Intellinetics Inc (INLX) 2021 Q3 法說會逐字稿

All right, Jim, shall we get going?

I am ready.

Good. Thank you and good afternoon, everyone. My name is Joe Spain, and I'm the Chief Financial Officer for Intellinetics, Inc. I'm pleased to welcome you to our 2021 third-quarter conference call.

Before we begin, I would like to remind listeners that during this conference call, comments that we make may include forward-looking statements regarding Intellinetics, Inc. that are not historical facts.

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. We undertake no duty to update any forward-looking statements.

For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today 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 in our annual report on Form 10-K filed March 30, 2021, and other risks and uncertainties discussed in our Form 10-Q filed today.

Also, please note that on the call today, we will discuss adjusted EBITDA, a non-GAAP financial measure, when discussing the company's financial performance. We provide a reconciliation of this non-GAAP measure to our GAAP financials in our earnings release. Our earnings release, including the non-GAAP measure reconciliation, is available on our website at intellinetics.com/company-news.

I would now like to turn the call over to Jim DeSocio, our President and CEO.

Thank you, Joe, and good afternoon, everyone. We have filed a record revenue quarter in Q2 with another record revenue quarter in Q3. I'm extremely proud of our entire team from sales to production and delivery for an outstanding quarter.

We're putting in processes and people to help ensure our long-term sustainable growth. We have fully transitioned to our new warehouse facility in Michigan, which has increased capacity and provides additional office space for more production. In doing so, we did not renew leases in two other locations as part of our consolidation plan, resulting in more capacity for the same operating cost.

We've expanded our production team to meet the demands of our sales growth, which you'll see at our growing headcount. Our business process outsourcing or BPO service, which we expanded and officially launched last quarter, will see additional growth and provides another ongoing recurring revenue stream.

We are signing new partners in our partner channel and continue to gain traction and credibility with our ERP partners. We have plans to hire additional sales representatives in our key markets and verticals to support our sales team growth, cross-selling, and net new business.

We have increased the amount of marketing initiatives and our lead generation campaigns. We are strengthening our messaging to reflect our expanded list of offerings as well as generally enhance brand awareness.

For over 1.5 years, our leaders and employees have efficiently and effectively addressed the pandemic protocols required for the safety of our employees. We are evaluating our policies and compliance processes should the current vaccination mandate guidance be upheld with the goal to minimize disruption to customers, maximize employee retention, and continue our track record of keeping employees and customers safe while also delivering our business commitments.

Joe will review the details of our consolidated statement of operations for 2021 next. But right now, I'm going to discuss our non-GAAP measure of adjusted EBITDA. In the third quarter of 2021, we reported adjusted EBITDA of $538,000, which is the sixth consecutive positive quarter and fifth consecutive quarter exceeding $300,000. This stability underscores my past comments about successful integration of our acquisitions in early 2020.

Similarly, we delivered solid cash flows again this quarter. You'll see on our statement of cash flows we had another quarter of positive net cash provided by operating activities. Operationally, the team continues to deliver on the acquisition synergies we promised.

Of course, profitability and cash flow generation are a result of revenue, where Intellinetics continues to see growth. In our third quarter of 2021, total revenue increased 26% over the same quarter last year, and software as a service is up 25% over the same period.

Customer renewals for software as a service and software maintenance are a key pillar of our future growth and remains strong, including contributions from the CEO acquisition that we did last year for recurring revenue. I am very happy with our Q3 results.

In addition to an integrated sales team and [while] cross selling targets now, we expect to have more opportunities for projects with new and existing customers with the increased amount of lead generation initiatives and continued promotion of our vastly expanded product offerings.

Also, our partner channel continues to earn us credibility in the industry and continues to grow. In Q3, we fired on all cylinders to produce the sixth consecutive quarter of meeting sales goals. Our earnings per share is $0.11. This gives me the confidence that we are on the right course. I'm bullish about our future and for the future.

At this time, I would like to turn the call over to our Chief Financial Officer, Joe Spain, to talk to you about our sixth consecutive quarter of meeting financial goals. Joe?

Thanks, Jim. I will now review our financial results for the third quarter of 2021 ended September 30, 2021. Total revenue for the quarter ended September 30 increased 26% to $3.2 million as compared to $2.5 million for the same period last year.

