Good day, ladies and gentlemen. And welcome to Red Violet’s Fourth Quarter and Full Year 2022 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, Vice President, Finance and Investor Relations. Please go ahead.

Good afternoon and welcome. Thank you for joining us today to discuss our fourth quarter and full year 2022 financial results. With me today is Derek Dubner, our Chairman and Chief Executive Officer; and Dan MacLachlan, 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. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investors 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. For 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-K and the subsequent 10-Qs. During the call, we may present certain non-GAAP financial information relating to our adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin 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 amount may be discussed as these metrics and their definitions can also be found in the earnings press release issued earlier today. With that, I am pleased to introduce Red Violet’s Chairman and Chief Executive Officer, Derek Dubner.

Thanks, Camilo. And good afternoon to those joining us today to discuss our fourth quarter and full year 2022 results. We are pleased to announce a strong fourth quarter, which produced another record year for Red Violet. Despite 2022’s uncertain economic environment, Red Violet continued to drive healthy double-digit percentage revenue growth while expanding gross margins and generating solid cash flow. We continue to strategically invest in our robust product roadmap and execution against our growing sales pipeline. Further, even with the investments made in 2022, we generated our first full year of GAAP profitability without a one-time gain. We remain intently focused on the execution of our long-term strategic plan and our industry-leading teams continue to outperform. Now turning to the numbers, for the quarter, total revenue was $13.1 million, a 16% increase over the prior year and a record fourth quarter for Red Violet. Platform revenue increased 19% to $12.9 million. Services revenue decreased 54% to $0.2 million. We produced $10 million in adjusted gross profit, resulting in an adjusted gross margin of 77% in the fourth quarter, up 3 percentage points. Adjusted EBITDA for the quarter was $1.5 million, up 16% over the prior year. Our IDI billable customer base grew by 148 customers sequentially from the third quarter, ending the fourth quarter at 7,021 customers. FOREWARN added over 6,900 users during the fourth quarter, ending the quarter at 116,960 users. Over 235 realtor associations are now contracted to use FOREWARN. For the year, revenue increased 21% to $53.3 million, generating adjusted EBITDA of $12.9 million. We generated $0.6 million in net income in 2022, our first full year of GAAP profitability without a one-time gain. Recall, our 2021 net income of $0.7 million included a one-time gain of $2.2 million from the forgiveness of our CARES Act loan. We continue to convert our larger enterprise prospect pipeline into wins. We had 67 customers contribute over $100,000 in revenue in 2022, a 43% increase compared to 47 customers in 2021. As well, our existing customers continue to spend more with us year-over-year. With 2022 behind us, we are excited about 2023 and beyond. While many companies are retrenching and right-sizing their organizations given the current climate, we are in the enviable position of being able to advance our long-term strategic plan. This consists of converting our healthy cash flow and solid balance sheet into innovative solutions, enhanced capabilities, entry into new markets and increasing market penetration. This is a delicate balance of pressing investments for future growth while exercising financial prudence to maintain the strong financial profile of our business. We have a robust product roadmap of planned releases throughout 2023 and the next several years. These releases include enhancements to existing solutions and new solutions in identity, fraud prevention and detection, background screening support, commercial real estate analytics, marketing services and the public sector. These innovations are designed to improve customer outcomes for current use cases and to address customer needs where there are presently no solutions or current market solutions are inadequate. As you can imagine, developing solutions to address complex problems often takes time and multiple iterations between us and pilot project participants. Importantly, our target markets remain resilient and we expect strong demand for existing and new solutions for the foreseeable future. The secular tailwinds that our business has are firmly in place — a digital transformation is in its infancy, cybercrimes and fraud that are omnipresent, demand for integrated solutions that drive efficiency and more. Our solutions are mission-critical. They are used to manage risk, gain efficiency and acquire customers, all essential, especially in a challenging economic environment. Overall, we are pleased with our performance in 2022. Notwithstanding the economy, we are making solid progress against our strategic plan and nothing has altered our view regarding our product roadmap and our expectations around adoption by our target markets. Given this and the strong start to the year we are experiencing here in the first two months, we remain very optimistic about our prospects for 2023 and beyond. With that, I turn it over to Dan to discuss the financials.

