Q4 2022 Red Violet Inc Earnings Call
Speaker 1: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11.
Speaker 2: You
Speaker 3: Good day, ladies and gentlemen, and welcome to Red Violets fourth quarter and full year 2022 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.
Speaker 3: As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Camila Ramirez, Vice President, Finance, and Investment Relations. Please go ahead. Good afternoon and welcome. Thank you for joining us today to discuss our fourth quarter and full year 2022 financial results.
Speaker 3: With me today is Derek Dubner, our Chairman and Chief Executive Officer, and Dan McLaughlin, 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 of the event will be available following the call on our website.
Speaker 3: To access the webcast, please visit our investors page on our website, www.redviolet.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 under the Safe Harbor provisions of the private security review.
Speaker 3: Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward-looking statements due to risk and uncertainties.
Speaker 3: associated with the company's business. The company undertakes no obligation to update the information provided on this call.
Speaker 3: For discussion of risk uncertainties associated with red violets business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the most recent annual report on Form 10-K . And the subsequent 10 cues during the call, we may present certain non-GAAP financial information.
Speaker 3: relating to our adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin, and free cash flow. Reconciliations of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measure are provided to the U.S. GAAP financial measure.
Speaker 3: 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 in the earnings press release issued earlier today.
Speaker 3: With that, I am pleased to introduce Red Violet's Chairman and Chief Executive Officer Derek Dubner.
Speaker 3: Thanks Camilo, and good afternoon to those joining us today to discuss our fourth quarter and full year 2022 results.
Speaker 3: We are pleased to announce a strong fourth quarter, which produced another record year for red violet.
Speaker 3: Despite 2022's uncertain economic environment, Red Violet continued to drive healthy, double digit percentage revenue growth while experiencing, excuse me, while expanding gross margin and generating solid cash flow.
Speaker 3: We continue to strategically invest in our robust product roadmap and execution against our growing sales pipeline.
Speaker 3: Further, even with the investments made in 2022.
Speaker 3: We generated our first full year of GAAP profitability without a one-time gain.
Speaker 3: on the execution of our long-term strategic plan, and our industry-leading teams continue to outperform.
Speaker 3: Now, turning to the numbers.
Speaker 3: For the quarter, total revenue was $13.1 million.
Speaker 3: a 16% increase over prior year, and a record fourth quarter for red violet.
Speaker 3: Platform revenue increased 19% to $12.9 million.
Speaker 3: of 77% in the fourth quarter, up three percentage points.
Speaker 3: Adjusted EBITDA for the quarter was 1.5 million dollars, up 16 percent over prior year.
Speaker 3: Our IDI billable customer base grew by 148 customers sequentially from the third quarter, ending the fourth quarter at 7,021 customers.
Speaker 3: For WARN, added over 6,900 users during the fourth quarter, ending the quarter at 116,960 users.
Speaker 3: Over 235 Realtor Associations are now contracted to use for war.
Speaker 3: For the year, revenue increased 21% to $53.3 million.
Speaker 3: generating adjusted EBITDA of $12.9 million.
Speaker 3: We generated $0.6 million in net income in 2022, our first full year of GAAP profitability without a one-time gain.
Speaker 3: Recall, our 2021 net income of $0.7 million included a one-time gain of $2.2 million from the forgiveness of our CARES Act loan.
Speaker 3: We continue to convert our larger Enterprise Prospect Pipeline into WINS. We had 67 customers contribute over $100,000 in revenue in 2022.
Speaker 3: a 43% increase compared to 47 customers in 2021.
Speaker 3: As well, our existing customers continue to spend more with us year over year.
Speaker 3: With 2022 behind us, we are excited about 2023 and beyond.
Speaker 3: While many companies are retrenching and rightsizing their organizations given the current climate, we are in the enviable position of being able to advance our long-term strategic plan. This consists of converting our healthy cash flow and solid balance sheet into innovative solutions.
Speaker 3: enhanced capabilities
Speaker 3: entries into new markets,
Speaker 3: and increasing market penetration.
Speaker 3: This is a delicate balance of pressing investments for future growth.
Speaker 3: while exercising financial prudence to maintain the strong financial profile of our business. We have a robust product roadmap of planned releases throughout 2023 and the next several years.
Speaker 3: These releases include enhancements to existing solutions and new solutions in identity, fraud prevention and detection,
Speaker 3: include enhancements to existing solutions and new solutions in identity, fraud prevention and detection, background screening support, and security.
Speaker 3: Commercial Real Estate Analytics.
Speaker 3: commercial real estate analytics, marketing services.
Speaker 3: public sector. These innovations are designed to improve customer outcomes for current use cases.
Speaker 3: and to address customer need where there are presently no solutions.
Speaker 3: current market solutions are inadequate.
Speaker 3: As you can imagine, developing solutions to address complex problems often takes time and multiple iterations between us and pilot project participants.
Speaker 3: Importantly, our target markets remain resilient, and we expect strong demand for existing and new solutions for the foreseeable future.
Speaker 3: The secular tailwinds that our business has are firmly in place.
Speaker 3: a digital transformation in its infancy,
Speaker 3: cyber crimes and fraud that are omnipresent, demand for integrated solutions that drive efficiency, and more.
Speaker 3: Our solutions are mission critical. They are used to manage risk,
Speaker 3: gain efficiency, and acquire customers.
Speaker 3: All essential, especially in a challenging economic environment.
Speaker 3: On the whole, we are pleased with our performance in 2022.
Speaker 3: Notwithstanding the economy, we are making solid progress against our strategic plan, and nothing has altered our view regarding our product roadmap.
Speaker 3: and our expectations around adoption by our target markets.
