In the first quarter of 2024, Intellinetics, Inc. (INLX) demonstrated a strategic shift towards a SaaS-centric business model, reporting a 7.7% increase in total revenue to $4.5 million.
The company's SaaS revenue now constitutes 31% of consolidated revenue, bolstered by the introduction of the IntelliCloud Payable Automation Solution (IPAS). While the document conversion business continues to yield a positive contribution margin, its consistency is expected to wane over time.
Intellinetics plans to further invest in marketing its SaaS offerings and anticipates IPAS to play a significant role in revenue growth, including the launch of a K-12 IPAS pilot. Despite the potential for reduced revenue from its largest customer due to contract renegotiations in 2025, the company maintains a positive outlook, expecting to deliver adjusted EBITDA for 2024 in line with 2023 figures.
Key Takeaways
- Intellinetics' total revenue increased by 7.7% to $4.5 million in Q1 2024, with a significant contribution from SaaS offerings.
- The company is transitioning to a SaaS-centric business model, expecting recurring revenue to become the majority of total revenue.
- The new IPAS is contributing positively to the company's financial results and is expected to grow further with a K-12 pilot.
- Despite potential renegotiations with its largest customer, Intellinetics anticipates maintaining adjusted EBITDA levels similar to 2023.
- The company has added a sales representative to the IPAS team and is confident in the implementation process for K-12 and commercial customers.
Company Outlook
- Intellinetics foresees growth in SaaS revenues and aims to make it the majority of its total revenue.
- Plans are in place to accelerate investment in marketing SaaS offerings.
- The company expects to grow revenues for the fiscal year 2024 and maintain adjusted EBITDA levels similar to 2023.
Bearish Highlights
- There is uncertainty surrounding the outcome of contract renegotiations with the company's largest customer in May 2025, which could lead to revenue reductions.
- The document conversion business is expected to become less consistent as a revenue source over time.
Bullish Highlights
- Intellinetics shows strong momentum with cross-selling opportunities and an optimistic outlook for the IPAS product line.
- The company has reported successful implementation of its SaaS products, with all customers paying and no major issues.
- New commercial contracts are expected to be operational within 60-90 days after signing.
Misses
- Potential revenue reduction from the largest customer due to contract renegotiation poses a risk to future earnings.
Q&A Highlights
- CEO Jim DeSocio expressed confidence in the company's K-12 product and implementation process, which is expected to be simpler than for larger commercial customers.
- The company is investing in support staff to prevent overselling and ensure customer satisfaction.
- Incremental increases in G&A expenses are anticipated, excluding one-time stock compensation expenses.
In conclusion, Intellinetics is navigating a period of transition with a clear focus on expanding its SaaS offerings. The company's leadership remains confident in its strategy and ability to adapt to potential challenges ahead. With IPAS gaining traction and a proactive approach to market its SaaS solutions, Intellinetics appears positioned to capitalize on the opportunities within the growing SaaS market.
InvestingPro Insights
In light of Intellinetics' (INLX) strategic shift to a SaaS-centric business model, recent data from InvestingPro provides valuable insights into the company's financial performance and market position. With a market capitalization of $34.9 million, Intellinetics is trading at a high earnings multiple, with a P/E ratio of 61.91 for the last twelve months as of Q4 2023, which further adjusted to 67.22. This high earnings valuation reflects investor confidence in the company's growth prospects, especially considering the significant returns over various time frames, including a 94.24% return over the last year.
InvestingPro Data further highlights that Intellinetics has experienced a 20.47% revenue growth in the last twelve months as of Q4 2023, indicating a solid upward trajectory in its financial performance. Additionally, the company's gross profit margin stands at an impressive 62.56%, demonstrating the efficiency of its operations and the potential profitability of its SaaS offerings.
An InvestingPro Tip that stands out for Intellinetics is its significant return over the last week, with a price total return of 17.86%. This suggests a strong market reaction to recent developments or expectations, which may interest potential investors looking for short-term gains. However, it is also essential to consider the tip highlighting the stock's high price volatility, which could indicate a higher risk profile for the investment.
