Intellinetics Q2 2024 Earnings Report

Intellinetics EPS Results

• Actual EPS: $0.02
• Consensus EPS: $0.04
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: N/A

Intellinetics Revenue Results

• Actual Revenue: $4.64 million
• Expected Revenue: $4.61 million
• Beat/Miss: Beat by +$30.00 thousand
• YoY Revenue Growth: N/A

Intellinetics Announcement Details

• Quarter: Q2 2024
• Date: 8/13/2024
• Time: N/A
• Conference Call Date: Tuesday, August 13, 2024
• Conference Call Time: 4:30PM ET

Intellinetics (NYSEAMERICAN:INLX) is a provider of enterprise content management and digital transformation solutions designed to help organizations streamline document-centric processes and improve operational efficiency. The company’s platform enables clients to capture, store, manage and retrieve both paper and electronic records through a unified system, reducing reliance on manual workflows and minimizing the risks associated with paper-based information handling.

The company offers a range of software products and professional services aimed at automating business processes and ensuring secure, compliant access to critical data. Key offerings include cloud-based content management, document imaging and capture solutions, workflow automation tools and robotic process automation integrations. These solutions support secure electronic signatures, audit trails and role-based access controls, making them suitable for environments with stringent regulatory requirements.

Intellinetics serves a diverse customer base across the United States, including government agencies, healthcare providers, financial institutions, insurance companies, legal practices and educational organizations. Headquartered in South Florida, the company leverages a nationwide network of implementation and support specialists to tailor its platform to industry-specific needs. Since its founding in the late 1990s, Intellinetics has focused on combining scalable technology with professional services to enable clients to transition from paper-driven operations to fully digital environments.

Intellinetics Q2 2024 Earnings Call Transcript

Key Takeaways

• Total revenue grew 9% year-over-year to $4.6 M in Q2 2024, driven by a 9.6% increase in SaaS and a 15.8% lift in professional services, with consolidated gross margin expanding by 387 bps.
• The company generated $698 K in adjusted EBITDA while maintaining 30% of revenue from recurring SaaS subscriptions, bolstering its profitability and recurring revenue model.
• Intelenetics is accelerating sales and marketing investments — adding four new reps and ramping trade show activity — which is expected to modestly dent EBITDA this year but to accelerate top- and bottom-line growth in 2025.
• The new iPaaS payables automation solution has doubled live reference customers to four, with three to four more expected in Q3 and a pipeline that supports 15-18 deployments by year-end.
• The document conversion segment faces potential revenue reductions due to the transition of tasks by its largest professional services customer, with timing and magnitude still uncertain.

Presentation

[Operator]

...Greetings, and welcome to the Intellinetics Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. A brief question-and-answer session will follow a formal presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Tom Baumann, Investor Relations. Thank you, Tom. You may begin.

[Tom Baumann, Head of Investor Relations at Intellinetics]

Thank you, and good afternoon, everyone. I am pleased to welcome you to Intellinetics 2024 second 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 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, future events or results. Intellinetics undertakes no duty to update any forward-looking statements.

[Tom Baumann, Head of Investor Relations at Intellinetics]

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, as well as the risks and uncertainties included in this section under the caption Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in Intellinetics Annual Report on Form 10-K or the quarterly report on Form 10-Q filed today. Also, please note that on the call today, the management will discuss non-GAAP financial measures such as Adjusted EBITDA and recurring Revenue. 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. A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today.

[Tom Baumann, Head of Investor Relations at Intellinetics]

With all that said, I would now like to turn the call over to Jim DeSocio, Intellinetics President and CEO. Jim, the call is yours.

[Jim DeSocio, CEO at Intellinetics]

Thank you, Tom. Intellinetics continues to generate solid financial results. While taking these steps to enable accelerated top and bottom line growth in the future, we delivered growth in SaaS and overall recurring revenue in line with our stated strategy. We also generated continued profitability, even as we begin to invest significantly in sales and marketing to support a broader SaaS initiative. Yellow Folder continues to grow, and the response to our new IntelliCloud Payables Automation Solution, or IPAS offering, has been highly encouraging. With deployments accelerating, we generated significant cash and continued to pay down debt. The pieces are in place for continued success for years to come. This progress comes even as our newest SaaS offering, IPAS, has just started contributing to our results. As I said, the response to IPAS has been very strong.

[Jim DeSocio, CEO at Intellinetics]

Our pipeline of opportunities for IPAS is improving in terms of quality and quantity with each passing month. Demand for Yellow Folder solutions is also growing, and overall, Intellinetics is well positioned across all our SaaS offerings. As we have been communicating, we have been investing to scale our business, and we are now planning to accelerate our investment in marketing our SaaS offerings. These investments will support all of our SaaS offerings, including Yellow Folder and IPAS. In the quarter, SaaS revenue as a percentage of our consolidated revenue remained at 30%, even with a record contribution from our professional services business. Once again, our goal is to make recurring revenue the majority of our total revenue, with as much contracted SaaS revenue as possible. This will reduce earnings volatility, make our business very easy to model, and benefit shareholders through consistent profitability.