Speaker 3: Given this and the strong start to the year we are experiencing here in the first two months, we remain very optimistic about our prospects for 2023 and beyond.
Speaker 3: With that, I turn it over to Dan to discuss the financials. Thank you, Derek, and good afternoon. 2022 was a great year for red violet.
Speaker 3: We executed well against our planned initiatives laid out at the beginning of the year.
Speaker 3: we solidly grew revenue while maintaining healthy margins and cash flow.
Speaker 3: We added key strategic hires in several verticals and tactically built out our product development and go-to-market resources.
Speaker 3: As an organization, we added 46 team members in 2022, including 14 in sales and marketing, and 27 in technology and product development.
Speaker 3: These significant additions will enable scalability across the organization.
Speaker 3: This time last year, we explained that we would leverage our strong balance sheet and healthy cash flow to reinvest in the business in the form of human capital.
Speaker 3: expanding the capabilities, depth, and efficiency of our team.
Speaker 3: We explained we could make these investments while maintaining adjusted EBITDA margins in the range of 20 to 25 percent.
Speaker 3: We executed well against that expectation.
Speaker 3: We grew revenue by over 20% to $53.3 million in 2022, maintaining a 24% adjusted EBITDA margin, which produced $12.9 million in adjusted EBITDA.
Speaker 3: Importantly, 2022 was our first full year of GAAP profitability without a one-time gain.
Speaker 3: generating $0.6 million in net income, which resulted in earnings of 4 cents per basic and diluted share. The markets for our solutions continue to show strong fundamentals and increasing opportunity.
Speaker 3: We are releasing new features and enhancements on current solutions and developing new solutions to address additional use cases in Identity, Commercial Property Solutions, Background Screening Support, and Marketing Services.
Speaker 3: With our higher tier opportunity pipeline strong and growing, we continue to make significant progress in moving upmarket in both size and volume potential.
Speaker 3: We are competing successfully, converting those higher tier private and public sector opportunities to wins.
Speaker 3: We had 67 customers contribute over $100,000 in revenue in 2022, a 43% increase over prior year.
Speaker 3: We remain confident in our ability to drive strong growth in 2023 and beyond.
Speaker 3: Turning now to our fourth quarter results.
Speaker 3: For clarity, all the comparisons I will discuss today will be against the fourth quarter of 2021 unless noted otherwise.
Speaker 3: Total revenue was $13.1 million, a 16% increase over prior year. Platform revenue increased 19% to $12.9 million.
Speaker 3: Services revenue decreased 54% to $0.2 million.
Speaker 3: We produced 10 million dollars in adjusted gross profit resulting in a margin of 77% in the fourth quarter of three percentage points.
Speaker 3: Adjusted EBITDA for the quarter was $1.5 million, up 16% over prior year.
Speaker 3: adjusted EBITDA margin remained consistent at 12% for the quarter.
Speaker 3: Continuing through the details of our P&L, as mentioned, revenue was $13.1 million for the fourth quarter, consisting of revenue from new customers of $1.2 million, base revenue from existing customers of $10.6 million, and growth revenue from existing customers of $1.3 million.
Speaker 3: Our IDI billable customer base grew by 148 customers sequentially from the third quarter, ending the fourth quarter at 7,021 customers.
Speaker 3: Forwarn added over 6,900 users during the fourth quarter, ending the quarter at 116,960 users.
Speaker 3: Over 235 Realtor associations are now contracted to use for warmth.
Speaker 3: Our contractual revenue was 77% for the quarter, down two percentage points from prior year.
Speaker 3: Our revenue attrition percentage was 5% compared to 4% in prior year.
Speaker 3: We expect our revenue attrition percentage to trend between 5 and 10 percent for the foreseeable future.
Speaker 3: Moving on from our revenue metrics and down the P&L, our cost of revenue exclusive of depreciation and amortization increased.2 million dollars, or 4%, to 3.1 million dollars.
Speaker 3: This $0.2 million increase was a result of an increase in data acquisition costs.
Speaker 3: Adjusted gross profit increased 20% to $10 million dollars.
Speaker 3: producing an adjusted gross margin of 77%, a 3 percentage point increase over 4th quarter 2021.
Speaker 3: Sales and marketing expenses increased $0.8 million dollars or 36% to $3 million dollars for the quarter.
Speaker 3: The increase was due primarily to an increase in salaries and benefits and sales commissions.
Speaker 3: The $3 million of sales and marketing expense for the quarter consisted primarily of $1.8 million in employee salaries and benefits and $0.7 million in sales commissions. Internal and administrative expenses increased $0.9 million or 14%.
Speaker 3: to $7.1 million for the quarter. This increase was primarily the result of a $0.6 million increase in employee salaries and benefits and a $0.2 million write-off of long-lived assets.
Speaker 3: The $7.1 million in general and administrative expenses for the quarter consisted primarily of $4.1 million of employee salaries and benefits, which included year-end bonuses as part of our company's discretionary bonus plan.
Speaker 3: professional thieves.
Speaker 3: Depreciation and amortization increased $0.3 million, or 24%, to $1.8 million for the quarter.
Speaker 3: This increase was primarily the result of the amortization of internally developed software. Our net loss for the quarter narrowed $0.3 million, or 13%, to $1.5 million.
Speaker 3: We reported a loss of 11 cents per basic and diluted share for the quarter based on a weighted average share count of 14 million shares.
Speaker 3: Moving on to the balance sheet, cash and cash equivalents were 31.8 million dollars at December 31, 2022 compared to 34.3 million dollars at December 31, 2021.
Speaker 3: Current assets were $38.1 million compared to $38.6 million. And current liabilities were $5.4 million compared to $3.5 million.
Speaker 3: We generated $12.5 million in cash from operating activities for the year ended December 31, 2022 compared to generating $8.9 million in cash from operating activities for the same period in 2021.
