Q3 2020 Red Violet Inc Earnings Call

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As a reminder, today's call is being recorded.

I would now like to introduce your host for today's conference Camilo Ramirez director of Finance and Investor Relations. Please go ahead.

Good afternoon and welcome. Thank you for joining us today to discuss <unk> third quarter 2020 financial results with me.

Me today is they're doing or our chairman and Chief Executive Officer, and Dan Mclaughlin, Our Chief Financial Officer.

Our call today will begin with comments from Derek and then followed by a question and answer session.

I would like to remind you that this call is being webcast live and recorded.

A replay of the event will be available following the call on our website to access the webcast. Please visit our investors page on our website www dot red violin Dot com.

Before we begin I would like to advise listeners that certain information discussed by management. During this conference call are forward looking statements are covered under the safe Harbor provisions of the private Securities Litigation Reform Act.

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Actual results could differ materially from those stated or implied by our forward looking statements due to risks and uncertainties associated with the company's business.

The company undertakes no obligation to update the information provided on this call.

For a discussion.

Risks and uncertainties associated with violent <unk>.

I encourage you to review the Companys filings with the Securities and Exchange Commission, including the most recent annual report on form 10-K.

Thank you.

During the call we may present, certain non-GAAP financial information relating to adjusted gross profit adjusted gross margin and adjusted EBITDA Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are provided in the earnings press release issued earlier today.

In addition, certain supplemental metrics that are not necessarily derived from any underlying financial statement amount maybe discussed and these metrics and their definition can also be found in the earnings press release issued earlier today with that I am pleased to introduce Red Violets, Chairman and Chief Executive Officer, Derek Dubner.

Thanks, Camilo and good afternoon to those joining us today to discuss our third quarter 2020 results.

We sincerely hope that you and your loved ones are safe and healthy during this time.

We are pleased to report today, another strong quarter during an incredibly challenging time.

These strong results demonstrate the applicability of our technology and solutions across diverse markets and industries as well as the need of organizations to integrate our solutions to enable their workflow and better data driven decision making.

The momentum we experienced exiting the second quarter continued throughout the third quarter generating a 31% sequential increase in revenue to $9.3 million and a 130% sequential increase in adjusted EBITDA to a record 2.1.

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Further the third quarter proved to be one of our best quarters to date with record platform revenue of $9 million driving record adjusted gross margin of 71%.

Given the current state of the pandemic I would like to take a moment to reflect on the path. We have traveled since the start of the crisis.

In the second quarter.

This is faced unprecedented challenges to their survival as a result of pandemic related events, including a government mandated stay at home order, which created significant uncertainty.

These impacts caused many customers to retract.

Causing certain parts of our business such as our collections vertical two experienced reduced transactional volume.

As a reminder, we cited in our last earnings call that in the face of these challenges we maintained our long term view and implemented a multi prong strategy, including among other things assisting our customers.

Focusing on the health and well being of our team members gaining.

Gaining market share and the continued advancement of our technology and solutions.

At the onset of the crisis, we committed to what we termed our partnership approach to assisting our customers through the economic downturn.

We knew that ensuring the survival and health of our customers' businesses would in turn ensure the future health of our business.

We worked with customers in a variety of ways strengthening the enduring relationships that we have built overtime.

What became obvious to most businesses is that to survive the downturn one must adapt to the current circumstance.

As part of the adaptation process, we worked with our customers to understand their objectives and me and we demonstrated the utility and efficiency of our products and solutions.

Especially given the competitive advantage of our cloud native platform.

This exercise proved to be fruitful as our customers appreciated the goodwill and they were able to fine tune their processes for better outcomes.

Their reliance on our solutions as evidenced by the increase in our base revenue from existing customers to $5.8 million, 15% sequentially and growth revenue from existing customers to $2.7 million, 151% sequentially. We're very.

Be proud of these metrics as put simply they show that customers prefer our solutions and are finding ways to utilize them more.