For readers interested in further insights and tips on Intellinetics, InvestingPro offers additional analysis, including 9 more tips that could help in making informed investment decisions. To explore these valuable insights, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at https://www.investing.com/pro/INLX.
In conclusion, the InvestingPro data and tips provide a nuanced view of Intellinetics' financial health and market performance, complementing the company's optimistic outlook and strategic initiatives in the SaaS market.
Full transcript - Intellinetics (INLX) Q1 2024:
Operator: And welcome to the Intellinetics' First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Tom Baumann with FNK Investor Relations. Thank you, sir, you may begin.
Tom Baumann: Thank you and good afternoon everyone. I am pleased to welcome you to a Intellinetics 2024 First 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 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. Intellinetics Inc. undertakes 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 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 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, 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. It may be different from non-GAAP financial measures presented by other companies. The reconciliation between GAAP and non-GAAP measures can be found in the press release issued today. With all that said, I would like to now turn the call over to Jim DeSocio, Intellinetics' President and CEO. Jim, the call is yours.
Jim DeSocio: Thank you, Tom. The transition of Intellinetics to SaaS-centric company continues. Our recurring revenue continues to grow faster than our consolidated revenue. And the SaaS portion of our recurring revenue is an increasingly important part of our business. This progress comes even as our new SaaS offering IntelliCloud Payable Automation Solution, or IPAS, has just started contributing to our results. Response for IPAS has been very strong and our pipeline of opportunities for IPAS is growing rapidly. Demand for the Yellow (OTC:YELLQ) Folder K-12 SaaS solution is also growing and overall Intellinetics is well-positioned across our SaaS offerings. Accordingly, we are accelerating our investment in marketing our SaaS offerings not just to support IPAS, but to support of our SaaS solutions. SaaS revenue as a percentage of our consolidated revenue increased to 31% in the first quarter, up from approximately 29% in the first quarter last year. Our goal is to make recurring revenue the majority of our total revenue with as much contracted SaaS revenue as possible. This will make our business very easy to model, reduce earnings volatility and benefit shareholders. It will also enable us to appropriately size fixed cost so that we are systematically profitable, creating a durable, sustainable, scalable platform for profitable growth. Our non-recurring software revenue continues to become less and less relevant to our story. Meanwhile, the document conversion portion of our digital transformation business including business process outsourcing and document storage and retrieval continues to generate positive contribution margin. As you may recall, we significantly expanded this business with the acquisition of Graphic Sciences in 2020. And since then, this business provided additional cash flow to create and acquire SaaS offerings. However, over time, the organic growth opportunities in this business will become less consistent. Additionally the non-recurring nature of this business makes budgeting and modeling more difficult. We have no plans to divest this business as it continues to generate cash. However, we plan to maximize our promotional activities around SaaS offerings rather than non-recurring revenue streams with the goal of accelerating our SaaS growth. This strategy, the non-revision, is not a revision of our prior strategy. Those who have followed in Intellinetics, recognize that we have been increasingly emphasizing our SaaS business lines over the past few years, even more so since the Yellow Folder acquisition. This is an acceleration of that strategy based on the success we have had over the past two years and the early response to IPAS. We see a path to evolving into a newly total SaaS company, a transformation, which we strongly believe will benefit shareholders. As I said, our IPAS solution has given us significant momentum. The lower end of our pipeline has increased by 50% over the past six months. We have signed nine customers and eight of the nine have already paid in full, which is uncommon for SaaS deployments where customers typically delay payment until deployment is fully complete. This data point reinforces our optimism regarding this solution, validating the customer support for IPAS and demonstrating the tangible value IPAS provides to users. In the aggregate, these nine customers represent an estimated combined annual revenue of $500,000 and we expect to more than double the customer count in this business over the next few quarters. As we move through 2024, we anticipate IPAS becoming a larger and larger contributor to our consolidated revenue. As I previously said, our 2024 budget includes an incremental $400,000 of spend towards accelerating IPAS. This includes sales and marketing dollars as well as growing our development staff. Simultaneously, our K-12 operations now have 597 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 2022. Importantly, each of these districts is a target for additional Intellinetics services including IPAS. We anticipate launching a K-12 IPAS pilot this summer to address this opportunity. At this time, I would like to turn the call over to our Chief Financial Officer, Joe Spain talk to you about our financials.
