Intellinetics, Inc. (INLX) Q3 2021 Earnings Call Transcript

00:13 Thank you and good afternoon everyone. My name is Joe Spain and I am the Chief Financial Officer for Intellinetics, Inc. I’m pleased to welcome you to our twenty twenty one 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. 00:36 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. 00:52 For 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 ten K filed March thirty, twenty twenty one, and other risks and uncertainties discussed in our Form ten Q filed today. 01:22 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’ve provided 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 intellinetics.com/company-news. 01:49 I would now like to turn the call over to Jim DeSocio, our President and CEO.

01:56 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 in sales to production and delivery for an outstanding quarter. We're putting in processes in people to help ensure our long-term sustainable growth. 02:20 We have full 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. 02:40 We've explored our production team to meet the demands of our sales growth, which we’ll see at our growing headcount. Our business process outsourcing or BPO service, which we expanded and officially launched last quarter, we'll see additional growth and provides another ongoing recurring revenue stream. 03:01 We are signing new partners on 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. 03:15 To support our sales team growth, cross-selling and net new business we've increased the amount of marketing initiatives and our lead generation campaigns. We are strengthening our messaging to reflect our expanded risk of offerings, as well as generally enhanced brand awareness. 03:34 For over a year and half, 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 from customers safe, while also delivering our business commitments. 04:07 Joe will review the details of our consolidated statement of operations for twenty twenty one next. But right now, I'm going to discuss our non-GAAP measure of adjusted EBITDA. In the third quarter of twenty twenty one, we reported adjusted EBITDA of five hundred and thirty eight thousand dollars, which is the sixth consecutive positive quarter and fifth consecutive quarter exceeding three hundred thousand dollars. This stability underscores my past comments about successful integration of our acquisitions in early twenty twenty. 04:50 Similarly, we delivered solid cash flows again this quarter. You'll see at 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. 05:12 Of course, profitability and cash flow generation are a result of revenue, where Intellinetics continues to see growth. In our third quarter of twenty twenty one, total revenue increased twenty six percent over the same quarter last year and Software as a Service is up twenty five percent over the same period. 05:34 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. 05:55 In addition to an integrated sales team and have 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. 06:14 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 a sixth consecutive quarter of meeting sales goals. Our earnings per share is point one one dollars. This gives me the confidence that we are on the right course. I’m bullish embrace about our future and for the future. 06:41 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?

06:54 Thanks, Jim. I will now review our financial results for the third quarter of twenty twenty one ended September thirty, twenty twenty one. Total revenue for the quarter ended September thirty increased twenty six percent to three point two million as compared to two point five million for the same period last year. 07:12 In Q3 twenty twenty, our document conversion business, primarily professional services was still recovering from pandemic lows of the second quarter of twenty twenty, exacerbating the gap to a record third quarter twenty twenty one revenue. 07:28 Following are the various components of revenue in the order presented on our statements of operations. Software revenue, which is comprised of perpetual revenue, increased nine percent for the quarter ended September thirty, twenty twenty one to fifty nine thousand dollars from fifty four thousand dollars for the same period last year. 07:47 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 and create eleven percent to six hundred and eighty nine thousand for the quarter from six hundred and twenty two thousand for the same period last year. 08:13 Within this category of recurring revenue, SaaS is growing more rapidly than software maintenance services at twenty five percent versus minus one percent. 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 file solution, which shifts the revenue from maintenance to SaaS, but of course, has no net effect on total recurring revenue. 08:41 Professional services revenue increased thirty four percent to two point two million for the quarter from one point six million for the same period last year. As a percentage of total revenue, professional services revenue increased to sixty eight percent total revenue for the quarter compared to sixty four percent of total revenue for the same period last year. 09:02 The majority of the revenues from graphic sciences, our acquisition in twenty twenty, our professional services revenues related to document conversion services and comprised ninety two percent of the total Q3 professional services revenues. The increase is driven in Q3 twenty twenty one by an ideal mix of projects and firing all cylinders, as Jim described earlier with all production groups at full capacity all quarter. 09:32 Storage and retrieval services revenue increased seventeen percent to two hundred and fifty nine thousand for the third quarter, compared to two hundred and twenty thousand for the third quarter of twenty twenty. This revenue stream has grown from growth, price increases, and project work. 09:50 Cost of revenue increased twenty three percent or two hundred and thirty five thousand to one point three million for the quarter, compared to one million for the same period in twenty twenty due to our increase in revenues. Total gross margin was flat at sixty one percent for Q3 this year and last year. 10:09 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. 10:23 Operating expenses increased to one point five million for the quarter ended September thirty, twenty one, compared to one point two million for the same period in twenty twenty. The increase quarter over quarter was twenty four percent, which reflects both the increase in revenue and expanded sales and marketing expenses in twenty twenty one, which increased thirty percent compared to the same period during twenty twenty. 10:48 Interest expense for the quarter was one hundred and thirteen thousand, compared to one hundred and fifteen thousand for the same period last year. The interest expense is consistent as expected with no significant changes in our debt quarter over quarter. 11:04 Net income for Q3 was two hundred and ninety six thousand compared to one hundred and fifty six thousand for the same period last year. Adjusted EBITDA, a non-GAAP measure for the quarter was five hundred and thirty eight thousand or zero point one nine dollars per basic share, and zero point one seven dollars per diluted share, compared to adjusted EBITDA of three hundred and seventy five thousand in twenty twenty or zero point one three dollars per basic and diluted share. 11:32 Next, I'd like to turn to review of Intellinetics balance sheet. September thirty, twenty twenty one, we had cash of one point eight million in accounts receivable net of nine hundred and forty nine thousand. Our total assets were twelve point two million and total liabilities were nine point six million, including two million in debt principal on the balance sheet as of September thirty, twenty twenty one. 11:59 I want to wrap up with a brief financial outlook. Based on our current plans and assumptions, and subject to risk uncertainties we described on our filings and this call, we’re maintaining our prior guidance for the year twenty twenty one we expect to build on the positive adjusted EBITDA of twenty twenty, while we're executing on our plan to drive revenue growth. 12:23 Short and sweet. With that, we thank you all for listening. And at this time, we would like to open up the call to any Q and A. I think everyone is one mute. So, you have to unmute yourself. I see ones already. Q - Unidentified Analyst: 12:38 Hi. This is Howard from [indiscernible]. How are you guys doing?