In Q3 2020, our document conversion business, primarily professional services, was still recovering from pandemic lows of the second quarter of 2020, exacerbating the gap to a record third-quarter 2021 revenue.

The following are other various components of revenue in the order presented on our statements of operations.

Software revenue, which is comprised of perpetual license revenue, increased 9% for the quarter ended September 30, 2021, to $59,000 from $54,000 for the same period last year. The ongoing industry shift towards cloud solutions in lieu of on-premise solutions makes this small component of our overall revenue increasingly inconsistent.

Recurring revenue, which is comprised of SaaS, including hosting revenue and also software maintenance services, revenue increased 11% to $689,000 for the quarter from $622,000 for the same period last year. Within this category, recurring revenue, SaaS, is growing more rapidly than software maintenance services at 25% versus minus 1% as expected, given the continued shift toward cloud solutions.

The slight decrease in software maintenance can be attributed to customers migrating from our on-premise solution to our cloud solution, which shifts the revenue from maintenance to SaaS, but of course, has no net effect on total recurring revenue.

Professional services revenue increased 34% to $2.2 million for the quarter from $1.6 million for the same period last year. As a percentage of total revenue, professional services revenue increased to 68% total revenue for the quarter compared to 64% of total revenue for the same period last year.

The majority of the revenues from Graphic Sciences, our acquisition in 2020, are professional services revenues related to document conversion services and comprised 92% of the total Q3 professional services revenues. The increase is driven in Q3 2021 by an ideal mix of projects and firing all cylinders, as Jim described earlier, with all production groups at full capacity all quarter.

Storage and retrieval services revenue increased 17% to $259,000 for the third quarter compared to $220,000 for the third quarter of 2020. This revenue stream has grown from growth, price increases, and project work.

Cost of revenue increased 23% or $235,000 to $1.3 million for the quarter compared to $1 million for the same period in 2020 due to our increase in revenues. Total gross margin was flat at 61% for Q3 this year and last year. There was an unfavorable impact of the increased volume in the professional services that was offset by high-margin projects in both our document management and document conversion segments.

Operating expenses increased to $1.5 million for the quarter ended September 30, '21 compared to $1.2 million for the same period in 2020. The increase quarter over quarter was 24%, which reflects both the increase in revenue and expanded sales and marketing expenses in 2021, which increased 30% compared to the same period during 2020.

Interest expense for the quarter was $113,000 compared to $115,000 for the same period last year. The interest expense is consistent, as expected, with no significant changes in our debt quarter over quarter.

Net income for Q3 was $296,000 compared to $156,000 for the same period last year. Adjusted EBITDA, a non-GAAP measure for the quarter, was $538,000 or $0.19 per basic share and $0.17 per diluted share compared to adjusted EBITDA of $375,000 in 2020 or $0.13 per basic and diluted share.

Next, I'd like to turn to review of Intellinetics' balance sheet. September 30, 2021, we had cash of $1.8 million and accounts receivable net of $949,000. Our total assets were $12.2 million, and total liabilities were $9.6 million, including $2 million in debt principal on the balance sheet as of September 30, 2021.

I want to wrap up with a brief financial outlook. Based on our current plans and assumptions and subject to risks and uncertainties we described on our filings and this call, we're maintaining our prior guidance for the year 2021 we expect to build on the positive adjusted EBITDA of 2020, while we're executing on our plan to drive revenue growth.

Short and sweet. With that, we thank you all for listening. And at this time, we'd like to open up the call to any Q&A. I think everyone's on mute, so you have to unmute yourself. I see [ones] already.

Hi, this is Howard from Taglich. How are you guys doing?

Howard, we're quite happy as you can see from the third-quarter results.

Yes. A couple of questions, one regarding the revenue that occurred in professional services in the quarter. Was there any one-time project that occurred that bolted up a little bit, or is this sort of that $2 million area plus now going to be your baseline now that you've got the increased capacity?

So I would say there's always projects. So that's a tough one. I mean, in terms of one-time projects, this professional service revenue line has many components. There's certainly a smaller piece in terms of the software integration side. But as you listened to me earlier, 90-plus percent is from graphic sciences doing the document conversion.

