ACCESS Newswire Inc (ACCS) 2018 Q2 法說會逐字稿

Greetings, and welcome to Issuer Direct's Second Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, the conference is being recorded.

I would now like to turn the conference over to your host, Steve Knerr, Chief Financial Officer. Please go ahead, sir.

Thank you, and good afternoon, everyone. Brian and I would like to thank you for taking the time to participate in our second quarter 2018 earnings call today.

Before we begin, I need to read the following safe harbor statement. Statements or comments made on this conference call may be forward-looking statements that include financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. Our actual results may differ significantly from those projected or suggested in any forward-looking statement due to a variety of factors, which are discussed in detail in our recent SEC filings.

Further, we will discuss both GAAP and non-GAAP financial information on this call. We believe the presentation of non-GAAP information provides you with useful supplementary data concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. Non-GAAP results are, however, provided for informational purposes only. Please refer to the press release and related tables for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website in our Investor Relations tab a description as well as reconciliation of GAAP measures to which we will refer on the call.

With that complete, I'll begin by going over our results for the quarter and turn it over to Brian, who will provide an operational review and outlook followed by a Q&A session.

The second quarter was another solid quarter for Issuer Direct as we continued to build our Platform and Technology business, increased revenue to a record level and worked toward completing our second acquisition in less than a year.

Total revenue increased 10% or $356,000 to $3,799,000 for the second quarter of 2018 as compared to $3,443,000 for the same period of the prior year. Revenue for the 6 months ended June 30, 2018, increased 16% or $1,031,000 to $7,329,000 as compared to $6,298,000 for the same period of the prior year. Revenue from customers obtained from our acquisition of Interwest Transfer Company totaled $381,000 and $799,000 for the 3 and 6 months ended June 30, 2018, of which $51,000 and $95,000 came from additional subscriptions to our platform or services cross-sold to these customers.

Platform and Technology revenue increased $356,000 or 19% to $2,246,000 for the second quarter of 2018 and increased $767,000 or 22% to $4,277,000 for the 6 months ended June 30, 2018. Platform and Technology revenue increased to 59% of our total revenue for the second quarter of 2018 compared to 55% for the second quarter of 2017.

As with previous quarters, revenue from our ACCESSWIRE module led the growth, increasing 18% and 24% for the 3 and 6 months ended June 30, 2018, respectively, compared to the same periods of the prior year.

In a few minutes, Brian will talk further about our expectations for continued growth with ACCESSWIRE and how we will integrate our recently acquired newswire, Filing Services Canada, or FSCwire, into and with our ACCESSWIRE operations.

Also contributing to the increase in Platform and Technology revenue was revenue from customers acquired from our Interwest acquisition in the fourth quarter of 2017 as well as increased licenses of Platform id. During the quarter, we sold subscriptions of Platform id. to 27 new or existing customers at an annualized contract value of $242,000.

Services revenue of $1,553,000 for the second quarter of 2018 was flat compared to the second quarter of 2017 and increased $264,000 or 9% to $3,052,000 during the 6 months ended June 30, 2018, compared to the same period of the prior year.

The increase for the 6-month period is primarily the result of an increase in transfer agent services, not only due to the addition of Interwest customers but also from an increase in corporate directive and actions of our legacy Issuer Direct transfer agent customers, particularly in our community banking sector. The increase in transfer agent revenue was partially offset by the continued decline of our legacy Annual Report Service, due in part to continued attrition as customers leave the service, decrease hard copy requirements or transition to electronic delivery. Additionally, revenue from our compliance services decreased as we continue to face pricing pressure or customers begin to take advantage of our platform offering.

In the second quarter of 2018, we also experienced a decline in print and proxy distribution revenue due to the timing of onetime projects that occurred in the prior year.

It's important to note, when comparing results to previously filed reports, $186,000 and $393,000 of revenue during the 3 and 6 months ended June 30, 2017, respectively, which was previously reported as Services revenue, was reclassified to Platform and Technology revenue. This was the result of the adoption of a new accounting pronouncement as of January 1, 2018, that required us to separate the revenue of bundled contracts for our ARS or shareholder outreach offering, which include both electronic and physical hard copy delivery of our customers' annual reports. The reclassified amounts represent the allocation of contract value of electronic delivery of the annual reports. All results have been appropriately adjusted for comparison purposes.