Speaker 3: We generated $3.6 million in free cash flow in 2022 compared to generating $3.7 million in 2021.
Speaker 3: Cash used in investing activities was $8.8 million for the year ended December 31, 2022, mainly the result of $8.5 million used for software developed for internal use.
Speaker 3: Cash used in investing activities in prior year was $5.2 million. Cash used in financing activities was $6.1 million for the year ended December 31, 2022, mainly the result of two items.
Speaker 3: One, acquiring approximately 252,000 shares of company stock for $5.2 million from the net share tax settlement of employee restricted stock units. And two, purchasing 50,000 shares of company stock for $0.9 million under our stock repurchase program at an average price.
Speaker 3: This was the result from the net proceeds of $20.9 million in growth financing raised through the sale of 552,915 shares of common stock at a price of $38 per share.
Speaker 3: This was offset by $3.3 million of cash used to acquire approximately 143,000 shares of company stock from the net share tax settlement of employee restricted stock units. As it relates to our stock repurchase program.
Speaker 3: we will continue to monitor prevailing market conditions and other opportunities that we have for the use or investment of our cash balances and, as applicable, strategically acquire additional shares in accordance with our repurchase program.
Speaker 3: In closing, we are pleased with our fourth quarter and full year results.
Speaker 3: Despite the uncertain economic environment, we are excited about what we are seeing in the first 2 months of this year and expect 2023 to be another great year for red violet.
Speaker 3: With that, our operator will now open the line for Q&A.
Speaker 4: To ask a question, please press star 1 1 on your telephone and wait for your name to be announced. If you withdraw your question, please press star 1 1 again.
Speaker 4: Once again, that's Star 1-1 for questions. Please stand by. We'll compile the Q&A roster.
Speaker 4: One moment for our first question.
Speaker 4: Our first question will come from the line of Brandon Austin from Venator. Your line is open. Please see review squad pitch.
Speaker 3: Hey guys, happy New Year. Hey Brandon, how are you? I'm good, I'm good. Obviously a really good quarter. I mean it only compares somewhat poorly to the ridiculous quarter you guys put up in Q3. So, second best quarter ever.
Speaker 3: All right, a couple questions here.
Speaker 3: Can you remind me what the dollar value of the headwind you guys faced this year because of that customer that got acquired? The growth rate is probably better than maybe $2.
Speaker 3: what the stated growth rate is. I just can't remember how much loss. Was it like a half million or something? I can't remember.
Speaker 3: Yeah, it was it was roughly a half a million a quarter, right? So annualized about $200,000. Yeah, okay. So I mean we're really looking at...
Speaker 3: Like, does this 12-8 basically, should I be comparing that 12-8 to like...
Speaker 4: 10-2 or something? Does that make, or I guess 13 with 10-7, does that make more sense then? Apples to apples?
Speaker 3: Yeah, look, I think that's a good way to look at it. Right? It was a larger customer that we discussed. Right? And so that was 500,000 a quarter that we needed to go get. So that's that's a good way to look at it for sure. Okay, okay.
Speaker 5: And just a few short ones here, because he has put out a lot of detail anyways. Can you remind me, so just the seasonal impact of the EBITDA in Q4, is that just your end bonuses for management and employees?
Speaker 3: So, yeah, we have a company discretionary bonus plan and because of the discretionary nature, a lot of that falls into the fourth quarter, you know, based on performance and such. And then from a top line perspective, and we've said this before, you know, we always see a little bit of seasonality in the fourth quarter just based on less business days, right? When we're dealing with businesses.
Speaker 3: as a portion of our revenue still is transactional, right, with less business days and less business happening towards the end of the year, we do see some seasonality at the top line as well.
Speaker 5: Okay. And I guess, I mean, you guys alluded to.
Speaker 5: Strong start to the year. I mean, we've only got a couple of weeks left and I know you guys don't like to guide. But is it fair to expect that Q1 revenues will be above Q4 revenues? Is that a fair expectation without letting too much out of the bag? Yes, Brandon, I think that's a fair statement.
Speaker 5: Yes. Okay. Okay. And two other questions here. Can you can you give me a feel for I mean, you really have two markets that I would consider somewhat cyclical. I mean, law enforcement is particularly cyclical, but like cyclical material.
Speaker 5: and somewhat impacted by, you know, by rules and regulations. Can you give me a sense about how you're feeling on the repo market, which should be starting to come up? And on the other hand, the real estate market, which you are adding, you do seem to be adding customers there.
Speaker 5: But can you can you give me a sense of what you're seeing on that side as well? Sure, absolutely. Thanks, Brandon. Yes, we have seen an uptick in the repo market. Of course, what you're seeing is when and rather not surprising. Is that a lot of the government support from?
Speaker 5: in the way of subsidies and moratoria on collections and standoff on mortgage payments and evictions. You're seeing those wear off and you're seeing the consumer on the low end, if you will, sort of subprime as they call them, having difficulty. Inflation has impacted them.
Speaker 5: Significantly as it does everybody, but more significantly to that type of base and savings are depleted and they're turning to credit cards. You're seeing credit card delinquencies moving up. And you're also seeing reported repossessions of autos. That were bought many times during the coven period. credit card steadfast ph wi
Speaker 3: And so, and with shortage of supply, probably paying too much for those autos. So finding themselves in difficult positions. So the repossession market is relatively strong. And so we're seeing volumes move up there. As far as real estate, we did talk about it last year. That very
Speaker 3: Swift move in mortgage rates from in March of last year, I believe from about mid 3% to 6% did slow down the real estate I'll call it marketing or identity side of the business. That's where we power some of the real estate software solutions to identify
Speaker 5: certain demographics of propensity to sell or indoor purchase. So think of identifying a deceased in a home, multi-home owner, age, et cetera. So we had some real estate customers in that segment that when mortgage rates spiked.
