Q3 2024 Red Violet Inc Earnings Call

Good day, ladies and gentlemen and welcome to Red Violet's 3rd quarter 2024 earnings conference call. At this time, all participants are in a list and only mode.

After Speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised.

Speaker Change: To withdraw your question, please press star one one again. Please be advised that today's conference call is being recorded. I would not like to introduce your host for today's conference. Camilo Ramirez, Senior Vice President, Finance, and Investor Relations. Please go ahead.

Camilo Ramirez: Good afternoon and welcome. Thank you for joining us today to discuss our third quarter 2024 financial results.

Camilo Ramirez: With me today is Derek Dubner, our Chairman and Chief Executive Officer, and Dan MacLachlan, our Chief Financial Officer. Our call today will begin with comments from Derek and Dan, followed by a question-and-answer session.

Camilo Ramirez: Before we begin, I would like to advise listeners that certain information discussed by management during this conference call are forward-looking statements.

Camilo Ramirez: covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Camilo Ramirez: 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.

Camilo Ramirez: For a discussion of risk and uncertainties associated with Red Violet's 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 subsequent 10-Qs.

Camilo Ramirez: During the call, we may present certain non-GAAP financial information relating to adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share, and free cash flow.

Camilo Ramirez: Reconciliations of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measure are provided in the earnings press release issued earlier today.

Camilo Ramirez: 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 be found in the earnings press release issued earlier today.

Camilo Ramirez: With that, I am pleased to introduce Red Violet's Chairman and Chief Executive Officer, Derek Dubner.

Derek Dubner: Thanks Camilo. Good afternoon and welcome to those joining us today to discuss our third quarter 2024 results.

Camilo Ramirez: Following a very strong first half of the year, we are pleased to deliver another record quarter across various financial metrics.

Camilo Ramirez: We generated record revenue, gross profit, and cash flow in the third quarter.

Camilo Ramirez: Our performance underscores the strength of our business and the commitment of our exceptional team.

Camilo Ramirez: It was yet another quarter of strong new customer onboarding and growth from our existing customer base.

Camilo Ramirez: with balanced transaction volume increases across verticals.

Camilo Ramirez: We remain very well positioned to close out a record 2024 and to drive accelerated growth in 2025.

Camilo Ramirez: Revenue for the quarter was up 20% to a record $19.1 million, producing a record-adjusted gross profit of $15.7 million and record margin of 83%.

Camilo Ramirez: adjusted EBITDA for the quarter was up 25% to 6.7 million dollars.

Camilo Ramirez: producing an adjusted EBITDA margin of 35%.

Camilo Ramirez: Adjusted net income increased 23% to $3.1 million for the quarter.

Camilo Ramirez: We generated a record $4.8 million in free cash flow in the quarter.

Camilo Ramirez: Within IDI, we added 266 customers sequentially from the second quarter, reflecting strong demand across our verticals.

Camilo Ramirez: Revenue growth remains robust led by our investigative vertical on a percentage basis and closely followed by emerging markets and our financial and corporate risk verticals.

Camilo Ramirez: each achieving impressive double-digit growth in the third quarter.

Camilo Ramirez: Our collections vertical continues to demonstrate encouraging signs of a durable recovery.

Camilo Ramirez: Favorable factors such as asset appreciation and low unemployment are supporting consumers and driving transaction volumes across many of our verticals.

Camilo Ramirez: while lower-income consumers face ongoing challenges from inflation, high interest rates, and the depletion of government subsidies.

Camilo Ramirez: which, in turn, lends support to our collections and other related verticals.

Camilo Ramirez: Given the current economic landscape and anticipated interest rate reductions,

Camilo Ramirez: Barring unforeseen circumstances, we expect this favorable environment to continue benefiting our business.

Camilo Ramirez: through the remainder of the year and throughout 2025.

Camilo Ramirez: For Warren continues to solidify its position as the leading proactive safety tool for face-to-face engagement.

Camilo Ramirez: For Warren added 21,091 users during the quarter.

Camilo Ramirez: Over 500 realtor associations are now contracted to use ForeWarrant.

Camilo Ramirez: Our achievements year-to-date have enabled us to strategically invest in our business throughout the year.

Camilo Ramirez: continuing to execute upon our product roadmap and enhance our go-to-market strategies.

Camilo Ramirez: After adding 13 team members in the second quarter, we again added another 13 team members in the third quarter with emphasis on various sales and marketing capabilities.

Camilo Ramirez: Notwithstanding the continued investment in the business, due to the operational leverage of our business model, we still produced record-free cash flow.

Camilo Ramirez: adding approximately five million dollars of cash to the balance sheet sequentially from the second quarter.