Moving to gross margin. Our overall gross margin percentage was 73% and 72% for the 3 and 6 months ended June 30, 2018, respectively, compared to 74% for the same periods of the prior year. The primary reason for the decrease in gross margin percentage was due to an increase in amortization of the capitalized software placed in service in 2017 of $116,000 and $255,000 for the 3 and 6 months ended June 30, 2018, respectively.

Platform and Technology gross margin percentage was 81% and 80% for the 3 and 6 months ended June 30, 2018, respectively, compared to 85% for the same periods of 2017. Again, the decrease in gross margin percentage is due to the increase in amortization I noted earlier.

With all the previously capitalized costs now baked in, we anticipate gross margin percentage of our Platform and Technology business to expand with increased revenue.

Gross margin percentage from our Services revenue stream was 61% and 60% for the 3 and 6 months ended June 30, 2018, respectively, compared to 59% for the same periods of the prior year.

As we have continued to invest in our business for top line growth, we've experienced increases in operating expenses, which increased $373,000 or 21% and $832,000 or 24% for the 3 and 6 months ended June 30, 2018, respectively, compared to the same periods of the prior year.

General and administrative expenses increased approximately 10% as a result of an increase in personnel expenses, stock compensation and acquisition-related expenses.

Sales and marketing expenses increased 12% for the quarter and 18% for the 6 months ended June 30, 2018, due to an increase in our sales and marketing teams by about 20% over the same periods of the prior year, partially offset by a decrease in trade show expenses.

We also continued to invest in Platform id. as product development expenses increased due to less capitalization and increased maintenance costs associated with our cloud-based products that were placed into production during 2017.

Amortization expense increased as well due to additional amortization resulting from a tangible asset acquired as part of the Interwest acquisition.

Skipping down to the tax line. We recognized income tax expense of $224,000 in both the second quarter of 2018 and 2017. For the second quarter of 2018, the difference between our effective tax rate of 38% and the federal statutory rate of 21% was due to additional income tax expense associated to the tax shortfall related to stock-based compensation. This is in contrast to the 3 and 6 months ended June 30, 2017, in which our effective tax rate was lower due to a tax benefit associated with stock-based compensation.

For GAAP purposes, we recorded net income of $366,000 or $0.12 per diluted share for the second quarter of 2018 as compared to net income of $493,000 or $0.16 per diluted share for the same period of 2017. For the 6-month period ended June 30, 2018, we reported net income of $686,000 or $0.22 per diluted share compared to net income of $817,000 or $0.27 per diluted share for the first 6 months of 2017.

Looking at some non-GAAP metrics. Total EBITDA increased 4% and 11% to $935,000 and $1,590,000 for the 3 and 6 months ended June 30, 2018, as compared to the same periods of the prior year. As a percentage of revenue, EBITDA was 25% and 22% for the 3 and 6 months ended June 30, 2018, respectively, compared to 26% and 23% for the same periods of 2017.

Non-GAAP net income increased to $663,000 or $0.21 per diluted share for the second quarter of 2018 compared to $590,000 or $0.20 per diluted share for the second quarter of 2017. Non-GAAP net income increased to $1,121,000 or $0.36 per diluted share for the 6 months ended June 30, 2018, compared to $995,000 or $0.33 per diluted share during the same period of the prior year.

We continue to generate positive cash flow from operations as we generated an additional $1,052,000 during the second quarter of 2018 compared to $810,000 during the same period of the prior year. This brought our total cash balance to $6.8 million as of June 30, 2018.

Additionally, on July 12, we announced a cash dividend of $0.05 per share, making it our 12th consecutive quarter for paying dividends.

Lastly, I would like to touch on our recent acquisition of FSCwire, which was completed on July 3. I would like to welcome the entire FSCwire team to the Issuer Direct family and look forward to working with them. Like our press release business, FSCwire has been experiencing growth, which we hope to continue here by combining it with our ACCESSWIRE team. Albeit small, we expect this transaction to be immediately accretive to revenue, net income and EBITDA. We are also looking forward to partnering with our new customers and showing them how they can benefit from our single-sourced consolidated disclosure and communications solution.