Speaker 5: when they spend with us, it's all a matter of ROI. What are they getting? What can they do with the information? How can they translate that into ROI? And so there was a pause. It did pick back up throughout the year a bit and stabilize. That is different, I want to be very clear, that's different than Forewarn. Forewarn is a risk and identity product. It's a safety tool.
Speaker 3: used by realtors. Forewarn is very highly exact. It's entirely contractual and so different from our forewarn product. But we've seen relative stability in the real estate market since that impact in Q2 last year.
Speaker 5: Yeah, I saw an Apple news article out of London Times or one of the European ones about real estate agents and the dangers that they face for showings when they don't know the counterparty like physical dangers. Maybe worth looking up.
Speaker 5: And then my last question, and I'm going to ask the stupid question. I know it's a stupid question before I ask it, but I can ask it anyway. Just because everyone wants to hear something. So just with regards, I mean, you know, in terms of all the hype recently around, you know, call it artificial intelligence, machine learning, whatever you want to call it, you have a platform that has a major, has a significant...
Speaker 5: on behalf of your customer, or on behalf of your customer base. I mean, even forewarned is somewhat of a predictive system in terms of what might be lurking on the other side of a transaction. So just any, I don't need details, just any thoughts there, what you're telling people when asked.
Speaker 6: Sure, I appreciate the question. It's Derek. Setting aside all of the AI talk, that's really the hot buzzword right now. As we've told the street many times, this is the third platform we have built in this space. This platform, it was built in the cloud from the ground up, and it is really the only platform that was built that way.
Speaker 6: The data trail, the data we leave behind grows with our multi-year address history, with events in our lives, with bankruptcies, liens, judgments, criminal histories, you name it, with asset transfers, with businesses formed and affiliations within those businesses.
Speaker 6: believed to be a far more intelligent interface than what's out there as well with the platform underlying and generating a lot of that knowledge creating you know taking data and making it actually actionable. So that's how we view our platform that's how we've been telling our story for quite a while. We are still small we only have 7,000 customers and those customers are real life.
Speaker 4: Thank you. One moment for our next question.
Speaker 4: investments. Your line is open.
Speaker 5: Hey guys, thanks for taking my questions. I want to talk about headcount a little bit. I think you're capping off your biggest year ever for hiring. You hired about 46 net new people. Are you?
Speaker 7: ready for this year with the current
Speaker 7: headcount or should we expect similar firing patterns in 23 and then going off of that, can you discuss how that may or may not impact your margin profile on gross margin and adjusted EBITDA? Sure, thanks David. You're right, we made significant higher...
Speaker 6: hires in various parts of the organization to, for example, bolster our infrastructure while we add to our data science team, our product development team, and build those products to add to sales and marketing to get out there and to tell our story and to bring these fantastic solutions to market.
Speaker 6: So, I would say there is going to be no repeat to the number of additions that we did. I think we're pretty well positioned as far as who we've already added. So, there's no intention of significantly or even to-in significantly adding to that position other than
Speaker 6: where we see we have nice traction. We've always said we will spend into that traction a bit to really get going. Dan, why don't you talk a little bit about margins and what you can expect. Yeah, sure. Thanks, David. Great to hear from you. Look, I think this kind of sets for us kind of that new level, if you will, that gives us a lot of leverage over the next several years.
Speaker 3: You know, strategically, as Derek said, we'll look at areas where we start to gain traction, potentially lean in, but the expectation is, you know, we would kind of maintain around this level for most of the year. What that means for margin, the expectation is for this year, you know, margin would be relatively consistent with what you saw in 2022 and then ultimately,
Speaker 3: starting to hit towards those targets that we've talked about in the past, you know, closer to the 35%. So that's kind of what the expectation is for 23 and then leaving 23 going into 24.
Speaker 7: So when you say consistent, do you mean sort of maybe in the mid 20s range? Is that right? So if you're, I just want to make sure I understand this, but if you're not making significant hires and you're largely a fixed cost business and presumably
Speaker 7: you'd be growing revenue that should flow through at a pretty high incremental margin. Where are you spending if not in headcount? Because my thought is that if you're not spending, we should see some pretty good operating leverage. But it sounds like we'll still be sort of in the mid-20s range. So then can you talk about that a little bit?
Speaker 3: Yeah, so look, when we look at it, we look at it from a conservative standpoint. And as I said, as we're kind of leaving out of 23, the expectation is you'll start to see that nice leverage, right? So when you look at last year, 22 versus this year, obviously we added a good portion of the 46 kind of in, you know, moving out of second quarter into third and fourth quarter, and that's probably added half in the beginning of the year, half in the second half.
Speaker 3: Obviously, we came on the high side of that closer to 25%. I would have the expectation that we have more upside in that margin than downside based on our revenue growth.
Speaker 7: Okay, and then on top line, I know we've talked about this a bunch of times, but is your intent to still grow this business organically? And are you seeing anything on the M&A front that?
Speaker 7: gets you a little bit excited because I'm just trying to think of your bridge of some of these long-term targets that you laid out and I I I just like to get some commentary around that that'd be great
Speaker 6: Thanks David. Yeah, this is good. You know, we always come into the office every day with the goal of building this business organically. That said, we do have nice relationships, banking relationships that provide us with opportunities to look at. We have.
Speaker 6: said before that we have interest in a couple of areas that might be where we can acquire some unique data assets, perhaps some unique technology in a buyer-built scenario thought process if you will, and or some front-facing or end-user facing solution that may be already well branded in market and would be...
