Earnings Call Transcript - INLX Q3 2025

Operator, Operator

Greetings, and welcome to Intellinetics Third Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to Roger Grabner. Thank you, Roger. You may begin.

Roger Grabner, Moderator

Thank you, and good afternoon, everyone. I'm pleased to welcome you to the Intellinetics 2025 Third 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 events or results. Intellinetics undertakes no duty to update any forward-looking statements. For more information about the 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 and 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 of 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, 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.

James DeSocio, CEO

Thank you, Roger. I'm pleased to share that we're now coming out of the temporary slowdown in professional services revenue with the renewal of our large state contract in June that we discussed last time. Just like in Q2, our Q3 softness was mainly due to lower digital transformation work, especially paper scanning. But what wasn't visible during that time is that our operations in that area were improving every month. As I mentioned in our earnings release earlier today, we've rebuilt our backlog with orders already in hand. That backlog will bring our digital transformation work back to historical levels and will carry us beyond the end of the second quarter of fiscal 2026, even without closing another major deal. And we're not stopping there. Our pipeline is strong, and our goal is to build an even longer runway of backlog while also expanding our other revenue streams with these same customers. One great example of expansion is in our storage and retrieval services. We're expanding into microfilm and microfiche storage, providing temperature and humidity controlled environments for our largest customers and others. The interest has been strong, and we're already seeing preorder volumes coming in. This new storage offering is in addition to the large microfilm conversion project I talked about last quarter, which is expected to begin generating revenue in Q4 and will contribute revenues through next year and beyond. Now turning to our SaaS business. We continue to make solid progress across multiple fronts. We have fully embraced AI throughout our development team and have started supplementing our internal code writing and mapped out delivery AI agents with our solutions, while at the same time, are already utilizing AI on our sales and marketing efforts. Two of our key markets are homebuilders and K-12 education. As many of you know, 2025 has been a tough year for homebuilders. Even so, we're going to grow our SaaS revenue in this market segment, which will contribute to the extremely quick payback of our payables automation solution. We have several enthusiastic customers who will be sharing their success stories at the upcoming Build Smarter Show in San Diego. That's Constellation Homebuilders' largest user event of the year. Our team will be there, including me. Another positive sign for this product is the expansion potential. Many of our customers start small and grow. For instance, one homebuilder who began with a $30,000 annual subscription will double to $60,000 when they renew. That's because of higher volumes and implementing our system across their operations. In K-12 education, we're also seeing encouraging momentum. We've moved beyond the uncertainty around public education funding from earlier this year. As a reminder, we launched our K-12 payables automation solution in April. With the help of AI and development and a short beta period, payables automation is fully rolling out through our K-12 partner ecosystems. As proof of the success of our strategy, we hosted a webinar for K-12 customers on October 22, and the response has been tremendous. 67 school districts joined our webinar. And within 3 weeks, we closed 19 new payables automation orders from that single event. On top of that, our press release says we've already closed another 11 sales this quarter, but we closed an additional 2 more since that went to press. So that's about 31 new SaaS deals in the last couple of weeks. Between our 2 K-12 partners, we have around 4,000 targeted prospects for these solutions. Altogether in all product lines and solutions, we have a very strong pipeline. Beyond that, we're continuing to pursue new partnerships that will open up additional industries and markets. Our technology is industry agnostic. So when we find the right ERP partner who needs our content management or payables automation to strengthen their offering, it's a win-win. Growing our partner ecosystem and keeping customers happy remains central to our strategy. We're truly at an exciting inflection point. Since 2022, we've achieved all of this primarily through our positive cash flow and with the continued use of AI throughout our solutions. We're competing effectively with companies many times our size. With that, I'll now turn the call over to our Chief Financial Officer, Joe Spain, to walk through the financials.

