Intellinetics, Inc. Q2 FY2025 Earnings Call

Greetings, and welcome to the Intellinetics Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Roger Grabner. Thank you, Roger. You may begin.

Thank you, and good afternoon, everyone. I am pleased to welcome you to the Intellinetics 2025 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 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. 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 differ 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. 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.

Thank you, Roger. We have a lot of great things going on, and I'm excited to provide an update. First, I'd like to address our temporary reduction in revenue volume in Q2. The major contributor to our Q2 revenue results falling short of last year's Q2 is the reduction of digital transformation work going up in our professional services revenue line. This reduction corresponds to the timing of our June 1 renewal of our 5-year contract with our largest customer. We use the word temporary intentionally. Since the signing of the contract, we have rebuilt our backlog with orders in hand that will provide transformation work back to historical levels before the end of Q3. This backlog of orders and work will take us into Q1 '26 without having to close another major contract, and we're not stopping. Our goal is to have an even longer runway of backlog. In addition, we just completed successful testing on a large microfilm conversion project that will add more revenue in Q4 and beyond. Further, as a reminder, our June 1 contract renewal is for 5 years with an additional 5-year extension. That's a very good time horizon for us, but we're not resting there. We are working to expand sales through our other channels. We've had success there in recent years, taking our largest commercial reseller from $250,000 in annual revenue 5 years ago to over $750,000 in annual revenue in 2024. On the SaaS side, we've grown revenues 12.6% in Q2 this year over last year Q2. Frankly, I'm disappointed. I wanted more growth than that. Two of our key target vertical markets have faced their headwinds this year, particularly in Q2. Construction and homebuilding faced stubbornly higher interest rates and the threat of tariffs, causing them to pause major projects. K-12 education is worried about the impacts of cuts to public education. I want to be clear that we're not losing orders, but we are experiencing longer lead times on new sales from these factors. A 2-month buy cycle can become 3 or even a bit longer. That said, we are currently seeing renewed activity, and we are optimistic that customer decision-makers are moving past the early pause button mentality and are seeing that our products save them time, money, and provide expanded visibility into their critical performance data. We have modified our messaging to more clearly articulate that now is the time to realize the ROI that our solutions offer. More than ever, I continue to believe that now is the time to invest in sales and marketing to enhance what we do in every aspect of the customer lifecycle, from initial messaging, marketing campaigns, sales material and sales process, to nurturing existing customers using a customer success model. Some specific successes include hiring industry and AI subject matter experts. Our enhanced industry expertise in the construction and homebuilding space, specific to payables automation, has already resulted in key payables automation wins and we have improved our messaging to key buyers in the homebuilding market. Our strength in AI expertise expedites leveraging AI for more wins with customers and accelerated development. Our historical consolidating sales and marketing spend as a percent of revenue has barely broken into the low teens. Usually, fast-growing software or SaaS companies spend 40% or more of revenues on sales and marketing. We're financing our growth out of current cash flow as we have been, and I believe that even with these modest investments, we can take our growth to the next level. Our investment in sales and marketing includes identifying partners to expand our partner-based customer acquisition model. Our increased infrastructure spending includes the development and implementation resources to programmatically bring on new partners, validate our solutions to the market, and accelerate integration. Our mission is to expand partner ecosystems and happy customers. Further, we're committed to leveraging AI in several ways, which fall into 3 distinct core pillars: one, new features, including AI agents within our solutions; two, marketing and customer support; and three, leveraging existing tools to significantly accelerate our internal development, both in bringing new features to market faster and enhancing the customer user interface and ensuring behind-the-scenes data center efficiencies and compliance. As you can tell from the excitement in my voice, we're at an inflection point after successfully paying off $7.6 million in debt and earnouts over the last few years, $6.3 million of that was from cash flow we generated and $1.3 million in equity. We are now positioned to invest in sales and marketing and development as we transform ourselves to grow more rapidly. Our solutions bring ROI efficiencies and executive transparency. On top of that, our implementations are low fit, low change management relative to major players. Our customers win, and we win. At this time, I would like to turn the call over to our Chief Financial Officer, Joe Spain. Joe?

