Q4 2020 Red Violet Inc Earnings Call

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Good day, ladies and gentlemen, and welcome to Red Violet as fourth quarter and full year 2020 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time and families require operator assistance. Please press Star then zero on your phone.

Minder. This 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 and thank you for joining us today to discuss our fourth quarter full year 2020 financial results with me today is Eric do and there are chairman and Chief Executive Officer, and Dan Nguyen, Our Chief Financial Officer, our call today will begin with comments from Derek and Dan followed by a question and answer session.

I would like to remind you that this call is being webcast live and recorded a replay and the events will be available following the call on our website to access the webcast. Please visit our investor page on our website www dot red Violet and 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 covered on the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.

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 of risks and uncertainties associated with Red Violet business and I encourage you to review the Companys filing.

And with the Securities and Exchange Commission, including the most recent annual report on form 10-K, and subsequent 10 Qs 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 measure 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 amounts may be discussed and these metrics and their definitions can also be found and the earnings press release issued earlier today with that.

And I am pleased to introduce Red Violet as chairman and Chief Executive Officer, Derek Dubner.

Thanks, Camilla and good afternoon to those joining us today to discuss our fourth quarter and full year 2020 results.

Red Violet delivered another strong quarter as we close out a very unique year. It was a year full of challenges and which the red Violet team executed brilliantly.

Throughout and we remain focused on the key drivers of our business leveraging our business model to not only bolster our financial strength, but also positioning ourselves for the recovery.

We demonstrated the power and versatility of our innovative technology and critical solutions.

We performed better and all key financial metrics, and 2000 and 'twenty as compared to the prior year.

Turning now to the numbers fourth quarter revenue was $9 million.

A 1% decrease from prior year.

Adjusted gross profit increased 11% to $6 $3 million and adjusted gross margin increased to 70% from 62% compared to the same period of 2019.

Adjusted EBITDA increased 49% to $1 2 million.

Of key importance, our high margin platform revenue increased 12% to $8 6 million for the quarter.

In the fourth quarter, we set a new record for contractual revenue at 77% <unk>.

Backing out the spike that occurred and the second quarter of 2020 as a result of our accommodations granted to certain pandemic impacted customers.

For the full year 2022.

Total revenue increased 14% to $34 6 million.

Platform revenue increased 26% to $32 5 million.

And adjusted EBITDA increased 213% to $5 9 million.

Evidenced the strength of our business model.

Our high margin platform revenue allowed us to generate over 90% contribution of total incremental revenue to adjusted EBITDA with a $4 $3 million increase in total revenue in 2020, generating a $4 million increase and adjusted EBITDA.

While the fourth quarter traditionally faces seasonal headwinds our business is firing on all cylinders platform revenue is strong with the exception of certain parts of our collections vertical all of our verticals are back to pre pandemic levels and I'm pleased to report.

And that the first quarter of 2021 is currently pacing towards record revenue and adjusted EBITDA.

Performing and the manner, we did throughout 2020 has energized the company internally.

Overcoming the obstacles that 2020 presented has strengthened an already strong culture.

It has confirmed that which we already knew.

We have demonstrated that organizations across diverse industries need our solutions to conduct business with confidence.

In order to ensure continued success our 2021 goals are straightforward.

We are devoting our time and resources to the expansion of our competitive strength.

These strengths include innovative cloud native technology.

On a massive differentiated and unified data asset.

And customer centric solutions by which customers derive better intelligence driven decisions.

Behind the information and that drives the solutions is our innovative technology.

Unlike legacy technology construct our technology purposely purpose built for the enterprise was built and the cloud from the ground up.

Due to its cloud native construct our platform exhibits increased speed and scalability against competitor technologies.

Competitors are investing millions of dollars transitioning their platforms from David infrastructures to primarily hybrid cloud environments. We are already cloud native and we are investing our time and our resources and our technology and people to widen our lead.

Over competitive technologies.

We've spent years assimilating and unifying a massive differentiated data asset.

The accelerating digitization of human interactions and the corresponding generation of data there from is creating information overload for organizations that are desirous of unifying often disparate and siloed set of data.

We are continuously working towards the enhancement of our data assets. So that customers can seamlessly integrate a single platform to drive their workflow.

We are relentlessly focused on innovation and the customer experience.

Customers rely on our solutions to solve complex problems make better information driven decisions and to produce greater efficiencies in their workflow.

We endeavor to understand our customers' needs at the moment of first engagement.

We continuously engaged with our customers thereafter to evaluate their usage of our solutions throughout their lifecycle.

To maximize utilization of our solutions and hence their productivity.

We are working to enhance our current solutions and develop new products to enable more intelligent interaction with information, which further and grains us and the daily workflow of our customers.

As we have demonstrated over the last couple of years, if we remain committed to focusing on these key areas and our technology.