Joseph Spain, CFO

Thanks, Jim. I will now review our financial results for the third quarter of 2025. Total revenue for the quarter ended September 30, '25, decreased 12.8% to $4.0 million as compared to $4.6 million for the same period last year. The following are the material components of our revenue presented on our statements of operations. SaaS, including hosting revenue, grew 14.6% to $1.6 million for the quarter from $1.4 million for the same period last year, primarily driven by continued early payables automation successes. Software maintenance services were down as expected, decreasing $42,000 or 11.9% from 2024. As a reminder, these maintenance revenues are from support agreements with customers continuing on our premise solution. Professional services revenue decreased 28% to $1.9 million for the quarter from $2.6 million for the same period last year. Jim has already discussed the factors driving this decrease in this call and our Q2 call. As a percentage of total revenue, professional services revenue was 48% of total revenue for the quarter compared to 57% last year. Margins have remained solid for each revenue line and continue to be robust for our subscription software offerings, including SaaS and maintenance. Consolidated gross margin percent increased 434 basis points to 64.2% for Q3 this year compared to 59.8% last year. The consolidated increase was driven by a favorable revenue mix, a result of increased SaaS volume and reduced professional services volume. SaaS margins remained strong at 85.1%, up from 84.3% last year. Professional services margins decreased to 40.5% in the quarter from 42.9% last year, with a particularly challenging project offsetting the early impact of June 2025 price increases. Storage and retrieval margins were very strong in the quarter at 71% compared to 50.6% last year, primarily the impact of April 2025 price increases. Operating expenses decreased 1.9% to $2 million, $2.0 million for the Q3 2025 compared to $2.1 million in Q3 '24. The increases from our investments in sales and marketing as well as infrastructure, which we've been discussing these last couple of quarters were offset in Q3 by reductions in variable and share-based compensation expense. Net loss for Q3 was $370,000 compared to a net loss of $393,000 for the same period last year. Loss per share was $0.08 per share compared to a loss per share of $0.09 last year. Our adjusted EBITDA for the quarter was $105,000 compared to an adjusted EBITDA of $480,000 for the same period in '24. The difference is driven by the professional services revenue reduction and investments in SG&A, as just discussed. Next, a brief overview of our balance sheet. At September 30, '25, we had cash of $3.2 million and accounts receivable net of $951,000. Our total assets were $18 million, including $8.8 million in intangible assets and goodwill as part of acquisitions made since 2020. Total liabilities were $6.6 million, including $3.6 million in deferred revenues, reflecting signed SaaS and maintenance contracts and $1.9 million in lease liabilities as of September 30. We've had no debt on the balance sheet since we paid the last of it in June of this year. 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 expect 2025 revenues to be less than 2024 revenues driven by weakness in professional services in the first 3 quarters of the year. However, we expect to still grow SaaS revenues and maintain positive adjusted EBITDA. We anticipate fourth quarter 2025 SaaS revenues to be higher than fourth quarter '24 SaaS revenues, and we further anticipate fiscal year 2026 SaaS revenues to exceed 2025 SaaS revenues. We're maintaining our previous expectation that 2025 adjusted EBITDA will 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 '25 and beyond. With that, we thank you all for listening. And at this time, we'd like to open up the call to Q&A.

Operator, Operator

Our first question comes from the line of Howard Halpern with Taglich Brothers.

Howard Halpern, Analyst

In terms of what Jim discussed regarding the 31 new SaaS deals in the K-12 market, what kind of annual recurring revenue are we anticipating? Additionally, what type of ramp do you expect to achieve with your partners over the next couple of years?

James DeSocio, CEO

Yes, that's a very good question, Howard. The K-12 deals are somewhat smaller. The initial group of K-12 deals we sold are in partnership with Software Unlimited, which has already sold our document management product. We are now adding the payables automation component to that. This results in slightly less revenue for us, but the deals we've secured so far will generate over $100,000 in annual recurring revenue. We currently have 265 joint deals with SUI, and they have an additional 1,300 customers. We have established a new agreement with SUI that gives us direct access to sell to those 1,300 customers. This is very promising for us, as we can now steer our own path. Previously, SUI sold and installed our product without our involvement, which worked well for them. However, due to the success we've experienced in the first few weeks of launching this within their customer base, I've assigned another sales representative to that area. Now we have two sales reps focusing on that customer base. My goal for this year is to reach 40 to 50 deals by the end of the year. While that might be a bit ambitious, we already have 30 deals secured, and I am confident we can reach 40 to 50. Given the enthusiasm surrounding this initiative and the positive feedback we're receiving, I'm optimistic we can surpass 100 deals, and possibly more. So I stand by that.

Howard Halpern, Analyst

The implementation time for this customer base is fairly quick.

James DeSocio, CEO

We sold a few of the original 15, and they are already scheduled for installation. We are now starting to reach out to them for training, and it should take a couple of weeks, not months.

