by our document conversion business from one office location to another location in a way that could reduce annual revenue of our document conversion segment.
The amount of the future revenue reduction is still uncertain and their transition has been delayed by the customer with no clear timeframe. We are continuing to negotiate with the customer to mitigate the impact of this future revenue reduction.
For Q2, I want to congratulate the entire document conversion team for delivering a record revenue quarter. We continue to work on initiatives to improve efficiencies and margins there. But our new investments in sales and marketing are focused on growing our recurring revenue, in particular, our SaaS subscription revenue.
At this time, I’d like to turn the call over to our Chief Financial Officer, Joe Spain.

Joe Spain

Thanks, Jim. I will now review our financial results for the second quarter of 2024, the period ending June 30, 2024, compared to the prior year ’23. Total revenue for the quarter increased 9% to $4.6 million as compared to $4.3 million for the same period last year.
The following are the material components of our revenue. First, subscription software, which is comprised of SaaS, including hosting revenue and software maintenance services revenue increased to $1.75 million for the quarter from $1.63 million for the same period last year. SaaS grew 9.6% and consistent with history, and as expected, our software maintenance services are growing more slowly at 1.4% over 2023.
Secondly, professional services, revenue increased 15.8% to $2.66 million from $2.3 million for the same period last year. As a percentage of total revenue, professional services revenue was 57% of total revenue for the quarter, up from 54% last year.
Consolidated gross margin increased 387 basis points to 64.7% for Q2 compared to 60.8% last year. An increase was driven by both better revenue mix slightly weighted towards subscription revenue, plus higher margin professional service projects, and also positive impact from price increases.
Operating expenses increased 23.4% to $2.8 million compared to $2.3 million in Q2 ’23. The increase is largely due to the $0.5 million in non-cash stock-based compensation expense were restricted stock awards to employees, as well as investments in structure and scale.
A subset of operating expenses, sales and marketing expenses for the quarter increased 7.7% compared to the same period in 2023. As Jim mentioned, we continue to invest in marketing and sales and these prior period comparatives will continue to shift as we increase the sales and marketing investment compared to historical levels. This includes the sales rep additions Jim talked about plus increasing our trade show activity in ’24, which is important to both our IPAS and K-12 revenue acceleration.
Net income for Q2 was $75,000 compared to net income of $136,000 for the same period last year. Earnings per share was $0.02 per share compared to earnings per share of $0.03 last year. Our adjusted EBITDA for the quarter was $698,000 compared to an adjusted EBITDA of $651,000 for the same period in 2023.
Next, a brief overview of the balance sheet. At June 30, ’24, we had cash of $1.7 million and accounts receivable net of $1.4 million. Our total assets were $18.9 million, including $9.4 million in intangible assets and goodwill as part of acquisitions made since 2020.
Total liabilities were $8.5 million, including $2.8 million in deferred revenues, reflecting signed SaaS and maintenance contracts and $2.1 million in debt principal as of June 30.
In the first six months of ’24, we have prepaid $825,000 of our long-term debt, including $325,000 at the end of the second quarter. We expect to continue to pay down our debt, including another $800,000 this month and expect to have no net debt, meaning debt less cash at the end of 2024.
I want to wrap up with our financial outlook. Based on our current plans and assumptions and are subject to risks and uncertainties we described in our filings and this call, we are reiterating our expectation to grow revenues on a year-over-year basis for the fiscal year 2024.
As Jim mentioned, we’ll be increasing our investment in sales and marketing, including adding four salespeople to support our SaaS offerings over the next several quarters. These investments will have a modest short-term impact on our EBITDA margins.
To be clear, we continue to expect to generate positive adjusted EBITDA, enabling us to continue to pay down our debt and bolster our balance sheet. However, as noted in our earnings release, we are revising our guidance as we expect our adjusted EBITDA to decrease modestly year over year.
As the sales and marketing investments begin to bear fruit, we expect accelerated top and bottom line growth in 2025 and beyond.
With that, we thank you all for listening. And at this time, we’d like to open the call up to q-and-a.

Question and Answer Session

Operator

(Operator Instructions) Howard Halpern, Taglich Brothers.

Howard Halpern

Congratulations, guys, great quarter. In terms of IPAS, how many customers are actually live right now?

Jim DeSocio

Four are actively live, and we are expecting those three to go live sometime this quarter. And the two in August. Yeah, go ahead.

Howard Halpern

And in general, though, when we’re entering 2025, what you expect with the live implementations? What could the potential annualized revenue — recurring revenue run rate be for these IPAS customers?

