Red Violet Q1 2024 Earnings Call Transcript

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May 8, 2024

Key Takeaways

  • Red Violet delivered record Q1 results with revenue of $17.5 million (up 20% YoY), adjusted gross profit of $13.8 million, adjusted EBITDA of $5.7 million (up 54%, 32% margin) and adjusted earnings per share of $0.22.
  • The IDI billable customer base grew by 366 sequentially—the largest quarterly increase since 2020—to 8,241 customers, while the Forewarn platform added 51,259 users (a quarterly record) to reach 236,639 users and secured contracts with over 425 Realtor Associations.
  • All core verticals showed strength: collections achieved double-digit growth for the first time in three years, investigative services posted a ninth straight quarter of sequential growth, and financial/corporate risk grew double digits excluding a prior‐year one-time batch.
  • Strong cash generation produced $4.3 million of operating cash flow (up 181%) and $1.9 million of free cash flow, funding ongoing investments in technology, product expansion and go-to-market efforts while repurchasing nearly 300,000 shares under a $15 million buyback program.
  • With April also posting record revenue, management highlighted continued momentum, a highly leveraged cost structure and a robust pipeline, expressing optimism for accelerating growth and shareholder value through 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
Red Violet Q1 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Red Violet's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Camilo Ramirez, Senior Vice President, Finance and Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon and welcome. Thank you for joining us today to discuss our Q1 2024 financial results. With me today is Derek Huebner, our Chairman and Chief Executive Officer and Dan McLaughlin, our Chief Financial Officer. Our call today will begin with comments from Derek and Dan, followed by a question and answer session. I would like to remind you that this call is being webcast live and recorded.

Speaker 1

A replay of the event will be available on the call on our website. To access the webcast, please visit our Investor page on our website, www.redviolet.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call are forward looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward looking statements due to risks and uncertainties associated with the company's business. The company undertakes no obligation to update the information provided on this call or a discussion of risks 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 ks and subsequent 10 Qs.

Speaker 1

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. 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. 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 also be found in the earnings press release issued earlier today.

Speaker 1

With that, I am pleased to introduce Fred Bylitz, Chairman and Chief Executive Officer, Derek Dutner.

Speaker 2

Thanks, Camilo. Good afternoon and thank you for joining us today to discuss our Q1 2024 results. 2024 is off to a great start as we posted our highest quarterly revenue and adjusted EBITDA in our company history, driven by broad based demand across verticals and strong volumes experienced throughout the quarter. Our strategic initiatives executed over the last 18 months are paying off. We have been investing in our technology, the expansion of our product suite and our go to market capabilities and these investments are clearly bearing fruit.

Speaker 2

Our team executed superbly, capitalizing on the increasing realization by our target markets that our innovative solutions are indispensable tools for identity verification, fraud prevention and investigations. Our performance this quarter positions us well for 2024 and in fact, we just closed out the month of April, which produced a record revenue month for RedViolet. Now turning to the numbers. Total revenue for the quarter was a record $17,500,000 a 20% increase over prior year. We produced a record $13,800,000 in adjusted gross profit, resulting in a margin of 79% in the Q1.

Speaker 2

Adjusted EBITDA for the quarter was a record $5,700,000 up 54% over prior year. Adjusted EBITDA margin was 32%, up 7 percentage points. Adjusted net income increased 36 percent to $3,200,000 for the quarter, resulting in adjusted earnings of $0.22 per diluted share. Our IDI billable customer base grew by a very strong 366 customers sequentially from the 4th quarter, which is our largest sequential quarterly increase since 2020, ending the first quarter at 8,241 ForWarn added over 51,000 users during the Q1, the largest quarterly increase in our history, ending the quarter at 236,639 users. Over 425 Realtor Associations are now contracted to use for Warren.

Speaker 2

We saw solid contribution from law enforcement and legal, two segments that we have been very focused on and continue to make substantial progress in. We experienced increasing volumes from the diverse identity verification platforms that we power as financial and corporate risk were also strong contributors. Consistent with the last few quarters, we saw continued progress in our collections vertical with double digit percentage growth. We continue to see significant opportunities ahead in both further penetrating these markets as well as those where we are still very early stage, including marketing services, background screening and government. We generated $4,300,000 in cash from operating activities in the 1st quarter, a 181% increase from the same period in 2023.