Howard Halpern, Analyst

And with the relaxation or money may be starting to flow with the homebuilders in general in the U.S. and Canada. In terms of your current customer base, what are we looking at? Are they willing to expand beyond just the payables into a couple of your other modules that you have been developing?

James DeSocio, CEO

Very interesting. You mentioned that you've been following our internal meetings. Brookfield, one of Constellation's largest clients, has recently inquired about risk management and the handling of legal documents. Whenever they work on a building, they encounter numerous lawsuits and issues, as well as worker injuries. They require a document management system to centralize that information for tracking by project. They've contacted us expressing interest in our document management solutions and are seeking further details, believing that we could effectively meet their business needs in that area. Yes.

Howard Halpern, Analyst

Okay. And that could see...

Joseph Spain, CFO

I was just going to add, Jim, if you want a different angle to add to it is the example you cited about the customer we specifically didn't name, but the $30,000 to $60,000 ARR customer. That's not a new module, Howard. That's volume only.

James DeSocio, CEO

When customers make a purchase, they typically start with one of their divisions, initially handling a few thousand invoices. After experiencing success, they often realize they have additional divisions and we are able to scale our services to accommodate a greater volume for them. Therefore, there is significant potential for growth within our existing customer base in payables automation, independent of new products being sold to them.

Howard Halpern, Analyst

Okay. And you talked a little bit about maybe expanding the microfiche, microfilm storage, will that, over time, be considered a cloud-like SaaS model?

James DeSocio, CEO

Not really. In our digital transformation business, we have a small team that handles microfilm and microfiche conversions. There is a significant amount of microfilm and microfiche available in the market, and many people prefer to have us store it instead of converting it, as it often contains legal documents or student records that must be retained indefinitely. This material deteriorates quickly unless properly stored. Recently, a large customer approached us with a considerable quantity of microfilm and microfiche and requested that we establish a vault with temperature and humidity control. After reviewing the figures, we determined that while this isn't a SaaS model, it is definitely a recurring revenue model. We will bill them on a recurring basis, similar to our approach with Rocket Mortgage and storing their boxes. So yes, it would be a recurring revenue model, but not a SaaS model.

Howard Halpern, Analyst

And is that one that could also fit with the K-12 market at some point?

James DeSocio, CEO

We believe so because there's a lot of microfilm and microfiche within school districts as we all know, right? in their library in their student records. That was the media that was used years ago to get rid of paper and now it's transitioning to a digital format, so most definitely.

Howard Halpern, Analyst

And would that even move up to the university level at some point that business really get a good handle on it.

James DeSocio, CEO

Most definitely. Anybody that has microfilm, microfiche we would be able to make an offer to them that we could store for them.

Howard Halpern, Analyst

Okay, I have one last question regarding your outlook. Year-over-year, SaaS is expected to grow. Will there be any churn, or can we expect growth to continue sequentially compared to Q3?

James DeSocio, CEO

If I understand your question correctly, will there be churn? We've always experienced a very minor amount of churn. The industry average is under 10% in both dollars and numbers, and we have historically been single digit, what is it, Joe, 5%, even under 5%.

Joseph Spain, CFO

Often under 5%. Yes.

James DeSocio, CEO

We have been successful in selling and retaining our customer base and have not faced significant churn.

Howard Halpern, Analyst

Okay. So you would...

Joseph Spain, CFO

With that, Roger or sorry, Howard net, Howard, is the way to look at it. So yes, we're going to grow net. So inclusive of a modest, let's hope, right, low single-digit amount of churn, it's still going to grow.

James DeSocio, CEO

Thank you. So thank you, everybody. Listen, we're very well positioned for continued success. We had a little bump with the professional services and having to wait to resign our large customer. That customer is signed. We've re-ramped up and having back to historical levels where we were, and we think we don't think we're going to grow it on top of that. We're in a strong competitive position in growing markets and our diverse set of solutions with ample cross-selling opportunities. We absolutely believe that this is the right strategy to reinvest our historically strong cash flow into the company, particularly sales and marketing, which we have underinvested in over the years, and we are really investing in sales and marketing now. We've implemented HubSpot and some other marketing and sales tools to make us be more efficient and drive more regeneration. So we appreciate the continued support of our long-time shareholders and aim to attract new investors as well by delivering strong and consistent financial results as we have over the last 6 or 7 years. Thank you for joining us today, and we look forward to speaking again on our next conference call. Thank you.

Operator, Operator

And with that, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time, and have a wonderful day.