And within that document conversion within professional services, there's really two bigger pieces [contributing]: Graphic Sciences -- there's a BPO piece, the business process outsourcing, which is very recurring in terms of -- it's steady, as long as we have that customer contract. They're giving us work day in, day out, week in, week out. We just get work. That's great.

But the other half of it, let's say, there's a significant chunk, which is business that we go get. Jim and the sales team -- and Jim can elaborate on this more -- work -- have worked continuously now for the past many quarters to ensure that that pipeline is full to keep feeding the machine. But we do have to go out and get that business for the project work.

Okay. And -- go ahead, Jim.

Yes, I was just going to also say we do have another line of business, which is microfilm and microfiche conversion, which is a different group of -- different process we're allowed to double up. And we've had some nice projects over there, which allowed us to drive some additional revenue as well.

But one of our -- one of the things the management team talks about every day and every week is how we're growing the company, what levers do we need to pull to grow the company and the backlog and filling the backlogs to keep people working, and to keep the jobs and the revenue flowing. [The flow] has been very positive, and that's what we're focused on going forward as well.

And in terms of increasing the sales team and support staff, what -- over the next months, what kind of hiring plans do you have?

We are hiring -- we just hired one sales rep. We're hiring a couple more. And then next year, we also have plans to add additional headcount into the sales team. And we've proven we can fill the pipeline and keep them busy and drive X amount of revenue.

And we're also focusing the sales team on doing a lot more cross selling. We only did the acquisitions 1 year and 2 months ago. So it's bringing those people up and cross selling and penetrating some of our different Intellinetics accounts with GSI services and vice versa, selling the Intellinetics document management products into the GSI customers. We're really starting to hit our stride there.

And what impact have you seen from -- I know last call you hired a Director of Marketing. So what kind of impact has she had on operations so far?

We actually found a diamond in the rough there with Sandy. She stepped right in. A little bit unfortunate, we had more work to do. We've acquired two companies. We had to integrate all of the websites, so we started doing campaigns in the brand.

So she spent a lot in the last couple of months -- the first couple of months just bringing all of our websites together and making sure the content was all correct. And that's done, and we just really started ramping up all of our campaigns.

We're doing three or four campaigns as we speak. They're ongoing right now, and she's done an excellent job for us. And we think that -- we've also rolled out a couple of national campaigns, and we've already seen a number of people coming to our website for some of the different services and new services we offer, microfilm and microfiche conversion for one, and then also the business processing outsourcing has really started to grow for us as well.

And in terms of the SaaS in school districts, what are you seeing in the pipeline there, and how are your partners helping you achieve some of your goals there?

Well, I think, Howard, one of our really good partners is Software Unlimited, which sells back-office software to K-12, and they continue to deliver. We have no cost of sale. They do all the cost of sale, and they continue to deliver.

We have -- I believe the number is 115, 120 of their customers ready. The goal is to bring in 10 to 15 a quarter, and they continue to hit that goal. And the revenue stream from that group is in the -- it's about $350,000, I believe, so it's a good revenue stream for us.

They have about 1,200 customers, so we've barely penetrated their customer base at this time. So there's a heck of a lot of upside there for us as well.

And one last --

And by the way, just to expand on that, just a touch, we've actually taken that model and have now signed up another -- we've closed -- we've signed up another ERP company that does the same thing for K-12. I can't actually mention them yet, but it's a very similar company to SUI in a whole bunch of different states. They don't compete against SUI, So we hope to replicate what we've done over there in the K-12 space.

Okay. And one last one. It might be a little unfair, but bear with me on the question. With the cross-selling opportunities, especially within existing customers, over the next couple of years, how much revenue or a project activity do you anticipate can come from your existing customer base?

Well, that's the plan. Yes, go ahead, Joe.

I would say a meaningful amount. So again, I don't think we can really be specific in terms of assigning some quantifiable number, but not a [rounding error].

Okay. Okay, guys, keep up the great work.

It's been fun, Howard.

It's been fun watching

Thanks. Any other questions?

Well, with that, we'll wrap up. We appreciate the continued support of our longtime shareholders and aim to attract new investors as well by continuing to deliver results going forward. It is our goal to continue building a business model, which in turn builds shareholder value.

Thank you for joining us today, and we look forward to speaking again on our next conference call. Thank you all and have a great day.

Goodbye.