Speaker 2

Given our continued healthy cash generation, as we previously indicated, we've been leaning into these market opportunities, investing in our technology, various product developments and enhancements and strategically adding personnel to bolster our go to market capabilities. In addition to investing in our business, we purchased just under 300,000 shares of the company's common stock year to date through April 30, 2024 at an average price of $19.81 per share pursuant to the company's $15,000,000 stock repurchase program. The company currently has $4,600,000 remaining under its stock repurchase program. To sum up, Red Violet had a terrific quarter driven by robust and balanced demand across verticals. Given the continuing momentum we're currently experiencing and the opportunities in front of us, we are very optimistic about the remainder of the year.

Speaker 2

With that, I turn it over to Dan to discuss the financials.

Speaker 3

Thank you, Derek, and good afternoon. We are pleased to report a great start to the year, led by strong and increasing volume across the customer base. Revenue growth reaccelerated to 20%. We achieved record revenue of $17,500,000 and record adjusted EBITDA of $5,700,000 in the Q1, translating nicely into strong EPS and healthy free cash flow. As we discussed last quarter, we continue to see real opportunity in our current endeavors to lean in and accelerate our revenue growth in 2024.

Speaker 3

The team continues to execute well on these endeavors with increasing opportunity pipeline and converting that pipeline to wins. Turning now to our Q1 results. For clarity, all the comparisons I will discuss today will be against the Q1 of 2023, unless noted otherwise. Total revenue was a record $17,500,000 a 20% increase over prior year. We produced a record $13,800,000 in adjusted gross profit, resulting in a margin of 79% in the Q1, up 1 percentage point.

Speaker 3

Adjusted EBITDA for the quarter was a record $5,700,000 up 54% over prior year. Adjusted EBITDA margin was 32%, up 7 percentage points. Adjusted net income increased 36 percent to $3,200,000 for the quarter, resulting in adjusted earnings of $0.22 per diluted share. Moving through the details of our P and L. As mentioned, revenue was $17,500,000 for the Q1.

Speaker 3

Within IDI, we saw strong growth across verticals. Collections, for the first time in 3 years, broke into double digit percentage revenue growth. Our investigative vertical continues to perform well, led again by our law enforcement segment. The Q1 of 2024 represents the 9th consecutive quarter of sequential revenue growth for our investigative vertical. Our emerging markets vertical also experienced nice growth in the Q1 with strong contribution from our Legal segment.

Speaker 3

Within Financial and Corporate Risk, we had a tough comp from last year as the Q1 of 2023 included $700,000 in onetime nonrecurring batch revenue. Excluding this onetime revenue, financial and corporate risk was up double digits on a percentage basis. IDI's real estate vertical, which does not include forewarn, was down a few percentage points. Our IDI billable customer base grew by 366 customers sequentially from the 4th quarter, our largest sequential quarter increase since the Q3 of 2020. We ended the Q1 at 8,241 IDI customers.

Speaker 3

As it relates to FOREWARN, we added 51,259 users during the Q1, the largest quarterly increase in our history, led by the initial onboarding of Florida Realtors, the largest state realtor association in the United States. Forewarn revenue growth remains strong with the Q1 of 2024 representing the 16th consecutive quarter of sequential revenue growth. Over 425 Realtor Associations are now contracted to use for Warren. Our contractual revenue was 78% for the quarter, up 3 percentage points from prior year. Our gross revenue retention percentage was 93% compared to 94% in prior year.

Speaker 3

We expect our gross revenue retention percentage to trend between 90% 95% for the foreseeable future. Moving back to the P and L, our cost of revenue, exclusive of depreciation and amortization, increased $600,000 or 18 percent to $3,800,000 This $600,000 increase was primarily a result of an increase in data acquisition costs from the addition of new data assets. Adjusted gross profit increased 20 percent to $13,800,000 producing an adjusted gross margin of 79%, a 1 percentage point increase over Q1 2023. Sales and marketing expenses decreased $200,000 or 5 percent to $3,700,000 for the quarter. This decrease was due primarily to a decrease in the provision for bad debts, partially offset by an increase in salaries and benefits.

Speaker 3

The $3,700,000 of sales and marketing expense for the quarter consisted primarily of $2,200,000 in employee salaries and benefits and $800,000 in sales commissions. General and administrative expenses increased $600,000 or 10 percent to $5,800,000 for the quarter. This increase was primarily the result of a $600,000 increase in professional fees. The $5,800,000 in general and administrative expenses for the quarter consisted primarily of $2,700,000 of employee salaries and benefits, dollars 1,300,000 of non cash share based compensation expense and $1,200,000 in accounting, IT and other professional fees. Depreciation and amortization increased $400,000 or 18 percent to $2,300,000 for the quarter.