With that, I will turn it over to Brian, who will now talk further about the FSCwire integration and our overall strategy and new developments for the remainder of 2018.

Thank you, Steve, and thanks to everyone for joining us today to discuss our second quarter 2018 results.

As Steve just highlighted, we posted another strong quarter and a great start to the first half of the year. Then as a recap, 2018 second quarter revenues were up 10% compared to second quarter last year to $3,799,000 from $3,443,000. Sequentially, second quarter 2018 was also up 8% from the first quarter of this year.

Platform and Technology revenues increased 19% from Q2 of last year. And on a sequential basis, revenues increased 11% from Q1 of 2018. Our platform business continues to expand, now to 59% of our overall revenues for the second quarter. The business is beginning to hit its growth stride, and our team is continuing their first quarter highs right into Q2 of this year and delivered. The focus on execution, cross-selling and new customer wins is a recipe we will continue to build upon in the back half of the year and beyond.

As our subscription business continues to expand, so does our deferred revenues. During the second quarter, we generated an additional $242,000 in Platform id. subscriptions to new and current customers, bringing the total to $564,000 for the first half of the year, of which $412,000 still remains as a backlog to be recognized in revenue over the remaining term of the contract. This number represents 56 new subscriptions for the first half of the year, 27 for the second quarter.

Deferred revenue grew from $887,000 at the end of last year to $1,273,000 for the end of June. Conversely, the ARPU of these transactions for the first half of the year remain just over $10,000 per customer, something we continue to work hard to normalize our entire ARPU going forward. Growth in the pipeline is vital for us, and areas such as our exchange alliances and conference partnerships are helping our sales and marketing organizations do just that.

In summary, we saw sequential net new customer growth in both our Platform and Services businesses. We had 1,996 Platform and Technology customers during Q2 2018 compared to 1,854 in Q2 of last year and 1,845 during Q1 of this year. There were 142 net new customers or 8% on a year-over-year basis and slightly higher on a sequential basis. We also had 567 Service customers during Q2 of 2018 compared to 550 during Q2 of last year. That marginal 3% gain primarily came from our additional -- addition to our Interwest stock transfer clients.

We are committed to continuing the trend of client growth and feel that we can improve even further our customer profiling, contract terms and transitions from our service to our reoccurring high-margin subscription businesses. By doing this, we are confident that we can further reduce some of the seasonality typically found in parts of our business, print to digital and individual onetime services into and with an annual subscription.

With our complete platform subscription focus, we believe customers will use our systems more frequently and we will benefit from our annualized bundling, thus giving us a better insight into our customer accounts and true subscription ARPUs.

Perhaps, I could spend a few more minutes highlighting a few areas of our business, ACCESSWIRE and FSCwire transaction, as well as provide everyone a bit of forward-looking perspective into the insights business and strategically where we're focused the back half of the year.

The second quarter was the 15th consecutive quarter since 2014 that we have had year-over-year double-digit percentage revenue growth at our ACCESSWIRE news business. ACCESSWIRE has been a catalyst to our business overall in several ways, not only in how customers think about us as a provider but also in how we believe that we can expand the reach in an ever-changing market. Corporate issuers buy newswire differently today than they did when we entered the business. Definitely, we have benefited from being nimble enough to reach to the market and deliver the product in new ways to meet their needs. Our customers and revenue growth here speaks for the success but something that we continue to still mature and understand to look forward to in this continued growth phase.

At the end of the quarter, we also began integration with several other key distribution partners that are seeking to carry our news product on their broker terminals, investor platforms and news aggregation sites. We anticipate being able to speak in more detail about these on our next call when agreements are finalized.

Speaking of growth, the most recent July 3 transaction with FSCwire was a natural next step for us. FSCwire, a Canadian newswire that has been in the market for over 12 years, delivered cost-effective news distribution services to the Canadian and U.S. markets, primarily in the small-cap customer base providers, much like Issuer Direct. It's been growing nicely and is a perfect fit for ACCESSWIRE's overall North American goals.