[Jim DeSocio, CEO at Intellinetics]

SaaS businesses are historically quite profitable. We invested in 2022 to acquire Yellow Folder as we are paying down the debt related to this acquisition, having already fully paid down the debt from the 2020 Graphic Sciences acquisition. We launched IPAS in 2023, and we are investing in capabilities to maximize the opportunity. Historically, our sales and marketing investments have been relatively modest, but with the inclusion of IPAS into our portfolio, we have been meaningfully expanded our addressable market. The number of potential customers has increased significantly. This means we need to add skilled and capable salespeople, and we need to expand our presence at trade shows and similar events. For more specifics regarding sales personnel, we added one this March. Plan for two more right now, before the end of the third quarter, and we want to have two more on board in January.

[Jim DeSocio, CEO at Intellinetics]

These investments will modestly, and we expect temporarily, reduce our EBITDA, but they will pull forward revenue opportunities that should exceed the spend and be accretive at some point in 2025. Once revenue from IPAS exceeds these investments, incremental revenue will disproportionately drop to the bottom line. Additionally, this model will enable us to appropriately size fixed costs so that we are systemically profitable, creating a durable, sustainable, scalable platform for profitable growth... As I said, our IPAS solution has given us significant momentum. We have doubled the number of live reference accounts from two to four during the second quarter. These accounts are all running smoothly. We have an additional three or four expected to go live in the third quarter, and our pipeline continues to grow. Again, this is with a pretty modest sales and marketing function.

[Jim DeSocio, CEO at Intellinetics]

As we move through 2024, we anticipate IPAS becoming a larger and larger contributor to our consolidated revenue. Our K-12 operations now have 619 K-12 districts, generating significant SaaS revenue, which more than doubles our presence in this vertical market since before we acquired Yellow Folder in April of 2022. Importantly, each of these districts is a target for additional Intellinetics services, including IPAS. We are launching a K-12 IPAS pilot this week, as we speak, to address this opportunity. Meanwhile, the document conversion portion of our digital transformation business, including business process outsourcing, business and document storage and retrieval, continues to generate positive contribution margin.

[Jim DeSocio, CEO at Intellinetics]

As a reminder, last quarter, we disclosed that our largest professional services customer plans to transition certain tasks performed by our document conversion business from one office location to another location in a way that could reduce annual revenue of our document conversion segment. The amount of the future revenue reduction is still uncertain, and the transition has been delayed by the customer with no clear timeframe. We are continuing to negotiate with the customer to mitigate the impact of this future revenue reduction. For Q2, I want to congratulate the entire document conversion team for delivering a record revenue quarter. We continue to work on initiatives to improve efficiencies and margins there, but our new investments in sales and marketing are focused on growing our recurring revenue, in particular, our SaaS subscription revenue.

[Jim DeSocio, CEO at Intellinetics]

At this time, I'd like to turn the call over to our Chief Financial Officer, Joe Spain.

[Joe Spain, CFO at Intellinetics]

Thanks, Jim. I will now review our financial results for the second quarter of 2024, the period ending June 30th, 2024, compared to the prior year, 2023. Total revenue for the quarter increased 9% to $4.6 million, as compared to $4.3 million for the same period last year. The following are the material components of our revenue. First, subscription software, which is comprised of SaaS, including hosting revenue and software maintenance services revenue, increased to $1.75 million for the quarter from $1.63 million for the same period last year. SaaS grew 9.6% and consistent with history, and as expected, our software maintenance services are growing more slowly at 1.4% over 2023. Secondly, professional services.

[Joe Spain, CFO at Intellinetics]

Revenue increased 15.8% to $2.66 million from $2.3 million for the same period last year. As a percentage of total revenue, professional services revenue was 57% of total revenue for the quarter, up from 54% last year. Consolidated gross margin increased 387 basis points to 64.7% for Q2, compared to 60.8% last year. The increase was driven by both better revenue mix, better revenue mix, slightly weighted towards subscription revenue, plus higher margin professional services projects, and also positive impact from price increases. Operating expenses increased 23.4% to $2.8 million, compared to $2.3 million in Q2 2023.