Speaker 6: and the expectations from sellers of some of the assets we've seen. As you know throughout 22 and here in 23, those those valuations have come down. Public market probably faster than private market, but private market is certainly getting there where they need to access capital. So we keep our eyes open. We do review opportunities from time to time.
Speaker 6: But again, we will look at it. It's got to be some very key assets and it needs to be at the right price, at the right valuation.
Speaker 6: And absent that, we will continue to build this organically. We feel like we have, as we move from smaller and medium sized customers and continue this multi-year move into larger customers, enterprise customers if you will, in both the private and public sector, we believe we've got a real strong runway where...
Speaker 6: The latter half of the short, medium and long term present opportunities to expand revenue at an even faster clip. Now, obviously market and economy cooperating, but we're very excited about the opportunities in front of it and meeting the targets that we've talked about.
Speaker 7: That's great. And not to be too cute about it, but maybe you can use some of those good banking relationships to get some analysts on the call and some estimates out there and maybe get the liquidity on the stock up a little bit.
Speaker 4: We hear your comment. All right. Thanks, guys. Thank you very much. Thank you. And I'm not showing any further questions in the queue. I will now return the conference back to Derek for closer remarks.
Speaker 4: We hear your comment. All right. Thanks, guys. Thank you very much. Thank you. And I'm not showing any further questions in the queue. I will now turn the conference back to Derek for closing remarks. Thank you..
Speaker 6: We are pleased to have reported another strong quarter and a record year for red violet. Notwithstanding the climate, we remain steadfast in operating our business with a long term view.
Speaker 6: We continue to execute against this multi-year strategic plan that we've been discussing, and our business is financially strong. We are very excited about the prospects for 2023 and beyond. Good afternoon.
Speaker 6: against this multi-year strategic plan that we've been discussing and our business is financially strong. We are very excited about the prospects for 2023 and beyond. Good afternoon. This conference...
Speaker 1: To raise and lower your hand during Q&A, you can dial star 1-1.
Speaker 2: Public.
Speaker 2: I have you.
Speaker 2: The.
Speaker 4: Good day ladies and gentlemen and welcome to red violets fourth quarter and full year 2022 earnings conference call
Speaker 4: 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. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Camila Ramirez, Vice President Finance and Inrested Relations. Please go ahead. Camila Ramirez, Vice President Finance and Inrested Relations,
Good afternoon and welcome. Thank you for joining us today to discuss our fourth quarter and full year 2022 financial results. With me today is Derek Dubner, our Chairman and Chief Executive Officer, and Dan McLaughlin, 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 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.redviolet.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 under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. But actual results could differ materially from those stated or implied by our forward-looking statements due to risk 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 risk and uncertainties associated with red violets business. I encourage you to review the company's filings with the Securities and Exchange Commission, including the most recent annual report on Form 10-K .
and the subsequent 10 cues.
During the call we may present certain non-GAAP financial information relating to our adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin, and free cash flow. Reconciliations of these non-GAAP financial measures to their most directly comparable US GAAP financial measure are provided in the earnings press release issued earlier today.
With that, I am pleased to introduce Red Violet's Chairman and Chief Executive Officer, Derek Duebner.
Thanks Camilo and good afternoon to those joining us today to discuss our fourth quarter and full year 2022 results.
healthy double-digit percentage revenue growth while experiencing excuse me while expanding gross margin and generating solid cash flow.
We continue to strategically invest in our robust product roadmap and execution against our growing sales pipeline.
Further, even with the investments made in 2022, we generated our first full year of gap profitability without a one-time gain. We remain intently focused on the execution of our long-term strategic plan and our industry-leading teams continue to outperform.
Further, even with the investments made in 2022, we generated our first full year of GAAP profitability without a one-time gain. We remain intently focused on the execution of our long-term strategic plan and our industry-leading teams continue to outperform. Now turning to the numbers.
For the quarter, total revenue was $13.1 million, a 16% increase over prior year, and a record fourth quarter for red-violet. Platform revenue increased 19% to $12.9 million. Services revenue decreased 54%.
total revenue was $13.1 million dollars, a 16% increase over prior year, and a record fourth quarter for red-violet. Platform revenue increased 19% to $12.9 million dollars. Services revenue decreased 54% to $0.2 million dollars.
We produced $10 million in adjusted gross profit, resulting in adjusted gross margin of 77% in the fourth quarter, up 3 percentage points.
Adjusted EBITDA for the quarter was $1.5 million, up 16% over prior year. Our IDI billable customer base grew by 148 customers sequentially from the third quarter, ending the fourth quarter at 7,021 customers. For WARN, added over 6,900 users.
during the fourth quarter, ending the quarter at 116,960 users.
Over 235 Realtor Associations are now contracted to use for war.
For the year, revenue increased 21% to $53.3 million.
generating adjusted EBITDA of $12.9 million. We generated $0.6 million in net income in 2022, our first full year of GAAP profitability without a one-time gain.
Recall, our 2021 net income of $0.7 million included a one-time gain of $2.2 million from the forgiveness of our CARES Act loan.
We continue to convert our larger Enterprise Prospect Pipeline into WINS.
We had 67 customers contribute over $100,000 in revenue in 2022.
a 43% increase compared to 47 customers in 2021. As well, our existing customers continue to spend more with us year over year. With 2022 behind us, we are excited about 2023 and beyond.
While many companies are retrenching and rightsizing their organizations given the current climate, we are in the enviable position of being able to advance our long-term strategic plan.