Thank you, Derek, and good afternoon. 2022 was a great year for Red Violet. We executed well against our planned initiatives laid out at the beginning of the year. While continuing to strategically invest in the business, we solidly grew revenue while maintaining healthy margins and cash flow. We added key strategic hires in several verticals and tactically built out our product development and go-to-market resources. As an organization, we added 46 team members in 2022, including 14 in sales and marketing and 27 in technology and product development. These significant additions will enable scalability across the organization. This time last year, we explained that we would leverage our strong balance sheet and healthy cash flow to reinvest in the business in the form of human capital, expanding the capabilities, depth and efficiency of our team. We explained we could make these investments while maintaining an adjusted EBITDA margin in the range of 20% to 25%. We executed well against that expectation. We grew revenue by over 20% to $53.3 million in 2022, maintaining a 24% adjusted EBITDA margin, which produced $12.9 million in adjusted EBITDA. Importantly, 2022 was our first full year of GAAP profitability without a one-time gain, generating $0.6 million in net income, which resulted in earnings of $0.04 per basic and diluted share. The markets for our solutions continue to show strong fundamentals and increasing opportunity. We are releasing new features and enhancements on current solutions and developing new solutions to address additional use cases in identity, commercial property solutions, background screening support and marketing services. With our higher tier opportunity pipeline strong and growing, we continue to make significant progress in moving upmarket in both size and volume potential. We are competing successfully, converting those higher tier private and public sector opportunities to wins. We had 67 customers contribute over $100,000 in revenue in 2022, a 43% increase over the prior year. We remain confident in our ability to drive strong growth in 2023 and beyond. Turning now to our fourth quarter results, for clarity, all the comparisons I will discuss today will be against the fourth quarter of 2021 unless noted otherwise. Total revenue was $13.1 million, a 16% increase over the prior year. Platform revenue increased 19% to $12.9 million. Services revenue decreased 54% to $0.2 million. We produced $10 million in adjusted gross profit, resulting in a margin of 77% in the fourth quarter, up 3 percentage points. Adjusted EBITDA for the quarter was $1.5 million, up 16% over the prior year. Adjusted EBITDA margin remained consistent at 12% for the quarter. Continuing through the details of our P&L, as mentioned, revenue was $13.1 million for the fourth quarter, consisting of revenue from new customers of $1.2 million, base revenue from existing customers of $10.6 million and gross revenue from existing customers of $1.3 million. Our IDI billable customer base grew by 148 customers sequentially from the third quarter, ending the fourth quarter at 7,021 customers. FOREWARN added over 6,900 users during the fourth quarter, ending the quarter at 116,960 users. Over 235 realtor associations are now contracted to use FOREWARN. Our contractual revenue was 77% for the quarter, down 2 percentage points from the prior year. Our revenue attrition percentage was 5%, compared to 4% in the prior year. We expect our revenue attrition percentage to trend between 5% and 10% for the foreseeable future. Moving on from our revenue metrics and down the P&L, our cost of revenue, exclusive of depreciation and amortization, increased $0.2 million or 4% to $3.1 million. This $0.2 million increase was a result of an increase in data acquisition costs. Adjusted gross profit increased 20% to $10 million, producing an adjusted gross margin of 77%, a 3-percentage-point increase over the fourth quarter of 2021. Sales and marketing expenses increased $0.8 million or 36% to $3 million for the quarter. The increase was due primarily to an increase in salaries and benefits and sales commissions. The $3 million of sales and marketing expense for the quarter consisted primarily of $1.8 million in employee salaries and benefits and $0.7 million in sales commissions. General and administrative expenses increased $0.9 million or 14% to $7.1 million for the quarter. This increase was primarily the result of a $0.6 million increase in employee salaries and benefits and a $0.2 million write-off of long-lived assets. The $7.1 million in general and administrative expenses for the quarter consisted primarily of $4.1 million of employee salaries and benefits, which included year-end bonuses as part of our company’s discretionary bonus plans, $1.4 million of non-cash share-based compensation expense and $0.9 million in accounting, IT and other professional fees. Depreciation and amortization increased $0.3 million or 24% to $1.8 million for the quarter. This increase was primarily the result of the amortization of internally developed software. Our net loss for the quarter narrowed $0.3 million or 13% to $1.5 million. We reported a loss of $0.11 per basic and diluted share for the quarter based on a weighted average share count of 14 million shares. Moving on to the balance sheet, cash and cash equivalents were $31.8 million at December 31, 2022, compared to $34.3 million at December 31, 2021. Current assets were $38.1 million, compared to $38.6 million and current liabilities were $5.4 million, compared to $3.5 million. We generated $12.5 million in cash from operating activities for the year ended December 31, 2022, compared to generating $8.9 million in cash from operating activities for the same period in 2021. We generated $3.6 million in free cash flow in 2022, compared to generating $3.7 million in 2021. Cash used in investing activities was $8.8 million for the year ended December 31, 2022, mainly the result of $8.5 million used for software developed for internal use. Cash used in investing activities in the prior year was $5.2 million. Cash used in financing activities was $6.1 million for the year ended December 31, 2022, mainly the result of two items; one, acquiring approximately 252,000 shares of company stock for $5.2 million from the net share tax settlement of employee restricted stock units; and two, purchasing 50,000 shares of company stock for $0.9 million under our stock repurchase program at an average price of $17.52 per share. These shares were withheld in treasury and retired prior to the end of the year. During the same period in 2021, cash provided by financing activities was $17.6 million. This was a result from the net proceeds of $20.9 million in gross financing raised through the sale of 552,915 shares of common stock at a price of $38 per share. This was offset by $3.3 million of cash used to acquire approximately 143,000 shares of company stock from the net share tax settlement of employee restricted stock units. 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. In closing, we are pleased with our fourth quarter and full year results. Despite the uncertain economic environment, we are excited about what we are seeing in the first two months of this year and expect 2023 to be another great year for Red Violet.