[Joe Spain, CFO at Intellinetics]

The increase is largely due to the $0.5 million in non-cash stock-based compensation expense for restricted stock awards to employees, as well as investments in structure and scale. A subset of operating expenses, sales and marketing expenses for the quarter increased 7.7% compared to the same period in 2023. As Jim mentioned, we continue to invest in marketing and sales, and these prior period comparables will continue to shift as we increase the sales and marketing investment compared to historical levels. This includes the sales rep additions Jim talked about, plus increasing our trade show activity in 2024, which is important to both our IPAS and K-12 revenue acceleration. Net income for Q2 was $75,000, compared to net income of $136,000 for the same period last year.

[Joe Spain, CFO at Intellinetics]

Earnings per share was $0.02 per share, compared to earnings per share of $0.03 last year. Our Adjusted EBITDA for the quarter was $698,000, compared to an Adjusted EBITDA of $651,000 for the same period in 2023. Next, a brief overview of the balance sheet. At June 30, 2024, we had cash of $1.7 million and accounts receivable net of $1.4 million. Our total assets were $18.9 million, including $9.4 million in intangible assets and goodwill as part of acquisitions made since 2020. Total liabilities were $8.5 million, including $2.8 million in deferred revenues, reflecting signed SaaS and maintenance contracts, and $2.1 million in debt principal as of June 30.

[Joe Spain, CFO at Intellinetics]

In this first six months of 2024, we have prepaid $825,000 of our long-term debt, including $325,000 at the end of the second quarter. We expect to continue to pay down our debt, including another $800,000 this month, and expect to have no net debt, meaning debt less cash at the end of 2024. I want to wrap up with our financial outlook. Based on our current plans and assumptions, and subject to risks and uncertainties we described in our filings and this call, we are reiterating our expectation to grow revenues on a year-over-year basis for the fiscal year 2024. As Jim mentioned, we'll be increasing our investment in sales and marketing, including adding four salespeople to support our SaaS offerings over the next several quarters.

[Joe Spain, CFO at Intellinetics]

These investments will have a modest short-term impact on our EBITDA margins. To be clear, we continue to expect to generate positive Adjusted EBITDA, enabling us to continue to pay down our debt and bolster our balance sheet. However, as noted in our earnings release, we are revising our guidance as we expect our Adjusted EBITDA to decrease modestly year-over-year. As these sales and marketing investments begin to bear fruit, we expect accelerated top and bottom line growth in 2025 and beyond. With that, we thank you all for listening, and at this time, we'd like to open the call up to Q&A.

[Operator]

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Howard Halpern with Taglich Brothers. Please proceed with your question.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Congratulations, guys. Great quarter. In terms of-

[Joe Spain, CFO at Intellinetics]

Thanks, Howard.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

In terms of IPAS, how many customers are actually live right now?

[Joe Spain, CFO at Intellinetics]

Four are actively live, and we have another. We're expecting another three to go live sometime this quarter.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

A-and, uh-

[Joe Spain, CFO at Intellinetics]

Probably another two in August. Yeah, go ahead.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Just, you know, in general, though, when we're entering 2025, what do you expect with, you know, the live implementations? What could the potential annualized revenue, recurring revenue run rate be for these IPAS customers?

[Joe Spain, CFO at Intellinetics]

Well, that's forward-looking. Yeah.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Well, wow.

[Joe Spain, CFO at Intellinetics]

Well, yeah. I think, Howard, yeah, we're... I mean, it's a little bit in the box to have us be that specific-

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Yeah.

[Joe Spain, CFO at Intellinetics]

-that's time-bound-

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Right.

[Joe Spain, CFO at Intellinetics]

Because then, you know, we, we don't want to get too crazy within the bounds of what we're supposed to be able to say.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Yeah.

[Joe Spain, CFO at Intellinetics]

I mean, we can say certainly, qualitatively, it's going to be significant relative to our path.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Yeah.

[Joe Spain, CFO at Intellinetics]

Very significant. Yes.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay. And so with seven customers expected to be online, you know, entering the fourth quarter and new salespeople coming online, what—and your pipeline, could you give a little color as to the cadence you hope to achieve in not only signing customers, but then once you sign, implementing those customers? What should—and I know it's relative, you know, IPAS is relatively new for you, but what should the cadence be, or what do you hope the cadence to be?

[Joe Spain, CFO at Intellinetics]

Well, did I talk about our fourth budget? We're planning on 15-18 customers this year. We've already closed sold 11-12, so we're, you know, another 5 or 6 this year, we're counting.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay.

[Joe Spain, CFO at Intellinetics]

And then next year, with them coming on live, we plan to, you know, grow substantially after that, so.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay. And that's still all just from the, that one vertical, the home building vertical?

[Joe Spain, CFO at Intellinetics]

That's all from the one vertical. So we are in beta with our K-12-

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Right.

[Joe Spain, CFO at Intellinetics]

Beta site, and we've got some good things there, and we're also working on a new product. All these customers were sold with just AP, payables automation.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Right.