Turning now to our team.

I want to thank each and every one of them as their execution against our plan strategy laid the ground work for the acceleration of the business that we are experiencing.

Today, most of our Seattle team members are working remotely as are a handful of personnel in our south Florida offices.

The rest of the team is working in office and has been since June one.

With the significant precautions that we implemented prior to our returned to office, we have managed to safely adapt while facilitating I highly productive in office work environment.

While we continue to monitor business conditions, given the unpredictable environment sustained by the continued spread of the virus. We are actively recruiting for various growth positions across the organization.

Including in the areas of product development sales and infrastructure to solidify various teams as we drive the expansion of our business.

Another facet of our strategy was to use the crisis as an opportunity to increase our market share.

We positive early on that in order to cope with the economic downturn businesses would seek to cut costs immediately and identified greater efficiencies to implement into their workflow to offset the negative financial impacts to their business.

We focused on these prospects, who as a result of the downturn exhibited a greater propensity to entertain switching providers.

We made great strides in this area, adding over 380 customers to I'd i. core in the quarter.

This metric has always been a leading indicator of increasing revenues over the next six to nine months.

We believe the impact of the crisis I'm customer psyches, resulting in heightened focus on cost efficiencies will be long lasting and will provide a tailwind to providers of solutions, who address that need as we do.

Finally I'd.

I'd like to speak to the continued advancement of our technology and solutions.

Through innovation and our customer centric view, we maintain that we have developed the leading cloud native technology platform in our industry.

2020 has rapidly accelerated the digital transformation and has challenged organizations to increasingly move to cloud based solutions.

Our platform core addresses these challenges as we are delivering essential products and solutions to a multitude of organizations.

We provide our customers the speed usability.

Throughput.

Accuracy and scalability that we believe to be superior to that of our larger competition.

We have a robust roadmap of new technologies enhancements functionality and products and solutions that will drive our business near and long term.

And given the substantial inroads, we're making with new customers combined with the recovery of existing customers and pent up demand.

We are well positioned for the remainder of the year and throughout 2021.

Data is the life blood of this digital transformation.

But not just volume of data has too much data creates noise and inefficiency.

Too much data creates fragmentation and the inability to glean actionable insight.

Our mission is to continue developing and commercializing customer centric solutions that solve for the data fragmentation problem no matter the customer or the use case or.

Our goal is to ensure the applicability of our solutions across as many industries and transactions as possible to increase organizations output and efficiency.

We are very early in this mission and are well positioned for the future.

With that I turn it over to Dan to discuss the financials.

Thank you Derek and good afternoon.

During what has been a very unique and challenging time I could not be more pleased with the productivity professionalism and focus of the entire red vitality.

Combine that with the strength and resilience our business model continues to show and the result was a great third quarter.

As customers adapted and became more efficient transacting in the cobot environment, our transaction volume returned to pre cobot levels by the end of the third quarter.

With the exception of collection customer volume, we saw significant improvement across the markets we serve.

These improvements were evident in our growth revenue from existing customers that grew at a record pace in both percentage and dollars both sequentially and year over year.

We continue to see that as customers adopt our solution their business realized and thrive on our platform.

As a result, the third quarter proved to be one of our best quarters to date with record platform revenue that would leverage down the PML leading to record adjusted gross margin of 71% and record adjusted EBITDA of $2.1 million.

We remain confident in our ability to navigate these challenging times and remain focused on leveraging opportunities.

With that I'm excited to discuss our third quarter results for clarity all the comparisons I will discuss today will be against the third quarter of 2019 unless noted otherwise.

Total revenue was $9.3 million, a 12% increase over prior year.

Platform revenue grew 27% to $9 million, representing 97% of our total revenue.

With the exception of our collection vertical and specifically within our services revenue.

We saw a nice recovery in transaction volume across the board, including some pent up demand as businesses adapted and became more efficient operating in the current environment.

