Q3 2024 Intellinetics Inc Earnings Call
Speaker Change: Greetings, and welcome to Intellinetic's third quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce Joe Spain. Thank you, Joe. You may begin.
Thank you, and good afternoon, everyone.
Speaker Change: I am filling in for IR today, so I am pleased to welcome you to the Intellinetics 2024 third quarter conference call. Before we begin, I would like to remind listeners that during this conference call, comments made by management may include forward-looking statements regarding Intellinetics Inc. that are not historical facts.
Speaker Change: These forward-looking statements are based on the current expectations and beliefs of management and they are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results.
until NXInc undertakes no duty to update any forward-looking statements.
Speaker Change: For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release issued today.
Speaker Change: as well as risks and uncertainties included in the section under the caption Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations
Speaker Change: in Intellivex Annual Report on Form 10-K or the Quarterly Report on Form 10-Q filed today.
Speaker Change: Also please note that on the call today management will discuss a non-GAAP financial measure adjusted EBITDA. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and may be different from non-GAAP financial measures presented by other companies.
Speaker Change: The reconciliation between GAAP and non-GAAP measures can be found in the press release issued today.
Speaker Change: With all that said, I would now like to turn the call over to Jim DeSocio, Intellinux President and CEO. Jim, the call is yours.
Jim DeSocio: Thank you, Joe. Good afternoon, everybody. Our payables automation solution, iPaaS, continues to be our main story.
Jim DeSocio: We believe it will be the driver to take our business to the next level.
Jim DeSocio: Before I get more into that, I want to take a moment to share how proud I am of the team that helped build the business as it stands right now.
Jim DeSocio: Over the past few years, we've created a business model that is sustainable and generates cash.
Jim DeSocio: In fact, since 2021, we've paid out all the acquisition earnouts, totaling $2.7 million. And since December of 2022, we've paid $3.6 million in long-term debt.
mostly via prepayments, which has significantly reduced our interest expense.
Jim DeSocio: operational results enabling this aren't easy as everyone who has been through acquisitions knows
Jim DeSocio: So my heartfelt thanks go to every employee and particularly the leadership team in place.
Jim DeSocio: As pleased as I am with the team and what we've accomplished, I am more excited for our future. I've been talking about iPaaS for a couple of quarters now. I've been in software my entire career, and this launch is going as well or better than any launch I've been involved with.
Jim DeSocio: Customer acceptance is very high. Last month we presented at the Build Smarter Home Building Industry Conference where we turned into one of the stars of the show.
Jim DeSocio: In one session, a customer presented their incredibly strong ROI story in Going Live with our solution.
which pay for itself in a matter of months.
Jim DeSocio: This is why I-PASS sells and why we're so excited for our customers and for our ERP partner, in this case, Constellation HomeBuilder Systems.
Jim DeSocio: We're on schedule to release additional functionality around purchase orders at the end of this year. That will not only bring in customers on its own, but will add PO transaction volume to over half of the existing customers.
Jim DeSocio: using only the accounts payable functionality today, adding incremental revenue to us.
Jim DeSocio: At the same time, as we actively pursue the iPaaS opportunities in the Constellation ecosystem, we are fast-tracking discussions with our K12 partner, Software Unlimited, for deployment of iPaaS into their ecosystem.
Jim DeSocio: The beta customer went live last month and we have already secured an order beyond that first one.
Jim DeSocio: The K-12 customers have a smaller volume of transactions, which will translate to a smaller average selling price than homebuilders, but will also generally implement in less than half the time of the larger homebuilding entities.
Jim DeSocio: Our first priority is to make significant inroads into these two populations.
Jim DeSocio: We're not waiting on those alone, though, and we have resources focused on finding the next constellation in Software Unlimited. We have an opportunity with niche ERP providers where we can outperform and out-support competing generic solutions.
Jim DeSocio: Accordingly, as we have been communicating, now is the time for us to invest in scaling our business.
Jim DeSocio: We began in earnest in Q3, hiring two incremental sales reps, as well as a new implementations manager and additional help desk support. We also expanded our outbound sales efforts with internal and contracted resources.
Jim DeSocio: our marketing spend will include more frequency and a larger presence at select trade shows as well as expanded campaigns.
Jim DeSocio: These investments will modestly, and we expect, temporarily reduce our EBITDA, but we also expect that they will bring revenue opportunities that should exceed the spend and the accretive at some point in 2025.
Jim DeSocio: Once the additional revenue from IPAS exceeds these investments, incremental revenue will disproportionately drop to the bottom line. In other words, our incremental gross margins will more than offset our investment spend.
Speaker Change: At this time I'd like to turn the call over to our Chief Financial Officer Joe Spain to talk to you about our financials.