Camilo Ramirez: Given the continued momentum we are seeing in the business, we are optimistic that we will close out a record 2024 and drive continued momentum throughout 2025.

Speaker Change: Now, I will turn it over to Dan to discuss the financials.

Dan MacLachlan: Thank you, Derek, and good afternoon. We had another great quarter, hitting new records for revenue, gross profit, and free cash flow.

Camilo Ramirez: We continue to see strong growth from new customer onboarding and increased volume within the existing customer base.

Camilo Ramirez: Revenue increased 20% to a record $19.1 million, producing $6.7 million in adjusted EBITDA with a margin of 35% in the third quarter.

Speaker Change: To date, 2024 has been a great year across the board.

Camilo Ramirez: hitting record revenue milestones in each quarter and driving strong profitability and cash flow. All while continuing to invest in the business, including our go-to-market strategy.

Camilo Ramirez: Turning now to our third quarter results. For clarity, all the comparisons I will discuss today will be against the third quarter of 2023, unless noted otherwise.

Camilo Ramirez: Total revenue was a record $19.1 million, a 20% increase over prior year.

Camilo Ramirez: We produced a record $15.7 million in adjusted gross profit, resulting in a record adjusted gross margin of 83% in the third quarter, up 4 percentage points.

Camilo Ramirez: Adjusted EBITDA for the quarter was $6.7 million, up 25% over prior year.

Camilo Ramirez: Adjusted EBITDA margin was 35% up one percentage point.

Camilo Ramirez: Adjusted net income increased 23% to 3.1 million dollars for the quarter resulting in adjusted earnings of 22 cents per diluted share.

Camilo Ramirez: Moving through the details of our P&L, as mentioned, revenue was $19.1 million for the third quarter. I would note that this is an increase of $1 million sequentially from the second quarter when you exclude the one-time transactional revenue customer win that we discussed last quarter.

Camilo Ramirez: There was no material one-time transactional revenue in the third quarter.

Camilo Ramirez: Within IDI, we continue to see strong growth across verticals.

Camilo Ramirez: Our investigative vertical continues to outperform, led by law enforcement, which had its 11th consecutive quarter of sequential revenue growth.

Camilo Ramirez: Within our emerging markets vertical, we continue to see strong double-digit revenue growth across industries, including retail, repossession, legal, health care, and government.

Camilo Ramirez: We also experience strong double-digit revenue growth within our financial and corporate risk vertical, with both the insurance and financial industries being key contributors to the growth.

Camilo Ramirez: Our collections vertical had its third consecutive quarter of double-digit revenue growth as we continue to see signs of recovery in the collections industry.

Camilo Ramirez: IDI's real estate vertical, which does not include forewarned, was down approximately 10% in the third quarter.

Camilo Ramirez: As it relates to For Warren, we experience another quarter of strong revenue growth. This is For Warren's 18th consecutive quarter of sequential revenue growth.

Camilo Ramirez: Our contractual revenue was 77% for the quarter, down two percentage points from prior year.

Camilo Ramirez: Our gross revenue retention percentage remained unchanged at 94%.

Camilo Ramirez: Moving back to the P&L, our cost of revenue exclusive of depreciation and amortization remained flat at 3.3 million dollars.

Camilo Ramirez: Adjusted gross profit increased 26% to $15.7 million, producing an adjusted gross margin of 83%, a 4 percentage point increase from prior year.

Camilo Ramirez: This increase was due primarily to an increase in salaries and benefits from the additional employees added to our sales and marketing team and the increase in sales commissions.

Camilo Ramirez: General and administrative expenses increased 0.8 million dollars or 15% to 6 million dollars for the quarter.

Camilo Ramirez: Appreciation and amortization increased 0.2 million dollars or 12% to 2.4 million dollars for the quarter.

Camilo Ramirez: Our income before taxes increased 0.8 million dollars or 35% to 2.9 million dollars.

Camilo Ramirez: Our net income for the quarter decreased $10.8 million, or 86%, to $1.7 million, which produced earnings of $0.12 per diluted share. Note, prior year's third quarter included a one-time deferred income tax benefit of $10.3 million.

Camilo Ramirez: Adjusted net income for the quarter increased $0.6 million, or 23%, to $3.2 million, which produced adjusted earnings of $0.22 per diluted share.

Camilo Ramirez: Moving on to the balance sheet, cash and cash equivalents were $35.7 million at September 30, 2024, compared to $32 million at December 31, 2023.

Camilo Ramirez: Current assets were $45.9 million compared to $40.3 million and current liabilities were $4.6 million compared to $4.9 million.

Camilo Ramirez: We generated a record $7.2 million in cash from operating activities in the third quarter compared to generating $5.8 million for the same period in 2023.

Camilo Ramirez: We generated a record $4.8 million in free cash flow in the third quarter, compared to generating $3.3 million in the same period, 2023.