Data assets and customer centric solutions than our solutions expand and applicability to larger customers additional industries and use cases within.

As to our incredible Red Violet team I am proud of their devotion to the success of the company.

We have added 12 team members throughout the year to our product development and infrastructure teams to deepen and strengthen our current capabilities to ensure that we stand ready to meet current and future growth opportunities.

I'd like to share with you our theme for 2021.

It is raising the bar.

While we are pleased with our performance to date, we are by no means complacent.

<unk> with this theme 2021 is a year of advancing our technology, expanding our solutions deepening our data assets.

Stirring our infrastructure and augmenting the teams to accomplish these objectives.

I have every bit of confidence and the red Violet team and I remain as confident as I have ever been and our business model the health of our business and our prospects in 2021 and beyond.

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

Thank you Derek and good afternoon.

With the pandemic related challenges faced this past year like most of US I am happy that 2020 is solidly behind us.

I want to personally thank our team members for their dedication and hard work. Despite the challenges each based both personally and professionally.

Notwithstanding these challenges on a global level, our team outperformed and our business showed continued strength and resilience.

The underlying financials of our business are as strong as ever.

Looking back to this time last year I provided some color on the operational leverage of our business and I would like to revisit debt because I believe it speaks volumes of the health of our business. Despite the challenges we faced in 2020.

For the full year 2020 are four $3 million increase and total revenue translated into a $5 $3 million increase and adjusted gross profit.

Underlined by the strength and profitability of our 26% growth and platform revenue.

That $5 $3 million increase and adjusted gross profit translated into a $4 $9 million increase in cash flow from operations, a greater than 90% contribution of incremental adjusted gross profit to cash flow from operations.

Looking at this from a P&L perspective, the five $3 million increase and adjusted gross profit translated into $4 million of incremental growth and adjusted EBITDA, a greater than 75% contribution of incremental adjusted gross profit to adjusted EBITDA we are.

We're excited about these numbers because it demonstrates for the second year in a row the capabilities of our technology platform, our people and our business to drive profitable growth.

Moving on to the fourth quarter results.

Despite the fourth quarter, historically being a seasonally slower growth quarter for the business and.

And competing against a healthy pre COVID-19 comp from last year I am pleased to report we capped off the year with a strong fourth quarter.

For clarity all the comparisons I will discuss the day will be against the fourth quarter of 2019 unless noted otherwise.

Total revenue was $9 million.

A 1% decrease over prior year.

Attributed to our services revenue being down $1 million or 74%.

Important to understand and we have discussed this in the past our services revenue consists of transactional revenue generated from and ancillary solution, we provide to the collections market to complement our collections suite of products.

This ancillary solution known as IDI verified provides very little margin for the business and is offered merely to complete a one stop solution for a small subset of our collections customers are.

Our platform revenue on the other hand, which provides nearly 100% incremental contribution margin on every dollar of growth grew 12% to $8 6 million and the fourth quarter.

As a result, we produced an adjusted gross margin of 70% and eight percentage point up eight percentage points.

These profitable dollars flowed nicely down the P&L generating $1 2 million and adjusted EBITDA up 49% over prior year.

Overall, we saw strong demand for our products across all verticals as we discussed on our third quarter conference call with the exception of our collections vertical volume returned to pre COVID-19 levels by the end of third quarter.

That trend continued in the fourth quarter with volume at or above pre COVID-19 levels.

Within collections, we saw encouraging trends from platform revenue.

Collections platform revenue was less than 5% of its first quarter 2020 pre Covid hi.

As government and post collections Moratoria and forbearance programs were extended into 2021 and with the additional one nine trillion and government stimulus expected to be signed this week. We believe we will continue to see a soft recovery and collections through the first half of 2021.

Continuing through the details of our P&L as mentioned revenue was $9 million for the fourth quarter, consisting of revenue from new customers of <unk> 9 million base revenue from existing customers of $6 7 million and growth revenue from existing customers of $1 4 million on.

Or IDI core billable customer base remained flat sequentially compared to the third quarter of 2020, ending the fourth quarter at 5726 customers.

<unk> added over 3004 hundred users during the quarter.

I would like to provide some additional color on the IDI core billable customer count.

At the end of the third quarter, we implemented enhanced credentialing and compliance standards.

This impacted mostly smaller customers and the private investigator and process server space.

As a result of this initiative, we launched a total of 258 customers and the fourth quarter due to such customers not meeting our heightened compliance standards.

These 258 customers represented in total a loss of only $7000 and monthly revenue.

Netting out this compliance initiative, our sequential customer adds to the IDI core billable customer base and the fourth quarter would be consistent with prior quarters and in line with trending expectations.

We expect to see some residual impact from this compliance initiatives and the first quarter of 2021 as well.