When we looked at the newswire business, we knew we needed to continue to expand our distribution, find additional professionals to join our team that have significant experience and a path to growth in markets that otherwise were not the strongest. FSC fits the profile perfectly. Fred Gautreau, the President, and his team have been amazing over the last 30 days since the transaction closed. Our first priority was to integrate accounting and HR functions into and with our own systems. Now that this is behind us, we are moving toward systems of client experience platforms, taking the best from each system and combining it into our ACCESSWIRE distribution platform. This will include moving all 300-plus FSCwire customers into ACCESSWIRE under the brand we now have as ACCESSWIRE Canada, a wholly owned subsidiary of Issuer Direct.

Some of the 300 customers today also rely on FSC for anchorization and CR services, something we will continue to offer and expand upon with our Blueprint filing technology. Once we complete the integration, we will then turn our focus into cross-selling these customers into and with their Platform id. subscriptions. This is something that we look forward to late in Q4 and into 2019, as our primary goals right now are focused on integration and client stickiness.

Like Interwest's success, we believe we'll have similar success here with the FSC customers that are both TSX and CSE listed as well OTC listed here in the United States. Our communication subscription will be the biggest value driver for these customers in the long term.

The acquisition of Interwest and of FSCwire are the latest demonstrations of a solid track record of integrating accretive acquisitions. We continue to believe our industry will further consolidate, and as such, we are seeking additional accretive and strategic opportunities in the market. And as a result, we intend to file a shelf registration statement today at the close of the market. This shelf will put our company in a great position to have options should we find a potential acquisition target beyond our current capital needs.

Turning to our investor platform and investor network. Our investor-facing front-end platform recently was updated this week to include enhanced issuer profiles, industry news and over 3,000 quarterly earnings events just like this one and, very soon, research and transcripts. Many of the critical components and enhancements and back end are tied directly into our new data structure we internally have called people hub and company hub. These hub data sets and the -- are the underpinnings of our new insight and engagement platform, which we intend to release in Q4 of this year.

If we look ahead into the next year, we will be in a position to present to our clients the trends and insights they have previously not had the real-time access to before. In aggregate, we will be delivering engagement insights from millions of data points, segmented by peers, industries, indexes and exchanges. Our insight platform will allow issuers and IR professionals and, in some cases, third-party licensees to query and organize investor attributes into one central dashboard, utilizing similar technologies that have a common web cookie, Krux ID or fingerprint. Customers will now be able to sort investors and shareholders as we believe it's important to delineate the differences between an investor in the market compared to a shareholder of an actual company.

Insights are generated by investors and shareholders as they engage with earnings, events, IR websites, content and our network and investor conferences, alerts and requests from investor registrations and subscriptions. Having this data in one real-time platform will allow customers to segment their investors in several different ways so as to maximize and target their messages more efficiently.

In closing, we are encouraged by our continued client expansion, specifically the customers that are purchasing our platform, and the investments that we're making in our business, both on our platform advancements and our management team, which will put us in a position to further grow and scale the business.

We've posted another solid quarter in the second quarter, which put revenue 16% ahead for the first 6 months of this year compared to 2017.

Operator, can we please begin the Q&A session?

(Operator Instructions) Our first question today comes from Mark Lanier of Pegasus Capital.

I have 2 questions. I assume that Filing Services Canada is the same as DBA of FSCwire. Is that correct? Or is that a separate Canadian acquisition?

No. It is the same. FSC, Filing Services Canada is the same.

Correct.

Understood. The second question has to do with the metrics around your sales force expansion. I think you mentioned that headcount in sales had grown 20% year-over-year or something close to that. I wonder if you would clarify that going in. Also talk about what your plans for growth is in the sales side going forward.

Thank you, Mark. Yes. Our year-over-year sales expansion did -- from an expense percentage, was 20% year-over-year. From a headcount perspective, we continue to believe that we're going to do the same things in the back half of the year. At 14 headcount in sales and marketing, we're looking to increase that another 3 to 4 individuals by the end of the year, strategically both geographic in North America and as we look out to expanded markets. We just recently expanded our marketing teams at the beginning of Q3 here. And we believe that, that team is solid enough to carry us through the end of the year.