Camilo Ramirez: We did not purchase any shares of company stock in the third quarter under our stock repurchase program. Year-to-date, we have purchased a total of 292,744 shares at an average price of $19.81 per share.

Camilo Ramirez: We have 4.6 million dollars remaining under our stock repurchase program.

Camilo Ramirez: In closing, we've had three consecutive quarters this year of record revenue, each with approximately 20-30% revenue growth.

Camilo Ramirez: Strong profitability and strong cash flow.

Camilo Ramirez: We expect this momentum to continue in the fourth quarter and throughout 2025.

Camilo Ramirez: We are extremely proud of the way the team is performing and feel Red Violet is well positioned to continue this growth trajectory for years to come.

Camilo Ramirez: With that, our operator will now open the line for Q&A.

Speaker Change: Thank you very much. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Camilo Ramirez: Our first question comes from the line of Josh Nichols of B. Riley. Josh, your line is open.

Josh Nichols: Yeah, thanks for taking my question. Great to see the record three key results. And also I was just digging into the numbers. So a nice increase in IDI.

Josh Nichols: customers where you actually added some more subs than what was added in 2Q. I know you've been investing in some additional sales and marketing. Are you starting to see material results from those newer hires and is that what's given you so much confidence to start talking about?

Josh Nichols: the momentum that you're seeing today continue through 2025.

Speaker Change: The strategic initiatives that we've been investing in over the last 18 months or so, given that we're generating such strong cash flow, enable us to build out the sales and marketing capabilities around certain areas that were very early in penetrating these verticals.

Camilo Ramirez: So as we add these team members, very highly qualified individuals in their respective subject matter areas, we're seeing the fruits of that investment.

Camilo Ramirez: We've been very pleased with the customer onboarding, gosh, I would say for the last 18 months. We've been putting up just about, at least at or about, record highs in customer onboarding on a monthly basis.

Camilo Ramirez: Which is a really strong indicator for us giving us visibility into future sales, of course

Camilo Ramirez: It's been a continuation of the strength we've been seeing all year, paying dividends from the investments we've made.

Camilo Ramirez: So, because of that, we're very excited about 2025.

Speaker Change: That's great. And then I think you touched on this briefly in some of the commentary earlier on the call, but I'm kind of curious, how should we think about

Dan MacLachlan: Yeah Josh, thanks, and this is Dan, thanks for the question.

Dan MacLachlan: So yeah, we've done a good job as an organization, even at what I would consider kind of small and medium enterprise size customers, to not only onboard them with initial volume, but also increase that volume over time. So as we look at

Camilo Ramirez: you know, revenue growth this quarter. It's a good combination of both new customer revenue and existing customer growth.

Camilo Ramirez: but also as we move forward moving up enterprise into larger enterprise we have a even more of an opportunity to grow that existing base and expand so we're really excited as we continue to move forward on this journey.

Speaker Change: I appreciate that the detail there and last question for me that I let someone else take a stab at it.

Speaker Change: Looking at Fort Warren, it's been really impressive growth that's been pretty persistent throughout.

Speaker Change: This year, I'm just curious now where you think you are in terms of penetration and how much is left in terms of other

Speaker Change: MLS, a realty agency that you could continue to penetrate that will drive sustainable growth based on where you are today and the opportunities that remain in the market.

Dan MacLachlan: Sure, thank you. This is Dan again, and I'll take that question.

Speaker Change: But what we're also looking at now is taking that brand, taking that concept of really that protective safety due diligence tool for user-to-user engagement and expanding it out into additional industries.

Speaker Change: for a number of use cases. So, you know, plenty of go-get within the real estate industry. As I said, you know, what, 500 associations today, about 1,100 associations in total, but really now spending time, resources, and investing in looking to take that brand into new industries.

Speaker Change: Yes, this is Derek also Josh

Speaker Change: Obviously, the exciting part about 4Warn is that it's the leading proactive safety tool. We love the fact that many, many realtor professionals, real estate professionals provide their feedback to us and express their gratitude in protecting them prior to facing a difficult situation, a dangerous situation.

Speaker Change: So, we're very excited about introducing it to other small business ventures, and we think it has applicability across many industries.

Speaker Change: Appreciate it. Thanks, guys. I'll hop back in the queue.

Speaker Change: Thank you, Josh. Thank you, Josh. Thank you very much. At this time, I'm showing no further questions. I would now like to turn it back to Derek Dubner for closing remarks.

Derek Dubner: Thank you.

Derek Dubner: We are pleased to deliver another record quarter and a continuation of the strong performance year to date.

Derek Dubner: Given the progress against our strategic initiatives, we are very optimistic about the remainder of the year and 2025.

Speaker Change: Good afternoon.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.