This consists of converting our healthy cash flow and solid balance sheet into innovative solutions.
enhanced capabilities, entry into new markets, and increasing market penetration. This is a delicate balance of pressing investments for future growth while exercising financial prudence to maintain the strong financial profile of our business. We have a robust product roadmap.......
of planned releases throughout 2023 and the next several years. These releases include enhancements to existing solutions and new solutions in identity, fraud prevention and detection, protection that Run Goes the Kh According
background screening support, commercial real estate analytics, marketing services.
background screening support, commercial real estate analytics, marketing services, and public sector.
These innovations are designed to improve customer outcomes for current use cases and to address customer need where there are presently no solutions.
current market solutions are inadequate.
As you can imagine, developing solutions to address complex problems often takes time and multiple iterations between us and pilot project participants. Importantly, our target markets remain resilient and we expect strong demand for existing and new solutions for the foreseeable future.
The secular tailwinds that our business has are firmly in place. A digital transformation in its infancy.
cyber crimes and fraud that are omnipresent, demand for integrated solutions that drive efficiency,
more. Our solutions are mission critical. They are used to manage risk, gain efficiency, and acquire customers.
All essential, especially in a challenging economic environment. On the whole, we are pleased with our performance in 2022. Notwithstanding the economy, we are making solid progress against our strategic plan, and nothing has altered our view regarding our product roadmap.
our expectations around adoption by our target markets.
Given this and the strong start to the year we are experiencing here in the first two months, we remain very optimistic about our prospects for 2023 and beyond. With that, I turn it over to Dan to discuss the financials.
Thank you, Derek, and good afternoon. 2022 was a great year for Red Violet. We executed well against our planned initiatives laid out at the beginning of the year. While continuing to strategically invest in the business, we solidly grew revenue while maintaining healthy margins and cash flow.
We added key strategic hires in several verticals and tactically built out our product development and go-to-market resources. As an organization, we added 46 team members in 2022, including 14 in sales and marketing and 27 in technology and product development.
These significant additions will enable scalability across the organization. This time last year, we explained that we would leverage our strong balance sheet and healthy cash flow to reinvest in the business in the form of human capital, expanding the capabilities, depth, and efficiency of our team.
We explained we could make these investments while maintaining adjusted EBITDA margin in the range of 20 to 25 percent.
We executed well against that expectation. We grew revenue by over 20% to $53.3 million in 2022, maintaining a 24% adjusted EBITDA margin, which produced $12.9 million in adjusted EBITDA.
Importantly, 2022 was our first full year of GAAP profitability without a one-time gain, generating $0.6 million in net income, which resulted in earnings of 4 cents per basic and diluted share.
The markets for our solutions continue to show strong fundamentals and increasing opportunity. We are releasing new features and enhancements on current solutions and developing new solutions to address additional use cases in identity, commercial property solutions, and other
background screening support, and marketing services. With our higher tier opportunity pipeline strong and growing, we continue to make significant progress in moving upmarket in both size and volume potential. We are competing successfully.
converting those higher tier private and public sector opportunities to wins. We had 67 customers contribute over $100,000 in revenue in 2022, a 43% increase over prior year. We remain confident in our ability to drive strong growth in 2023 and beyond.
Turning now to our fourth quarter results.
For clarity, all the comparisons I will discuss today will be against the fourth quarter of 2021 unless noted otherwise.
Total revenue was $13.1 million, a 16% increase over prior year.
Platform revenue increased 19% to $12.9 million.
Services revenue decreased 54% to $0.2 million. We produced $10 million in adjusted gross profit, resulting in a margin of 77% in the fourth quarter, up 3 percentage points. Adjusted EBITDA for the quarter was $1.5 million, up 16% over prior year.
Adjusted EBITDA margin remained consistent at 12% for the quarter. Continuing through the details of our P&L, as mentioned, revenue was $13.1 million for the fourth quarter, consisting of revenue from new customers of $1.2 million.
base revenue from existing customers of $10.6 million, and growth revenue from existing customers of $1.3 million.
Our IDI billable customer base grew by 148 customers sequentially from the third quarter, ending the fourth quarter at 7,021 customers. Our warrant added over 6,900 users during the fourth quarter.
ending the quarter at 116,960 users. Over 235 Realtor Associations are now contracted to use for WARM. Our contractual revenue was 77% for the quarter, down 2 percentage points from prior year.
Our revenue attrition percentage was 5% compared to 4% in prior year. We expect our revenue attrition percentage to trend between 5 and 10% for the foreseeable future.
Moving on from our revenue metrics and down the P&L, our cost of revenue exclusive of depreciation and amortization increased.2 million dollars, or 4%, to 3.1 million dollars. This.2 million dollar increase was a result of an increase in data acquisition costs. Adjusted gross profit increased 20%.
This increase was due primarily to an increase in salaries and benefits and sales commissions.
The $3 million of sales and marketing expense for the quarter consisted primarily of $1.8 million in employee salaries and benefits and $0.7 million in sales commissions.
General and administrative expenses increased 0.9 million dollars or 14%. To 7.1M dollars for the quarter.
This increase was primarily the result of a $0.6 million increase in employee salaries and benefits, and a $0.2 million write-off of long-lived assets. The $7.1 million in general and administrative expenses for the quarter consisted primarily of $4.1 million of employee salaries and benefits.
professional fees.
Depreciation and amortization increased $0.3 million, or 24%, to $1.8 million for the quarter. This increase was primarily the result of the amortization of internally developed software.
Our net loss for the quarter narrowed 0.3 million dollars or 13% to 1.5 million dollars. We reported a loss of 11 cents per basic and diluted share for the quarter based on a weighted average share count of 14 million shares. Moving on to the balance sheet.
cash and cash equivalents were $31.8 million at December 31, 2022 compared to $34.3 million at December 31, 2021.
Current assets were $38.1 million compared to $38.6 million. And current liabilities were $5.4 million compared to $3.5 million.