Speaker 3

This increase was primarily the result of the amortization of internally developed software. Our net income for the quarter increased $1,100,000 or 149 percent to $1,800,000 We reported earnings of $0.13 per basic and diluted share for the quarter based on a weighted average share count of 14,000,000 shares basic and 14,200,000 shares diluted. Adjusted net income for the quarter increased $800,000 or 36 percent to $3,200,000 which resulted in adjusted earnings per share of $0.23 basic and $0.22 diluted. Moving on to the balance sheet. Cash and cash equivalents were $32,100,000 at March 31, 2024, compared to $32,000,000 at December 31, 2023.

Speaker 3

Current assets were $41,500,000 compared to $40,300,000 and current liabilities were $8,300,000 compared to 4,900,000 9 for the purchase of 200,000 shares of company stock from the Greater Miami Jewish Federation that settled on April 1, 2024. Following the repurchase, the Greater Miami Jewish Federation was no longer a beneficial holder of any securities of the company. We generated $4,300,000 in cash from operating activities in the Q1 compared to generating $1,500,000 in cash from operating activities for the same period in 2023. We generated $1,900,000 in free cash flow in the 1st quarter compared to negative free cash flow of $800,000 in the same period 2023. Cash used in investing activities was $2,400,000 for the Q1, mainly the result of a $2,300,000 used for software developed for internal use.

Speaker 3

Cash used in investing activities was $2,300,000 for the same period 2023. Cash used in financing activities was $1,800,000 for the Q1, mainly the result of 2 items. First, the purchase and settlement of 77,149 shares of company stock for $1,400,000 under our stock repurchase program at an average price of $18.30 per share. 2nd, we acquired 20,867 shares of company stock for $400,000 from the net share tax settlement of employee restricted stock units. These shares were withheld in treasury and retired prior to the end of the quarter.

Speaker 3

During the same period 2023, cash used in financing activities was $200,000 As it relates to our stock repurchase program, we will continue to monitor prevailing market conditions and other opportunities that we have for the use or investment of our cash balances and as applicable strategically acquire additional shares in accordance with our repurchase program.

Speaker 4

Currently,

Speaker 3

we have approximately $4,600,000 remaining under our stock repurchase program. In closing, 2024 is off to a great start. Revenue is accelerating. We are investing for product and market expansion. Our profitability and cash flow remains strong and we continue to convert a growing opportunity pipeline to wins.

Speaker 3

We expect 2024 to be an exciting year for Red Violet. With that, our operator will now open the line for Q and A.

Operator

Thank you. At this time, we will conduct a question and answer session. Thank you. Our first question comes from the line of Josh Nichols of B. Riley.

Operator

Your line is now open.

Speaker 4

Yes, thanks for taking my question and great to see essentially record quarters, particularly for IDI and also co warrant customer adds. This quarter, I was curious if you could dive a little bit more into the details specifically for IDI where you're seeing such strength to get this acceleration in sub growth. And also if any of these customers are potentially going to be these $100,000 plus annual revenue accounts that you've kind of been talking about going after more and more as you expand your marketing budget a little bit?

Speaker 2

Yes. Thanks, Josh. It's Derek. Great to talk to you. We saw very strong activity within IDI throughout the quarter.

Speaker 2

It was broad based. As we mentioned, we've had a focus for the last 12 to 18 months on legal and law enforcement. And we've made substantial progress there on boarding new customers and seeing good volume there. Aside from that, we also mentioned that, as you know, due to the uniqueness of our AIML powered platform and the consumer identity graph that we have built out and the accuracy of that identity graph and the way that organizations of all types can access that identity graph through various channels, in performing their work. We've seen robust activity, strong volumes from the identity verification platforms where we have become an integral part of their solutions in serving many use cases and in serving a diverse set of industries.

Speaker 2

So we've genuinely saw some very good strength and it was very consistent throughout the quarter. What I would add there is sentiment seems to be pretty strong within the verticals that we serve with the outbound sales, with some of the subject matter expert sales that we have, we're seeing some real nice sentiment in wanting to hear more about our solutions, what we can do for the end user, how differentiated we are. And so that's very positive and we believe that's going to be a tailwind. We've also invested a bit as you know Josh in some of our marketing. As in the early days, we did very little marketing of our products and solutions.

Speaker 2

And so we've been building out our marketing capabilities over the last 12 months. And that market awareness has definitely improved and done well for us. Dan perhaps can comment upon size of customer, Dan, if you will.