With 97% of revenue coming from platform, we generated extremely healthy margins that flow through the PNM generating $2.1 million in adjusted EBITDA and 84% increase.

We continue to see a slower recovery in our collections vertical resulting from temporary government imposed moratoria forbearance programs and government stimulus.

This was felt the most in our services revenue.

Services revenue was $8.3 million for the quarter, a 74% decrease over prior year.

We expect to see recovery in services revenue in early 2021 with strong tailwinds developing throughout the year as the Moratoria are lifted and the forbearance program and stimulus subside.

Continuing through the details of our PNM as mentioned revenue was $9.3 million for the third quarter, consisting of revenue from new customers a point sevenmillion based revenue from existing customers of 5.8 million and growth revenue from existing customers have to pay.

7 million.

Our <unk> core billable customer base grew by over 380 customers during the period to 5758 customers.

For warrant added over 4000 users during the quarter.

Our contractual revenue was 68% for the quarter led by a strong 116% increase in growth revenue from existing customers.

Our revenue attrition percentage was 10% compared to 6% in prior year.

This increase was primarily the result of pandemic related customer concessions, we provided and transactional customers, who temporarily paused volume during the second and third quarter.

Sequentially revenue attrition improved by one percentage point.

Because revenue attrition is calculated on a trailing 12 month basis.

We expect to see continued improvement sequentially over the next several quarters.

Moving on from our revenue metrics and down the PML.

Our cost of revenue decreased $2.4 million or 13% to $2.7 million.

At this point 4 million dollar decrease was a result of a decrease in third party service or cost associated with our services revenue, partially offset by an increase in data acquisition costs.

Adjusted gross profit increased 28% to 6.6 million producing an adjusted gross margin of 71% a nine percentage point increase over third quarter 2019.

Sales and marketing expenses increased $2.3 million or 15% to 2.2 million for the quarter.

The increase was due primarily to an increase in employee salaries and benefits.

The 2.2 million of sales and marketing expense for the quarter consisted primarily of 1.3 million and employee salaries and benefits and 0.4 5 million in sales commissions.

General and administrative expenses increased $2.6 million or 19% to $4.1 million for the quarter.

This decrease was primarily the result of $8.4 million increase in share based compensation expense.

The 4.3 million in general and administrative expenses for the quarter consisted primarily of 1.7 million of non cash share based compensation expenses $1.2 million of employee salaries and benefits and.

$1.8 million in the county, I T and other professional fees.

Depreciation and amortization increased 2.4 million or 49% to 1.1 million for the quarter.

This increase was primarily the result of the amortization of internally developed software.

Net loss narrowed point $1 million or 7% to point 9 million for the quarter.

We reported a loss of eight cents per share for the quarter based on a weighted average share count of 12.1 million shares.

Moving on to the balance sheet cash and cash equivalents were $12.4 million at September 32020.

Compared to 11.8 million at December 31, 2019.

Current assets remained consistent at 16 million and current liabilities were $4.7 million compared to $4.3 million.

We generated 4.7 million in cash from operating activities for the nine months ended September 32020.

Paired to generating point 4 million in cash from operating activities for the same period in 2009.

Internally, we track our operational cash burn versus burn on a monthly basis by calculating adjusted EBITDA and subtracting the cash we use for the development of internal use software and other capital expenses. Both found on our statement of cash flows.

Based on this earn burn analysis, we earned $1.8 million in cash for the third quarter 2020, compared to burning point 4 million for the third quarter 2019.

Cash used in investing activities was 4.4 million for the nine months ended September 32020.

Mainly the result of 4.3 million used for software developed for internal use.

Cash provided by financing activities was point $3 million for the nine months ended September 32020.

Resulting from the net proceeds of 2.2 million from the carriers Act loan less $1.8 million of cash use for the taxes on the net settlement of approximately a 122000 shares of restricted stock units.