Joe Spain: I will now review our financial results for the third quarter of 2024 for the period ending September 30, 2024 compared to the period ending September 30, 2023.
Joe Spain: Total revenue for the quarter increased 8% to $4.6 million as compared to $4.2 million for the same period last year.
Joe Spain: The following are the material components of our revenue presented on our Statements of Operations.
First subscription software
Joe Spain: which is comprised of SAS including hosting revenue and software maintenance services revenue.
Joe Spain: This increased to $1.76 million for the quarter, from $1.65 million for the same period last year. Stats grew 8.5% and, consistent with history and as expected, our software maintenance services revenue was flat to 2023.
Joe Spain: professional services revenue increased 11.5 percent to 2.6 million from 2.3 million for the same period last year. As a percentage of total revenue professional services revenue was 56.7 percent for the quarter up from 54.9 percent last year.
Joe Spain: Consolidated gross margin decreased 20 basis points to 61.1% for Q3 compared to 61.3% last year. The slight decrease was driven by unfavorable projects in our document conversion professional services business, which offset price increases over last year.
Joe Spain: As we point out in our MD&A, our professional services projects can vary in cost to deliver and will result in inconsistent margins month-to-month and quarter-to-quarter.
Similarly,
are SAS margins decreased.
Joe Spain: vary slightly to 83.7% from 84.5% last year. This is within a normal fluctuation tolerance.
Joe Spain: and these margins remain very strong. The margins for our SAS solutions are consistently in the low to mid-80s and remain ahead of last year for year-to-date.
Joe Spain: Operating expenses increased 37.3% to $3.1 million compared to $2.3 million in Q3'23. As called out in our earnings release,
Joe Spain: The increase in GAAP operating expenses of $844,000 is driven by three things. First, $381,000 in share-based compensation expense.
Second.
Joe Spain: Planned investments in sales and marketing resulting in an additional $206,000 over the same expense in the third quarter of 2023.
Joe Spain: Third, the balance from higher general and administrative expenses to scale the business, including our SOC 2 program and IT infrastructure enhancement.
Joe Spain: So to repeat the first part, nearly half the increase is non-cash, share-based compensation expense for restricted stock and options granted in Q3-24.
Looking at the next most significant increase in more detail.
Joe Spain: Our sales and marketing expense for the quarter increased 41.6% compared to the same period during 2023 or $206,000.
As Jim mentioned,
We are investing more heavily in marketing and sales.
Joe Spain: And these prior period comparatives will continue to be skewed as we increase the sales of market investment compared to historical levels. This includes increasing our trade share activity in 24 and beyond, which is important to both our IPAS and K-12 revenue acceleration.
Joe Spain: Net loss for Q3 was $393,000 compared to net income of $209,000 for the same period last year. Loss per share was $0.09 per share compared to earnings per share of $0.05 last year.
Joe Spain: Our adjusted EBITDA for the quarter was $479,000 compared to an adjusted EBITDA of $709,000 for the same period in 2023.
Thank you. Bye.
Speaker Change: Next, a brief review of our balance sheet. At September 30, 2024, we had cash of $2.5 million and a accounts receivable net of $1.3 million.
Speaker Change: Our total assets were $19 million, including $9.3 million in intangible assets and goodwill as part of acquisitions made since 2020.
Speaker Change: Total liabilities were $8.6 million including $3.5 million in deferred revenues reflecting signed SAS and maintenance contracts.
Speaker Change: As a reminder, many of our government and K-12 contracts run July to June annual subscription periods. So Q3 is always our highest deferred revenue quarter.
Speaker Change: We had 1.3 million in debt principal outstanding as of September 30 after making a further 800,000 in prepayments in the quarter.
Speaker Change: That brings us to a total of $1.65 million in debt principal repayments we have prepaid in the first nine months of 2024.
Speaker Change: I want to wrap up with our financial outlook, which is unchanged from last quarter.
Speaker Change: based on our current plans and assumptions and subject to risk and uncertainties we described in our filings and this call.
Speaker Change: We are reiterating our expectation to grow revenues on a year-over-year basis for the fiscal year 2024 and Due to our increased investments. We expect our adjusted EBITDA to decrease modestly year-over-year We expect our investments to have a positive impact on our financial results going forward
With that...
Speaker Change: We thank you all for listening and at this time would like to open the call up to Q&A.
Speaker Change: Thank you. We will now be conducting a question-and-answer session for those using speaker equipment that may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions.
And our first question comes from Howard Halpern, Taglitz Brothers.
Good afternoon, guys.
Hi, Howard. Hey. Hi.
Speaker Change: In the press release, you mentioned, I guess, three iPaaS customers going live in the fourth quarter. What will the total number of live customers be as we enter 2025?