Speaker 3

Yes, sure. Josh, this is Dan. Great to talk to you again. Yes, I mean, when we look at the ads in the Q1 on the IDI side, really good logos across the board, across the industries, a lot of opportunity potential within those customers as it relates to customers who are generating over 100,000 dollars in a yearly basis. If we look at Q1 on a trailing 12 month basis compared to what we reported at the end of 4th quarter, We have approximately 10 additional customers that are now within that 100,000 or over cohort.

Speaker 3

So, I'm seeing nice additions there as well as the cohort between 25,000 to 50000 a year. But when we look at the ads of the 300 plus customers in the Q1, quality logos across the board, across industries with a lot of potential for

Speaker 4

future growth. Thanks. That's great to hear that you're also adding some larger potential revenue generators to that pot as well. I wanted to touch on for Warren for a minute. It's not talked about as much, but you've had so many positive press releases about some of the wins.

Speaker 4

I'm just curious what your expectation for the trajectory going forward is for adding new subs to the platform, given the number of wins that you've announced just over the last 90 days or so?

Speaker 3

Yes, sure. This is Dan again. Yes, when we talk about Fort Warren, over the last several years, we've seen great expansion within the market, really saw last year tremendous uptake with associations across the board, an acceleration, if you will, on the amount of associations that we had wins last year. We would expect to continue to see that trend throughout 2024 and into 2025. When we look at kind of the overall level, there's approximately about 1100 to 1200 associations throughout the U.

Speaker 3

S. As we just reported, we have over 425 associations today, so plenty of go get. When we think about it from a realtor perspective, there's approximately 1,600,000 Realtors under the National Association of Realtors. Of that, I would probably say close to 800,000 to 900,000 are active realtors. They were selling more than 1 house a year and so on and so forth.

Speaker 3

And so, I think where we're at today with the number of users still have plenty of go get. So 2024, we would expect to continue to see that acceleration in the onboarding of associations and carry that into 2025.

Speaker 4

Thanks. So the last question for me, then I'll pass it towards here. It sounds like really all the end markets are doing pretty well. I guess, collections have been like the one piece of the business, but that for the last few years have kind of been facing some challenges, but now that's back to double digit growth. Do you think the collections business is likely to continue growing this year?

Speaker 3

So throughout the year, we've seen good signs. We've talked about it over the last several quarters anecdotally hearing from our customers, seeing good metrics come through that vertical. And we're starting to see that actually turn into revenue. We're very conservative when we look at the business. And I think conservatively as we look at collections, we're looking that as any significant growth this year as all upside.

Speaker 3

But the Q1 saw great numbers, good strong volume in April as well. And so the expectation is we're going to see a nice reversion in that industry. The expectation that would be probably leaving 2024 when we'll start to see real solid significant continued growth. But everything we're seeing now gives us really good indication that the next few quarters should be pretty healthy for collections compared to being flat or down over the last 3 years.

Speaker 2

Yes, Josh, it's Derek. Just adding to that. As you probably know and as many see that the consumer, a certain section of the consumer is challenged. Government subsidies have worn off and they're now having to pay their bills. Forbearance is gone.

Speaker 2

And therefore, first, what we saw were the autos going back, where many bought autos rates have peaked or not peaked, but at least hit a high level. It looks like we're going to be higher for longer, perhaps or at least until that changes. And so consumers have definitely been challenged there. After autos, credit card delinquencies have moved up. They're at the highest they've been since probably 2012 or so.

Speaker 2

And so given those indications and the fact that inflation, at least as of right now, seems to be a little sticky as the deceleration has slowed, It appears that the consumer will continue to be challenged or at least a good number of consumers. And as we know, it takes a little bit of a process where consumer goes through that process and it ends up being a collection effort. Now given that unemployment is still relatively low and as long as the consumer is working and able to pay some bills and continue to be the American consumer who's always been a robust spender, that may continue for some time. So jury is out a little bit on collections, but it's certainly showing durability over the last few quarters.

Speaker 4

Appreciate the update. Glad to see everything's off to such a good start for the Q1. Thanks guys.

Speaker 3

Thank you, Josh. Thanks, Josh.

Operator

I am showing no further questions at this time. I would now like to turn it back to Derek Dutner for closing remarks.

Speaker 2

Thank you all for joining us today to report our Q1 financial results. We reported another record revenue quarter, the highest in our company history and a reacceleration of our business. The investments we've made over the past 18 months are translating to better market awareness, better use and volumes of our solutions, enhancing our product suite and increasing our go to market capabilities as we continue to execute upon our strategic plan. Given our highly leverageable fixed cost model and healthy cash generation, we are well positioned to continue investing in our business and enhancing shareholder value. We're excited about the remainder of 2024 and beyond.

Speaker 2

Good afternoon.

Operator

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

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