[Joe Spain, CFO at Intellinetics]

We are coming out with PO in the future as well.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay.

[Joe Spain, CFO at Intellinetics]

Howard, to answer the second part of your question-

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Before we towards the end of the year.

[Joe Spain, CFO at Intellinetics]

Yes. Yeah, I would say, I mean, definitely it's going to accelerate, right? You know, this is a brand new-

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay.

[Joe Spain, CFO at Intellinetics]

Product released in 2023. You know, obviously, we've got some early adopters, but, you know, there, there's momentum to be had here. You know, the old buzzword a few years ago, the flywheel, right? I mean, it just hasn't even started spinning yet. So we definitely expect acceleration.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay, and-

[Jim DeSocio, CEO at Intellinetics]

And as I said, and what I said in the past, too, Howard, you know, the 11 customers we paid, I think, Joe, we're up to 9, have paid in full already as they're coming-

[Joe Spain, CFO at Intellinetics]

Yep.

[Jim DeSocio, CEO at Intellinetics]

going live. So, you know-

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay.

[Jim DeSocio, CEO at Intellinetics]

The people believe in the product, the implementations are going well, and they're paying us, which is, and, you know, in my experience in the software business, is that is a phenomenal metric, right?

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Right.

[Jim DeSocio, CEO at Intellinetics]

That people are paying, so.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

So the deferred revenue will be a leading indicator of, hopefully, the satisfaction and the future results. Okay.

[Jim DeSocio, CEO at Intellinetics]

Exactly.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Uh.

[Jim DeSocio, CEO at Intellinetics]

Yep.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

You talked about the document conversion. What actually drove the increase this? Was it just in Michigan, or were there some conversions of, you know, K-12 customers?

[Jim DeSocio, CEO at Intellinetics]

Well, we actually have upped the facility in Columbus, Ohio, and they're actually working-

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay.

[Jim DeSocio, CEO at Intellinetics]

on doing scanning business as well.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay.

[Jim DeSocio, CEO at Intellinetics]

We've closed a number of microfilm, microfiche deals, which is a different revenue line than the basic scanning business.

[Jim DeSocio, CEO at Intellinetics]

So everything came together this last quarter. And, you know, we've owned the business for a few years, and when we bought the business, the infrastructure was 40 years old, 30 years old. We've really invested in better systems. We've gotten better at running the business. We know how to do it much more effectively and efficiently now. So everything's come together, Howard, over the last year and a half or so. Yep.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Does it seem like there's a pipeline or a pent-up demand for that service out there from existing customers and new customers?

[Jim DeSocio, CEO at Intellinetics]

Yes. Well, keep in mind that, we're getting a lot of K-12 business, so we're doing a good job of cross-selling into our K-12 business. And, and keep in mind that school districts have to keep student records for 99 years.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay.

[Jim DeSocio, CEO at Intellinetics]

And, you know, it's, you know, it, it's generated by, you know, someone needs a new building. They're consolidating buildings. They're trying to get rid of all their paper documents, et cetera. So there's a lot of things that drive people to say, "Let me digitize all my back records and backfile all my back records.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Mm-hmm.

[Jim DeSocio, CEO at Intellinetics]

Recently, we've also been successful of, you know, the original vision was, you know, we've been in the document management business for a number of years, and people would say, "How do I get my old files into your system?" Well, now we're doing a much better job of actually integrating the sales team, so as they sell a document management system, we'll sell a scanning project as well at the same time.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Okay. Well, that, that all sounds great. Keep up the great work.

[Jim DeSocio, CEO at Intellinetics]

Thank you, Howard. Appreciate it.

[Operator]

Thank you. There are no further questions at this time. I would like to hand the call back over to Jim Spain for any closing comments.

[Jim DeSocio, CEO at Intellinetics]

Jim Spain, Jim DeSocio.

[Howard Halpern, Principal Equity Analyst at Taglich Brothers]

Yeah, well, we're welcome by.

[Jim DeSocio, CEO at Intellinetics]

Yeah. Thank you all for joining us. I'm very optimistic about the future of Intellinetics. We have exciting SaaS assets supported by project-oriented business that is expected to continue to generate cash. We are paying down our debt and investing in our sales and marketing function 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, structured around recurring revenue, is working. We appreciate the continued support of our longtime shareholders. Thank you for joining us today, and we look forward to speaking again on our next conference call. Thank you very much. Appreciate everybody coming and joining.

[Operator]

This concludes today's conference call. You may now disconnect your lines. Thank you for your participation.

Participants

Executives

• Jim DeSocio, CEO
• Joe Spain, CFO
• Tom Baumann, Head of Investor Relations

Analysts

• Howard Halpern, Principal Equity Analyst at Taglich Brothers