(Operator Instructions) Our next question comes from Mike Grondahl of Northland Capital Markets.

Brian, it's Mike. I think you reached your total client goal of like 2,500 this quarter. Any thoughts on the next goal or sort of how we think of that growth going forward?

Yes. You're right. It's -- the blended Platform, Technology, Service segments of ours is the 2,200 to 2,300 number and you add in the FSCwire count number gets us to the 2,500. I still believe that we're continuing that nice momentum of client additions and continuing to keep our churn numbers down. On an organic basis, we're still going to see low double-digit growth in our client count numbers. And then we believe with further opportunities in M&A, we'll see even an expanded way to get to the next step.

In the Platform and Technology area are there any modules you would call out that are kind of really leading the way there? I think you mentioned 27 Platform id. customers. But what are the models -- modules that have really kind of floated up?

Yes. It's 3 core segments. It's the entire platform, which gives both of our corporate issuers the ability to have compliance communications, and then each individual module of compliance communications can be subscribed to separately. The bigger driver for us as a result of ACCESSWIRE has been the communications module. Of the 27, the majority of those folks are buying communications platforms, and both of those -- a majority of those 27 came directly from our sales force not our channel partners or resellers or anything else. That's just pure organic new wins. But communications still tends to be the bigger driver for us. As I alluded to on the back half of the call, I think part of it is a result of the implied analytics, right? What are we going to be able to get from engaging and using your platform and what insights come of it? And so I think there's an appetite for that from our customer base.

And related to that implied analytics and kind of engagement, are you still sort of rolling out that module late 2018? Sort of what's the time line there?

It's -- yes, we still are. At the end of October, beginning November, we're planning to release. We've got components of it, I think I mentioned in the call here, that we internally call people hub and company hub and a little bit of our fingerprint technologies that are being spread throughout our networks now. All of our historical data have been added and analysts have been hard at work. We're into final testing and front-end development to be ready. I think we're confident in our data attributes that we're getting. It's most interesting to see how companies are engaged, what kind of materials are requested and consumed by the investment community and I think we're going to have significant amounts of data flow for our customers going forward. So yes, we're confident in that end of October, November time frame.

That will be interesting to see. In a follow-up to the previous person's question, 14 salespeople at the end of 2Q '18. What was the number at the end of 2Q '17?

I'm sorry, I didn't catch that. At the end of '17?

At the end of 2Q '17, what was the number of salespeople? I'm trying to just get the growth. It's 14 at the end of 2Q '18. What was it a year ago?

Yes, pure sales was 8.

Eight, okay. So that's pretty nice growth.

We've got work to do there, right? In fairness, I think that's -- it's a great question, and I think it's -- we need to continue to commit to invest in the platform. And by doing that, we've got to have the right blend of sales and marketing folks out in the field to continue the expansion.

And then -- good. Lastly, with FSCwire, I think it was mentioned there were 300 customers. I know you want to integrate first and make sure everything is sticky first, but how many of those 300 do you think are really good cross-sell potentials?

It's a great question. I think 25%. I think that's a rule of thumb in the modeling that we use. We examine client quantity, quality and spend. And then you really just have to look at the type of client they are, market cap, exchanges they're listed on. 25% of those clients are -- fit the ideal profiles for us that would indicate that, based on our past success, that they would be prime for a subscription of Platform id. And I think that we're zeroing in on those numbers and have been focused on that with our Interwest transaction. In historical past transactions, we've tried to achieve those numbers, but I think we've got a good recipe for how to cross-sell and how to make sure that we love these customers and teach them our platforms and make sure they understand the benefits. And I think that without the platform, we wouldn't be successful doing that. So this is really good to have an ecosystem that shows a clear efficiency both in spend and time, and clients are beginning to embrace and understand that now, which is fantastic.

There are no additional questions at this time. I would like to turn the call back to Brian Balbirnie for closing remarks.

Thank you, Brock. I'd like to thank everyone for taking the time to listen to Steve and I talk about our second quarter results. In the meantime, if anybody has any additional follow up, we welcome an opportunity to speak with you again between now and the Q3 call. I wish you all a good day. Thank you.