12:42 We're quite happy as you can see from the third quarter results.

12:48 Yeah. A couple of questions. One regarding the revenue that occurred in professional services in the quarter, were there any one-time projects that occurred that bolted up a little bit or is this sort of that two million area plus now going to be your baseline now that you’ve got increased capacity?

13:15 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 listen to me earlier, ninety plus percent is from graphic sciences doing the document conversion. And within that document conversion in, within professional services, there's really two bigger pieces contributing graphic sciences. 13:45 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. 14:08 Jim and the sales team, and Jim can elaborate on this more, work – have worked continuously over 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.

14:22 Okay. And… Go ahead, Jim.

14:28 Yeah. 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 where 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 [flow] [ph] has been very positive and that's what we're focused on going forward as well.

15:09 And in terms of increasing the sales team and support staff, what – over the next months, what kind of hiring plans do you have?

15:21 We are hiring – we just hired one sales rep. We are 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. 15:44 We've only did the acquisitions a year and couple of months ago, so it's bringing those people up in 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.

16:07 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?

16:19 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 acquired two companies, we had to integrate all the websites, so we start doing campaigns in the brand. So, she spent a lot of 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. 16:53 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 news services we offer. 17:16 Microfilm and microfiche conversion for one and then also the business processing outsourcing, it’s where we started to grow for us as well.

17:26 And in terms of, I guess the SaaS in school districts, what are you seeing the pipeline there and how are your partners helping you achieve some of your goals there?

17:41 Well, I think, you know Howard, one of our really good partners is Software Unlimited, which sells back office software to K12 and they continue to deliver, you know, we have no cost to sale. They do all the across of sale and they continue to deliver. We have, I believe the numbers are one hundred and fifteen, one hundred and twenty of their customers [already] [ph]. 18:03 The goal is to bring in ten to fifteen a quarter and they continue to hit that goal and the revenue stream from that group is in – it's about three hundred and fifty thousand, I believe. So, it's a good revenue stream for us. They had about twelve hundred customers. So, we barely penetrated their customer base this time. So, there's a heck of a lot of upside there for us as well.

18:32 And one last…

18:34 And by the way, just to expand on that, just to touch, we've actually taken that model and have now signed up another –we've signed up another ERP company that does the same thing for K12 can’t actually mention them yet, but it's a very similar company the 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 twelve space.

19:02 Okay. And one the 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 project activity do you anticipate can come from your existing customer base?

19:28 Well, that's the plan, you know like – yeah, go ahead Joe.

19:32 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 around here.

19:46 Okay. Okay, guys. Keep up the great work.

19:50 It's been fun [Howard] [ph].

19:53 It's been fun watching.

19:55 Thanks. Any other questions? Well, with that, we'll wrap up. We appreciate the continued support of our long time shareholders and aim to attract new investors as well by continuing to deliver results going forward. 20:15 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.

20:33 Goodbye.