We generated $12.5 million in cash from operating activities for the year ended December 31, 2022 compared to generating $8.9 million in cash from operating activities for the same period in 2021. We generated $3.6 million in free cash flow in 2022.
compared to generating $3.7 million in 2021. Cash used in investing activities was $8.8 million for the year ended December 31, 2022, mainly the result of $8.5 million used for software developed for internal use.
Cash used in investing activities in prior year was $5.2 million. Cash used in financing activities was $6.1 million for the year ended December 31, 2022, mainly the result of two items.
One, acquiring approximately 252,000 shares of company stock for $5.2 million from the net share tax settlement of employee restricted stock units. And two, purchasing 50,000 shares of company stock for $0.9 million under our stock repurchase program at an average price of $17.52 per share.
These shares were withheld in treasury and retired prior to the end of the year. During the same period 2021, cash provided by financing activities was $17.6 million. This was the result from the net proceeds of $20.9 million in gross financing.
raised through the sale of 552,915 shares of common stock at a price of $38 per share. This was offset by $3.3 million of cash used to acquire approximately 143,000 shares of company stock.
from the net share tax settlement of employee restricted stock units. As it relates to our stock repurchase program, we will continue to monitor prevailing market conditions and other opportunities that we have for the use or investment of our cash balances and as applicable,
strategically acquire additional shares in accordance with our repurchase program. In closing, we are pleased with our fourth quarter and full year results. Despite the uncertain economic environment, we are excited about what we are seeing in the first two months of this year and expect 2023 to be another great year for red violet.
With that, our operator will now open the line for Q&A. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
Once again, that's star 101 for questions. Please stand by. We'll compile the Q&A roster. One moment for our first question.
I mean it only compares somewhat poorly to the ridiculous quarter you guys put up in Q3. So I guess that's second best quarter ever.
All right, a couple questions here. Just can you guys remind, I'm gonna agree by a good amount this year. Can you remind me what the dollar value of the headwind you guys faced this year to that customer that got acquired?
because the growth rate's probably better than maybe what the stated growth rate is. I just can't remember how much loss. Was it like a half million or something? I can't remember.
Yeah, it was it was roughly a half a million a quarter right so annualized about $2 million. Okay, so I mean, we're really looking at. Like, is this 12, 8 basically should I be comparing that 12, 8 to like 10, 2 or something that makes or I guess 13 with
With 10 7, does that make more sense? Apples to apples. Yeah, look, I think that's a good way to look at it. Right? It was it was a larger customer that we discussed. Right? And so that was 500,000 a quarter that we needed to go get. So that's that's a good way to look at it for sure. Okay, okay. And just a few short ones here because he has put out a lot of detail.
And then from a top line perspective, and we've said this before, we always see a little bit of seasonality in the fourth quarter. Just based on less business days, right, when we're dealing with businesses. As a portion of our revenue still is transactional, right, with less business days and less business happening towards the end of the year. We do see some seasonality at the top line as well. Okay, and I guess, I mean, you guys alluded to
Strong start to the year. I mean, we've only got a couple of weeks left and I know you guys don't like to guide. But is it fair to expect that Q1 revenues will be above Q4 revenues? Is that a fair expectation without letting too much out of the bag? Yes, Brandon, I think that's a fair statement. Yes. Okay.
Two other questions here. Can you give me a feel for, I mean, you really have two markets that I would consider somewhat cyclical. I mean, law enforcement is particularly cyclical, like cyclical material and somewhat impacted by, you know, by rules and regulations.
Can you give me a sense about how you're feeling on the repo market, which should be starting to come up, and on the other hand, the real estate market, which you are adding, you do seem to be adding customers there, but can you give me a sense of what you're seeing on that side as well?
Sure, absolutely. Thanks, Brandon. Yes, we have seen an uptick in the repo market. Of course, what you're seeing is rather not surprising is that a lot of the government support from COVID in the way of subsidies and moratorium on collections and
standoff on mortgage payments and evictions. You're seeing those wear off and you're seeing the consumer on the low end, if you will, sort of subprime as they call them, having difficulty. Inflation has impacted them significantly, as it does everybody, but more significantly to that type of base. And savings are depleted and they're turning to credit cards you're seeing credit card delinquencies moving up and you're also seeing reported repossessions of autos.
that were bought many times during the COVID period. And so, and with shortage of supply, probably paying too much for those autos. So finding themselves in difficult positions. So the repossession market is relatively strong. And so we're seeing volumes move up there. As far as real estate, we did talk about it last year, that very.
Swift move in mortgage rates from in March of last year, I believe for about mid 3% to 6% did slow down the real estate Out-of-flight marketing or identity side of the business. That's where we power some of the real estate software solutions to identify certain demographics of propensity to sell or indoor purchase. So think of identifying a deceased in a home.
multi-home owner, age, etc. So we had some real estate customers in that segment that when mortgage rates spiked, when they spend with us, it's all a matter of ROI. What are they getting? What can they do with the information? How can they translate that into ROI? And so there was a pause.
and so different from our forewarned product. So but we've seen relative stability in the real estate market since that impact in Q2 last year. Yeah I saw an Apple news article out of London Times or one of the European ones that real estate agents and the dangers that they face.
I'm going to ask you something. So just with regards, I mean, you know, in terms of all the hype recently around, you know, call it artificial intelligence, machine learning, whatever you want to call it, you have a platform that has a major, has a significant database. So for you guys.
you know, maybe there's an output component, but there's also the fact that you have the database. So there's sort of an input component, right? It's all about who's got the data on one side, how they process the data in the middle and who spits out the data. Have you guys given any thoughts strategically to how you'd use your database on behalf of your customer or on behalf of your customer base? I mean, even for Warren is somewhat of a.
now. As we've told the street many times, you know, this is the third platform we have built in this space. This platform, it was built from the cloud, in the cloud from the ground up and it is really the only platform that was built that way as far as the competitors we have.