Jim DeSocio

Well, that’s forward-looking. Yeah.

Joe Spain

I think Howard, yeah, we’re I mean it’s a little bit in a box to have us read that specific, it’s time-bound. And we don’t want to get too crazy within the bounds of what we’re supposed to be able to say. But I mean, we can say certainly qualitatively, it’s going to be significant relative to our math, very significant.

Howard Halpern

Okay. And so with seven customers expected to be online entering the fourth quarter and new sales people coming online, what — and your pipeline, could you give a little color as to that cadence you hope to achieve and not only signing customers, but then once you sign implementing those customers, what should — and I know it’s relative to — IPAS is relatively new for you, but what should the cadence be or what do you hope the cadence to be?

Jim DeSocio

Well, can I talk about our forecast budget, we’re planning 15 to 18 customers this year. We’ve already closed, sold 11 to 12, so we’ve got another five or six this year, we’re counting. And then next year with them coming on live, we plan to grow substantially after that.

Howard Halpern

Okay. And that’s still all just from that one vertical, the homebuilding vertical.

Jim DeSocio

That’s all from the one vertical. So we are in beta with our K-12 com beta site, and we’ve got some good things there. And we’re also working on a new product. All these customers were sold with just AP, payables (inaudible) We are coming out with PO in the future as well.

Howard Halpern

Okay.

Joe Spain

And Howard (multiple speakers) end of the question, and yes. I would say I mean, definitely it’s going to accelerate, right? This is a brand new product released in 2023. Obviously, we’ve got some early adopters, but there’s momentum to be had here. And the old buzz word a few years ago, the flywheel, right, I mean, it just hasn’t even started spinning yet. So we definitely expect acceleration.

Howard Halpern

Okay.

Jim DeSocio

And what I’ve said in the past to Howard, the 11 customers we paid, I think, Joe, we’re up to nine of paid in four already as they’re coming.

Joe Spain

Yeah.

Jim DeSocio

Going live. So (multiple speakers) the product, the implementations are going well and they’re paying us, which is in my experience in the software business is that is a phenomenal metric, right, that people are paying.

Howard Halpern

So the deferred revenue will be a leading indicator of hopefully the satisfaction and the future results. Okay.

Jim DeSocio

Exactly. Yeah.

Howard Halpern

You talked about the document conversion. What actually drove the increase this? Was it just in Michigan or was there some conversions of K-12 customers?

Jim DeSocio

Well, we actually have up the facility in Columbus, Ohio, and there actually working and doing scanning business as well. We’ve closed a number of microfilm microfiche deals which is a different revenue line than the basic gaining business.
So everything came together this last quarter and we’ve owned the business for a few years. And when we bought the business, the infrastructure was 40 years old — 30 years old. We’ve really invested in better systems. We’ve gotten better at running the business. We know how to do it much more effectively and efficiently now. So everything’s come together over the last year-and-a-half or so. Yeah/

Howard Halpern

It does seem like there’s a pipeline, pent-up demand for that service out there from existing customers and new customers?

Jim DeSocio

Yes. Well, keep in mind that we’re getting a lot of K-12 business. So we’re doing a good job of cross-selling into our K-12 business. And keep in mind that school districts have to keep student records for 99 years. And I know it’s generated by someone needs a new building, you’re consolidating buildings.
They’re trying to get rid of all their paper documents, et cetera. So there’s a lot of things that drive people to say, let me digitize all my back records and back file all my back records. Recently, we’ve also been successful of the original vision was we have been in the document management business for a number of years, and people would say how do I get my old files into your system?
Well, now we’re doing a much better job of actually integrating the sales team. So as they sell a document management system, we’ll sell a scanning project as well at the same time.

Howard Halpern

Okay. That all sounds great. Keep up the great work.

Jim DeSocio

Thank you, Howard. Appreciate it.

Operator

Thank you. There are no further questions at this time, I would like to hand the call back over to Jim Spain for any closing comments.

Jim DeSocio

Jim Spain, Jim DeSocio. (multiple speakers) Yeah. Thank you all for joining us. I’m very optimistic about the future of Intellinetics. We have exciting SaaS assets supported by project oriented business that is expected to continue to generate cash.
We are paying down our debt and investing in our sales and marketing function to drive future growth. We have 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 long time shareholders. Thank you for joining us today, and we look forward to speaking again on our next conference call.
Thank you very much. Appreciate everybody coming and joining.

Operator

This concludes today’s conference call. You may now disconnect your lines. Thank you for your participation.