Our contractual revenue was 77% for the quarter and 11 percentage point increase over prior year.

Our revenue attrition percentage was 11% compared to 6% and prior year. A result of some lingering effects from the pandemic related customer concessions, we provided and the second and third quarter and transactional customers, who temporarily paused volume during that period.

Because revenue attrition is calculated on a trailing 12 month basis, we expect to see improvement over the next several quarters as we move away from the Covid impacted period, and expect a revenue attrition percentage to trend around 7% to 8% by the end of 2021.

Moving.

And on from a revenue metrics and down the P&L, our cost of revenue exclusive of depreciation and amortization decreased $7 million or 21% to $2 7 million.

$7 million decrease was a result of a decrease and third party service or cost associated with our services revenue, partially offset by an increase and data acquisition costs.

Adjusted gross profit increased 11% to $6 3 million producing an adjusted gross margin of 70% and eight percentage point increase over fourth quarter 2019.

Sales and marketing expenses decreased $1 million or 7% to $2 million for the quarter.

The decrease was due primarily to a decrease and the provision for bad debts.

The $2 million of sales and marketing expense for the quarter consisted primarily of $1 1 million and employee salary and benefits and <unk> 4 million and sales Commission.

<unk>.

General and administration expenses decreased $2 6 million or 34% to $5 million for the quarter.

This decrease was primarily the result, and a $3 million decrease and share based compensation expense slightly offset by an increase in payroll and benefits.

The $5 million and general and administrative expenses for the quarter consisted primarily of one $9 million of employee salaries and benefits.

$1 5 million of noncash share based compensation expense.

And <unk> $9 million and accounting.

And other professional fees.

Depreciation and amortization increased <unk> 4 million or 42% to $1 $2 million for the quarter.

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

Net loss narrowed to $3 million or 61% to $1 9 million for the quarter.

We reported a loss of <unk> 15 per share for the quarter based on a weighted average share count of $12 2 million shares.

Moving on to the balance sheet cash and cash equivalents were $13 million at December 31, 2020, compared to 11 $8 million at December 31, and 2019.

Current assets were $16 7 million compared to $16 million and current liabilities were $5 million compared to $4 3 million.

We generated $6 5 million and cash from operating activities for the year ended December 31, 2020, compared to generating $1 6 million and cash from operating activities for the same period in 2019.

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

Based on this operational earn and burn analysis, we were cash neutral for the fourth quarter of 2020 compared to burning 7 million for the fourth quarter of 2019.

Cash used in investing activities was $5 7 million for the year ended December 31, 2020, mainly the result of five 5 million used for software developed for internal use.

Cash provided by financing activities was <unk> 3 million for the year ended December 31, 2020, resulting from the net proceeds of $2 $2 million from the cares Act loans less one $8 million of cash used for the taxes on the net settlement of approximately 120.

2000 shares of restricted stock units.

In closing I am pleased with our strong performance and the fourth quarter. We are off to a great start in 2021 and I'm looking forward to what this team will accomplish over the next 12 months and beyond and with that our operator will now open the line for Q&A.

And if and when does have a question you press star one on your telephone keypad for your question again that star one training questions at this time.

Just momentarily compile the Q&A roster.

Okay.

And we do have a question on line from Pam Nelson from car management.

Hi, Thank you for taking my question.

Our platform revenue growth. This year was very impressive given the economic environment along those lines you had some encouraging commentary around the collection space as it relates to platform revenue.

And my question is really twofold.

Do you believe your collections platform business can be a growth vertical for you in the future and what percentage today.

He is collections to your overall overall revenue.

Great. Thank you Pam and this is Dan and I. Appreciate the question, so and yes, we're extremely pleased with our 26% platform revenue growth. Despite the COVID-19 related challenges we faced this year.

Our focus has been and will continue to be to drive revenue growth on our technology platform as it provides the greatest amount of leverage for our business. So looking at collections specifically.

And we're confident it can be a growth vertical for us once some of the government mandated moratoria and forbearance programs subside and the economic stimulus kind of runs its course, so despite the challenges the collection market has faced as a whole and relative to some of our competitors conservative commentary on the space.

And our collections platform revenue has performed well and we expect to see decent growth trends in the collection space and the second half of 2021, So to day collections revenue is less than 30% of our overall revenue.

Alright, great. Thank.

Thank you very much thanks.

Thanks, Tim.

And at this time, there and no other questions from the queue.

Thank you all for joining us today as you can see we've made significant progress throughout 2020 and not only recovering from the extraordinary economic conditions during the year, but and strengthening our financial and strategic business interests. We are fundamentally strong and we are.

Well positioned for the foreseeable future.

Thank you to our team members and thank you to our customers and those on the call today supporting us.

Good afternoon.

And this does conclude today's conference call you may now disconnect.