And we built this platform with machine learning built into it, always with the goal of analyzing data, looking for commonalities, looking for anomalies. As you know, as consumers, we leave our footprint in society every day. The data trail, the data we leave behind grows with our multi-year address history, with events in our lives, with bankruptcies leaned.
to use what we believe to be a far more intelligent interface than what's out there, as well with the platform underlying and generating a lot of that knowledge, creating, you know, taking data and making it actually actionable.
That's how we view our platform. That's how we've been telling our story for quite a while. We are still small. We only have 7,000 customers and those customers are realizing the advantages of getting our platform and our solutions into their workflow. So we feel we're very competitively differentiated from what's out there and feel great about our future. It's great. Thanks guys. Keep moving forward.
platform. That's how we've been telling our story for quite a while. We are still small. We only have 7,000 customers and those customers are realizing the advantages of getting our platform and our solutions into their workflow. So we feel we're very competitively differentiated from what's out there and feel great about our future. It's great. Thanks guys. Keep moving forward. Thanks Brandon.
Thank you. One moment for our next question. Our next question will come from David Polanski from Immersion Investments. Your line is open.
Hey guys, thanks for taking my questions. I want to talk about headcount a little bit. I think you're capping off your biggest year ever for hiring. You hired about 46 net new people. Are you ready for this year with the current?
headcount or should we expect similar hiring patterns in 23 and then going off of that, can you discuss how that may or may not impact your margin profile on gross margin and adjusted EBITDA? Sure, thanks David. You're right, we made significant hires last year.
And we looked around the organization and said, look, we seek significant opportunity as we roll out the product roadmap, and as we expand in certain verticals and as we enter new markets.
So we made hires in various parts of the organization to, for example, bolster our infrastructure while we add to our data science team, our product development team, and build those products, to add to sales and marketing, to get out there and to tell our story and to bring these fantastic solutions to market.
So, I would say there is going to be no repeat to the number of additions that we did. I think we're pretty well positioned as far as who we've already added. So, there's no intention of significantly or even significantly adding to that position other than.
over the next several years. Strategically, as Derek said, we'll look at areas where we start to gain traction, potentially lean in, but the expectation is we would kind of maintain around this level for most of the year. What that means for margin, the expectation is for this year, margin would be relatively consistent with what you saw in 2022. And then ultimately, as we're leaving 23 and seeing increasing in revenue, we'll start to see that.
I just want to make sure I understand this, but if you're not making significant hires and you're largely a fixed cost business and presumably you'd be growing revenue that should flow through at a pretty high incremental margin, where are you spending if not in headcount where
Because my thought is that if you're not spending, we should see some pretty good operating leverage, but it sounds like we'll still be sort of in the mid 20s range. So then can you talk about that a little bit? Yeah, so look, when we look at it, we look at it from a conservative standpoint, and as I said, as we're kind of leaving out of 23, the expectation is you'll start to see that nice leverage. Right? So when you look at last year, 20.
to be kind of in the mid-20s, but ultimately as we grow revenue I think we have a lot of upside to that. I mean, last year we guided around 20 to 25 percent. Obviously we came on the high side of that. Closer to 25 percent. I would have the expectation that we have more upside in that margin than downside based on our revenue growth.Watch more on the Central L complied
Okay, and then on top line, I know we've talked about this a bunch of times, but is your intent to still grow this business organically? And are you seeing anything on the M&A front that gets you a little bit excited? Because I'm just trying to think of your bridge to some of these long-term targets that you laid out. And I'd just like to get some commentary around that. That'd be great.
Thanks David. Yeah, this is good. You know, we always come into the office every day with the goal of building this business organically. That said, we do have nice relationships, banking relationships that provide us with opportunities to look at. We have Rainin and CLE
said before that we have interest in a couple of areas that might be where we can acquire some unique data assets, perhaps some unique technology in a buyer built scenario thought process, if you will, and or some front facing or end user facing solution that may be already well branded in market and would be an interesting.
from sellers of some of the assets we've seen. As you know throughout 22 and here in 23, those those valuations have come down. Public market probably faster than private market, but private market is certainly getting there where they need to access capital. So we keep our eyes open. We do review opportunities from time to time.
But again, we will look at it, it's got to be some very key assets and it needs to be at the right price, at the right valuation. And absent that, we will continue to build this organically. We feel like we have, as we move from smaller and medium sized customers and continue this multi-year move into larger customers.
enterprise customers, if you will, in both the private and public sector. We believe just we've got a real strong runway where the latter half of the short, medium, and long term present opportunities to expand revenue at an even faster clip.
Now, obviously market and economy cooperating, but we're very excited about the opportunities in front of us and meeting the targets that we've talked about.
That's great. And not to be too cute about it, but maybe you can use some of those good banking relationships to get some analysts on the call and some estimates out there and maybe get the liquidity on the stock up a little bit. We hear your comment. We obviously haven't chills05 on this one, so I'm going to leave you with this.
All right, thank you, Derek. Thank you very much. Thank you. And I'm not showing any further questions in the queue. I will now turn the conference back to Derek for closer remarks.
Thank you very much. Thank you. I'm not showing any further questions in queue. I will now return the conference back to Derek for closer remarks. Thank you.
We are pleased to have reported another strong quarter and a record year for red violet. Notwithstanding the climate, we remain steadfast in operating our business with a long-term view. We continue to execute against this multi-year strategic plan that we've been discussing, and our business is financially strong. We are very excited about the prospects for 2023 and beyond. Good afternoon.
This concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a great day.