Speaker Change: As we enter 2025, we hope to have the majority of our customers live. We just signed a very large customer.
that's going to provide $250,000 of annual revenue to us.
Speaker Change: They probably won't go live until the middle of the first quarter. But we should have about 11 or 12 customers live at that point.
Speaker Change: And as I've reiterated in the past, one of the great metrics in software is the majority of those are paid in full for their first year, which is a great metric showing that you're doing a good job with implementing and they are trusting us to get them up and running live.
Speaker Change: Okay and you talked about that the trade show that you showed at the home builders.
Speaker Change: What do you have some feeling, I guess, on what the pipeline could be coming out of that show? You know, how many attendees were there and were they all gravitating to you?
There was about 400
Speaker Change: attendees, the 450 attendees. I'm not sure exactly how many unique companies were there. I do know that we had a session there. Well, actually, Matt Cretion, who's our founder and is running, heading up the I-PASS business unit at Intellimetics.
Speaker Change: The CEO of Constellation Home Builders kicked off the meeting in front of all 450 people and then gave Matt two minutes to introduce himself and then telemedics.
Speaker Change: Constellation has been extremely supportive of Intellimetics and then in our breakout session we had over 50 people attend that session.
Speaker Change: and one of our customers, CW Group, was a testimony for us and actually ran that presentation talking about their ROI and their return on investment and how quick the payback was in getting up and running live.
Speaker Change: So it was a very, very good session, very excited about the momentum we came out of that show.
Speaker Change: Okay, and with the hiring of, you know, some software people and...
Speaker Change: you know, helpdesk, implementation people. As we go into the quarters next year, do you anticipate a faster...
Speaker Change: pace of implementations coming with full functionality that you talk about? Yeah, as in any new release, the first couple releases take longer, you're learning, customers are asking for additional features.
Speaker Change: know the product better and what questions our customers are going to ask. So we do certainly expect a lot quicker implementations going forward. Yes.
Speaker Change: and would you anticipate getting on to at least one or two other ERP systems into different verticals at some point next year?
Speaker Change: Yes and the exciting thing is SUI Software Unlimited has been a probably a four or five year partner of Intellinetics. They have
Speaker Change: 1,100 to 1,200 of their own customers. We share 215 customers right now with our document management package.
Speaker Change: and they have just signed a co-marketing agreement with us on the iPass product.
Speaker Change: As I said, we've been in beta with one of their larger school districts.
Speaker Change: went extremely well, another one signed, and we plan on rolling that out, if not the fourth quarter, certainly the first quarter, of really aggressively going out and selling that into the K-12 customer base.
Speaker Change: To finish my thought, one of the new hires we had, we did hire a couple of new sales people, we also hired a brand new partner manager.
Speaker Change: And that partner manager's responsibility is to identify and find new ERP partners that we can integrate with our iPaaS products.
Speaker Change: and we've identified a couple and he's only been doing it two months at this point and we're pretty excited about what he's turned up and our opportunity in that part of the business also.
Okay, and
Speaker Change: From a modeling perspective on iPass, would you, sort of inferring from your comments in the beginning, would you anticipate we'll see a meaningful inflection point in the SAS revenue, quarterly revenue, probably in the second half of next year?
Speaker Change: That is the plan, as you know, when you sign a...
Speaker Change: You know an IPAS deal towards the end of 24, you really Don't start seeing that revenue to the new year So anything we sell now probably won't start recognizing revenue until you know, March time frame as an example. So yes and just one last one since
Speaker Change: We're already into November. Can we make the assumption that the activity in Michigan will remain the same at this point?
Yes, certainly through the end of the year.
Speaker Change: The BPO business that we've talked about and the one that we referenced in prior releases is unchanged and our expectation is, you know, especially with government heading into these holiday months, that we have very low expectation of getting anything from them until the new year.
Okay, okay. Thanks and keep up the great work.
Thank you. Thanks Howard.
Speaker Change: Thank you and with no further questions I'd like to turn the floor back to Jim DeSocio for closing remarks.
Speaker Change: Thank you, Julian. Thank you all for joining us. I am very optimistic about the future of Intellinetics, as you could probably hear from our answers. We have exciting SaaS assets supported by projected oriented business that is expected to continue to generate cash.
Speaker Change: We are paying down our debt and investing in our sales and marketing functions to drive future growth. We have a strong competitive position in growing markets and a diverse set of solutions with ample cross-selling opportunities. Our business model is structured around delivering cash flow while growing SaaS is working.
Speaker Change: We appreciate the continued support of our long-term shareholders. Thank you for joining us today. We look forward to speaking again on our next conference call. Thank you.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
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