Joe Spain: Thanks, Jim. I will now review our financial results for the first quarter of 2024. Total revenue for the quarter ended March 31, 2024 increased 7.7% to $4.5 million, as compared to $4.2 million for the same period last year. The following are the material components of our revenue presented on our statements of operations. Subscription software, which is comprised of SaaS including hosting revenue and software maintenance service revenue increased to $1.76 million for the quarter from $1.59 million for the same period last year. SaaS grew 13.5% and consistent with history and as expected, our software maintenance services are growing more slowly at 2.4% over 2023. Professional services revenue increased 7.8% to $2.5 million for the quarter from $2.3 million for the same period last year. As a percent of total revenue, professional services revenue was 55% for the quarter, the same as last year. Consolidated gross margin increased 115 basis points to 64.3% for Q1 this year compared to 63.2% last year. The increase was driven by both better revenue mix, more weighting towards recurring revenue and positive impact from price increases. Operating expenses increased 24.2% to $2.9 million for Q1 24 compared to $2.4 million in Q1 2023. The increase is largely due to investments in structure and scale as well as timing of equity compensation expenses. Of note, we expensed a $398,000 charge for restricted stock awards to employees in the quarter, of which 328,000 was non-cash. Sales and marketing expense for the quarter decreased 7.8% compared to the same period in 2023, which is largely a timing matter. We continue to invest in marketing and sales for example, we hired an additional sales rep last quarter. We are also increasing our tradeshow activity in 2024, which is important to both our IPAS and K-12 acceleration. Net loss for Q1 was 175,000 compared to net income of $113,000, for the same period last year. The primary driver here was the 398,000 equity compensation expense, I referenced a moment ago, which is also called out in the earnings release including that 375,000 of it was one-time. Loss per share was $0.04 per share, compared to earnings per share of $0.03 last year. Our adjusted EBITDA for the quarter was 673,000, compared to an adjusted EBITDA of 630,000 for the same period in 2023. Next I'll turn to a brief overview of Intellinetics balance sheet. At March 31, we had cash of $1.2 million and accounts receivable net of $1.9 million. Our total assets were $18.9 million including, $9.5 million in intangible assets and goodwill as part of acquisitions made since 2020. Total liabilities were 8.8 million including, $2.6 million in deferred revenues reflecting signed SaaS and maintenance contracts and $2.46 million in debt principal as of March 31. As noted in our fourth quarter earnings call in March, we prepaid 500,000 of our long-term debt, and we expect to have no net debt meaning, debt less cash at the end of 2024. Further, we intend to prepay an additional 325,000 of our debt principal this month, which leaves the remaining debt principle of $2.1 million due December 1, 2025. I want to wrap up with our financial outlook. Based on our current plans and assumptions and subject to risks and uncertainties described in our filings on this call, we are reiterating our expectations to grow revenues on a year-over-year basis for fiscal year 2024. Regarding adjusted EBITDA, we are revising our guidance and expectation, that adjusted EBITDA for 2024 will be at or slightly less than 2023 levels. We have revised our guidance due to our expectation that our long-standing customer, our largest, will take steps to shift 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, starting in Q4 2024. Our management team believes the total value proposition which we provide our customer is substantial, that the customer understands that the timely and accurate execution of the tasks we perform are extremely important to it, and hence the company intends to educate and negotiate in good faith with the customer to have a mutually agreeable outcome. Jim, do you want to add?