In closing I'm extremely pleased with how well we perform across the board in the third quarter.

And although the fourth quarter historically present, some seasonal headwinds from our transactional customers in the form of less business days. The fourth quarter is off to a great start and we are excited to close out the year strong.

With that operator, we'll now open the line for QNX.

Thank you ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key once again to ask a question. Please press star and then.

One now.

And again, ladies and gentlemen, please press star and then one to ask a question.

And one moment, while we compile our culinary roster.

[laughter].

And our first question will come from Pamela Carter from Carter management.

Hi, Yeah.

Looks like you had some really strong growth in revenue from existing customers as well a decent growth from existing customer base revenue.

However, the revenue from new customers was down over prior year can you explain why that is and if there is any concern there.

Yeah, Hi, Pamela. Thank you for the question. This is this is Dan yes, so as I discussed in my commentary earlier, our growth revenue from existing customers was was very strong both sequentially and over prior year.

This is a healthy sign for the business as it tells us customers, who have been with us longer than six months continued to grow their volumes. It tells us that our customers continue to rely on our solutions both in their everyday work flow and as a means to help drive their business as they get back to business.

As for the new customer revenue, we're very pleased with how the numbers are trending what we're really seeing in this metric for the third quarter is really a result of the second quarter Kobin trough, where we saw fewer billable customers added resulting in less revenue generated from new customers in the third quarter looking at the Onboarding of over 300.

Written 80 billable customers in the third quarter, which is at a higher onboarding rate than our 2019 average it really tells the story and provide a very healthy leading indicator of future revenue. So we continue to see customers, who adopt our solutions grow in scale and volume over time, combining that with our low attrition rate and where.

We are very confident in the overall makeup of our revenue and so we're confident today and how and where that revenue is growing and how thats how it is trending.

Thank you.

Right. Thanks.

Thank you and again, ladies and gentlemen to ask a question. Please press star and then one.

And our next question comes from Scott Billeadeau from Walrus Partners. Your line is open.

Hi, guys good quarter. Thanks for taking my question, it's just kind of more of a technical one in.

In terms of your internalize software depreciation.

And it kind of where are you can you know that grew significantly.

In terms of what you're capitalizing Ghana, where is the run rate to expect and yes, maybe give us an update on what.

What the treatment that will be thanks, yeah sure. So the last few years, we've been running about $6 million a year in capitalization of internally developed software we've added additional resources and product development, but over time some of that the Meltem development goes towards kind of the maintaining if you will the system and so you don't really care.

Utilize that so from a trending indicators standpoint, you'll probably see over the next year or two I'm very similar capitalization of about $60 million, but as a result of kind of overall revenue and overall time is actually decreasing but on a dollar for dollar basis. It will trend around 6 million yearly over the next probably one or.

Two years.

Yeah, So you'll start to get some fuel you with a 40 per se because you're kind of at where the number will be so incrementally from here you'd be able to leverage at number.

Yes.

Correct correct. That's correct that is the unique you know fixed cost structure. If you will of the of the model that provides us so much leverage.

Got it okay that that's that's all I had guys. Appreciate it thanks good quarter great. Thank you. Thanks Scott.

Thank you and I am showing no further questions from our phone line I now like to turn the conference back over to Derek demand for any closing remarks.

Thank you.

Hopefully as you can see from our results today and the progress we made this year notwithstanding this rather unique environment that we're all in that we've built leading edge technology and products and solutions that are essential to the success of many organizations with the secular tailwind of the digital transformation in place for many years to come.

We expect that organizations are getting increasingly demand efficient solutions and there will be an increase in demand for fraud prevention identity verification general risk mitigation and consumer modeling.

We have and continue to position ourselves to be the go to provider for these solutions I'm very optimistic about our future and I look forward to updating you on our progress on our next quarterly call I want to thank our team members again as well as our customers and those on the call today supporting us it's much appreciated thank you and have a.

Good afternoon.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.

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