Thanks, Jim. I will now review our financial results for the second quarter of 2025. Total revenue for the quarter ended June 30, '25 decreased 13.6% to $4.0 million compared to $4.6 million for the same period last year. Following are the material components of our revenue presented on our statements of operations. SaaS, including hosting revenue, grew 12.6% to $1.6 million for the quarter from $1.4 million from last year, primarily driven by continued early payables automation successes. Software maintenance services were down as expected, decreasing $24,000 or 6.6% from 2024. As a reminder, these maintenance revenues are from support agreements with customers continuing on our premise solution. Professional services revenue decreased 29% to $1.9 million for the quarter from $2.7 million for the same period last year. Jim has already discussed the factors driving this decrease. As a percent of total revenue, professional services revenue was 49% of total revenue for the quarter compared to 56% last year. Margins have remained robust for each revenue line. Consolidated gross margin percent increased 328 basis points to 68% even for Q2 this year compared to 64.7% last year. The consolidated increase was driven by a favorable revenue mix, a result of reduced professional services volume. SaaS margins remained strong at 84.3%, consistent with 84.5% last year. The other revenue lines were similarly consistent, each within 50 basis points of 2024. Operating expenses increased 21.1% to $3.6 million for Q2 '25 compared to $2.9 million in Q2 '24. The increase is driven by our investments in sales and marketing as well as infrastructure, which is reflected in admin. Jim has discussed these investments as part of our strategy to accelerate sales and enable us to scale. Net loss for Q2 was $568,000 compared to net income of $75,000 for the same period last year. There were 2 primary drivers for the change. One, the temporary reduction in professional services; two, increased spending levels in selling, general and admin to enable us to achieve our growth goals later this year, in 2026 and beyond. Loss per share was $0.13 per share compared to net income per share of $0.02 per share last year. Our adjusted EBITDA in the quarter was $28,000 compared to an adjusted EBITDA of $698,000 for the same period in 2024. The difference is driven by the same professional services and investment factors just discussed. Next, I'll turn to a brief overview of Intellinetics' balance sheet. At June 30, '25, we had cash of $2.1 million and accounts receivable net of $800,000. Our total assets were $17.1 million, including $8.9 million in intangible assets and goodwill as part of acquisitions made since 2020. Total liabilities were $5.6 million, including $2.6 million in deferred revenues, reflecting signed SaaS and maintenance contracts and $1.9 million in lease liabilities as of June 30, '25. As of June 30, our balance sheet is very strong, with no debt. 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 on this call, we are revising our guidance and expect that 2025 revenues will be less than 2024 revenues, driven by weakness in professional services in the first half of the year. However, the company expects to still grow SaaS revenues and maintain positive adjusted EBITDA. Our adjusted EBITDA guidance is unchanged from Q1, where we expect our 2025 adjusted EBITDA to be reduced by more than half compared to fiscal year 2024 due to increased investments in sales and marketing intended to provide returns on those investments in late 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.

Our first question comes from Howard Halpern with Taglich Brothers.

In terms of the professional services ramping back up to historic levels, should we also model out that margins will be relatively healthy at historic levels or maybe even a little better than historical levels?

Jim, do you want to take that?

I think there will be go ahead, Joe.

There will be yes and then a little bit better.

Yes, a little bit better. That's what I was going to say.

Okay. In terms of how many customers on the homebuilder side, how many of them are live and how many of them have paused? And do you expect to go live in the next 6 months?

We just had a very positive review. Every week, every day, we're talking about our customers going live. And 80% of our customers are live right now, and the rest of them are moving to live dates very aggressively. So we're very confident that this was a fairly new product as it has matured over the last year or so. We've added more feature functionality and customers are starting to use it, and they're very, very happy. Again, I've said this in the past, I haven't gotten any calls that people are dissatisfied, which is pretty unique in the software industry. Our customers are very happy in moving to live dates. And I would say the majority of them are referenceable too at this point. So it's going very well.

And from this point forward, I know you said you were slightly disappointed with the 12% growth, but double-digit SaaS line should grow double digits if nothing else out of the ordinary occurs and the pace that you anticipate does occur in the quarters?

Yes, the pipeline is very strong. We have not lost any business. I spoke with the CEO of our largest partner, Constellation Homebuilders, and he mentioned uncertainty, indicating that builders are unsure. During uncertain times, investments tend to be on hold, but we believe changes are on the horizon. We expect a solid fourth quarter. Achieving 12.6% SaaS growth year-over-year is commendable, but I believe we can improve. We just introduced our payables automation product to the K-12 market and launched another service called Capture as a Service, which contributes to recurring revenue. We are currently negotiating an upsell of our products with our large K-12 partner, Software Unlimited. There are many positive developments, and I was in Sioux Falls, South Dakota last week negotiating that contract with Software Unlimited's management team. We anticipate a strong fourth quarter from that sector of our business as well.

Okay. I think I recall on our last call, there were, I think, 3 K-12 utilizing the IPAS for that market. Has that pipeline grown? Or has it even gotten more live customers?

Yes. We're now up to 4 live customers over there, which, again, we launched that in March, April time frame. So we've gotten 4 customers over there, and we are just actually signed. So there are 2 large partners in that space that we work with. One is Software Unlimited, who've been partners with for 5 or 6 years selling our document management system, and we've just launched payables automation into their customer base. And there's another company called Skyward, and Skyward has 2,300 school districts throughout the country. We've just signed our first 2 beta sites over there. They're probably a couple of weeks away from going live, but we're also ramping up our marketing to go after that market as well. So again, we already have 55 document management customers with Skyward right now, and we've just sold our first 2 payables automation customers there. So we're expecting some really good results on that side of the business as well.

Okay. And so I know you have your hands full with the homebuilders and the K-12. But I guess, can you talk about any progress being made on entering any new verticals, ERP verticals?

We do have a partner manager, and we're working very diligently. We have a pipeline of partners that we've been working with, not ready to divulge. We did sign Springbrook up earlier in the year, but that's going a little slower than we would like. But we are calling on net new partners every day to bring into our ecosystem.

Thank you. And with that, there are no further questions at this time. I'd like to turn the call back to Jim DeSocio for closing remarks.

Thank you, Julian. I would like to say, I am very bullish on our company right now. With the tariffs out there and the uniqueness of our business with homebuilders and with K-12, things are looking very, very positive for us as we go forward in the third and fourth quarter. We are ramping up. We will be back to where we were at the end of the third quarter with professional services revenue, which is very exciting as well. We are just well-positioned for continued success. We believe in our strong competitive position in growing markets and our diverse set of solutions with ample cross-selling opportunities. We further believe that it is absolutely the right strategy to reinvest our historically strong cash flow back into the company specifically for sales and development. I mean sales, marketing, and development in order to accelerate our growth. We appreciate the continued support of our long-term shareholders and aim to attract new investors as well by delivering strong, consistent financial results. Thank you all for joining us today, and we'll speak again in the future. Thank you.

Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.