Jim DeSocio: Thanks Joe. As a reminder, yes. As a reminder our document conversion business has multiple contracts with the customer beneath the overall master contract. These contracts assigned different prices and different locations for the same or similar work and have done so for many years. If you cherry picked location strictly on price without understanding that these contracts are economically linked, a customer could save for a short period of time, until contract renegotiation which for us is May 2025. Further, graphic sciences our subsidiary has been performing this specific work since 2017 and is quite good at it. And we have many incumbent advantages. Aside from high change costs, a new provider would have to be willing to accept same-day service level agreements and financial fines for every single error, made in processing, which I'm very happy to say we rarely incur. Perhaps once every two years which is just about error-free for five million images processed annually. We expect we can work out a mutually acceptable solution with this customer, but there are no guarantees in these sorts of negotiations. So we're doing our duty to advise you on this developing situation. I'm proud that this business can withstand potential revenue reductions from our largest customer, and still anticipate delivering adjusted EBITDA for 2024 and a similar range as 2023. With that said, we thank you all for listening. And at this time, I'd like to open the call up to Q&A.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Howard Halpern with Taglich Brothers. Please proceed with your question.
Howard Halpern: Congratulations on Q1 results guys. Again in terms of the total number of sales reps, you said you added one. How many do you have? And are they structured in a way where you're developing on IPAS team or are they integrated with the K-12 operation?
Jim DeSocio: Right. So we have five direct sales reps and that our management team our sales reps, too and carry quotas. And yes we are -- we hired the new sales rep into our IPAS team. We'll handle finding new partners to resell our iPass product through and also reselling to our K-12 customer based where our other two sales reps one being the executive in charge of that are selling IPAS to our one of our existing partners and that's where the great successes come from Howard.
Howard Halpern: Okay. And is the implementation process going to be simpler for the K-12 than it is for the larger customer of Constellation's customers?
Jim DeSocio: We believe so. We just inked our first beta site customer out of our K-12 customer base, and it's going to be a little bit different to start, not as complex as some of our commercial businesses that are using the product, certainly with multi-state, multi-tax, multi-country situations with our commercial product. K-12 is a little bit more straightforward. So we think it will be simpler and the other good great news is this is a fairly new release and over the last year or so our people have gotten much better. The product has matured more and we've gotten much better at implementing it et cetera. And I've been doing this for a couple of years. And when all of your SaaS customers pay that means you've got a pretty darn good product and a pretty good implementation. And I've never had never really seen that before. Usually people are holding money to you go live where they say you got a bug you say got this they've all paid, which is a great metric for us to track how our business is going how the product is still.
Howard Halpern: And is that why some of the incremental spend that you have is on, I guess, support or implementation type of people also?
Jim DeSocio: Exactly, exactly. We're a little concerned that we oversell the product. We don't have the support staff to get it up and running as quickly as we'd like. So we're investing in the support staff as well.
Howard Halpern: And you anticipate if you were to sign eight or nine new contracts, do you think from the commercial side, you think you could get them up and were all up and running, before the end of the year?
Jim DeSocio: It depends on when we sign them. If we sign them in the next couple of weeks. Most definitely we're looking at a probably a conservatively, a 60 day implementation and change and not us that slows it down. It's usually, they have to get their systems ready. We need to do integration into their systems. So they have to have a developer available to work with us. So there's-- there were a couple of things out of our control, but we've been very successful once, signed getting people up, pretty consistently in 60 to 90 days.
Q – Howard Halpern: Okay. And one last one. We should see incremental increases in G&A expense from that 1.8 level, if you take out the one-time stock compensation expense?
Jim DeSocio: Yes. Joe, do you want to elaborate on that?
Joe Spain: Yes.
Jim DeSocio: And yes, that’s what I gave, yes.
Q – Howard Halpern: Okay. Okay. Okay. Thanks, guys and keep up the great work.
Jim DeSocio: Thank you, Howard. Going forward, any questions, please feel free to contact us directly or Joe or myself or you can contact Tom Baumann at FNK.IR. And we'll be happy to have a conversation and answer any additional questions that you might have. So with that, I'd like to wrap up. Intellinetics is well positioned for continued success. We have significant momentum, 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 long-time shareholders, and aim to attract new investors as well by delivering strong consistent financial results. Thank you for joining us today, and we look forward to speaking again on our next conference call. Thank you all.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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