One moment for our first question. Our first question will come from the line of Brandon Osten from Venator. Your line is open.

Hey, guys. Happy New Year.

Hey, Brandon. How are you?

I am good. I am good. Obviously, a really good quarter, I mean, it only compares somewhat poorly to the ridiculous quarter you guys put up in Q3. So second best quarter ever.

Correct.

I have a couple of questions. Can you remind me about the dollar value of the headwind you faced this year due to that customer acquisition? I know you experienced significant growth, and the growth rate might actually be better than what has been reported. I just can't remember the exact loss—was it around $0.5 million?

Yeah. It was roughly $0.5 million a quarter, right? So annualized about $2 million.

Oh! Okay. So, I mean, we are really looking at, like, does this 12.8 basically, should I be comparing that 12.8 to like 10.2 or something, does that make or I guess 13 with 10.7, does that make more sense than apples-to-apples?

Yeah. Look, I think that’s a good way to look at it, right? It was a larger customer that we discussed, right? And so that was $500,000 a quarter that we needed to go get. So that’s a good way to look at it, for sure.

Can you remind me about the seasonal impact of the EBITDA in Q4? Is it just related to year-end bonuses for management and employees?

So, yeah, we have a company discretionary bonus plan and because of the discretionary nature, a lot of that falls into the fourth quarter based on performance and such.

Okay.

From a top-line perspective, we have previously mentioned that there is typically some seasonality in the fourth quarter due to fewer business days. Since a portion of our revenue is still transactional, the reduced business activity towards the end of the year results in noticeable seasonality at the top line.

Okay. I see you mentioned a strong start to the year. With only a couple of weeks left, I understand you prefer not to provide guidance. However, can we expect that Q1 revenues will exceed Q4 revenues? Is that a reasonable expectation without revealing too much?

Yeah. Brandon, I think that’s a fair statement. Yes.

Okay. Okay. And two other questions here, can you give me a feel for, I mean, you really have two markets that I would consider somewhat cyclical. I mean, law enforcement isn’t particularly cyclical, but like cyclical material and somewhat impacted by rules and regulations. Can you give me a sense about how you are feeling on the repo market, which should be starting to come up? And on the other hand, the real estate market, which you are adding, you do seem to be adding customers there, but can you give me a sense of what you are seeing on that side as well?

Sure, thanks, Brandon. We have indeed noticed an increase in the repo market. This trend isn't unexpected, as much of the government support provided during COVID, such as subsidies and moratoriums on collections, has started to fade. Consumers at the lower end of the economic spectrum, often referred to as sub-prime, are struggling significantly due to inflation, which affects everyone but hits this group harder, especially as their savings have diminished. They are increasingly turning to credit cards, leading to a rise in delinquencies, and we are also seeing more repossessions of automobiles purchased during the pandemic. Due to a shortage of supply, many of these autos were likely overvalued, putting consumers in tough situations. As a result, the repossession market is currently quite active. Regarding real estate, we noted last year that the rapid increase in mortgage rates from mid-3% to 6% around March affected that sector of our business, which provides software solutions to analyze demographics related to selling or purchasing homes. Our real estate clients were assessing their return on investment after the rate hike; thus, some paused their spending with us. However, activity picked up later in the year and has since stabilized. It’s important to differentiate this from our FOREWARN product, which is a risk and identity tool for realtors and operates on a different contractual basis. Overall, we've observed relative stability in the real estate market since the impact we saw in the second quarter of last year.

Yeah. Also, I saw an article out of London Times or one of the European ones that real estate agents and the dangers that they face for showings when they don’t know the counterparty, like physical dangers, maybe worth looking at. And then my last question and I am going to ask a stupid question, I know it’s a stupid question before I ask, but I will ask it anyway.

No problem.

Everyone is eager to hear about the recent excitement surrounding artificial intelligence and machine learning. Your platform has a significant database, which is a key asset. While there may be an output component, having that database also serves as an important input. It’s crucial to understand who possesses the data, how it is processed, and who ultimately delivers it. Have you considered strategically how to utilize your database to benefit your customers? Even your tool, FOREWARN, functions as a predictive system for potential outcomes in transactions. I’m not looking for detailed answers, just any insights on what you share with people when they inquire about this.

Sure, I appreciate the question. It’s Derek. Setting aside all the AI discussions, which are currently very popular, this is the third platform we've developed in this area. This platform was built from the ground up in the cloud and is unique among our competitors. We have incorporated machine learning into it, always aiming to analyze data and identify patterns and anomalies. As consumers, we leave a footprint in society daily. The data trail we create expands with our multi-year address history, significant life events, bankruptcies, liens, judgments, criminal histories, asset transfers, and business affiliations. This aspect is a major part of our platform, contributing to what we believe is a significant competitive edge. Our end users can utilize an interface we consider to be much more intelligent than what's currently available. Our platform takes data and transforms it into actionable insights. That’s our perspective on our platform, and we have been communicating this narrative for quite some time. While we are still a small company with only 7,000 customers, those customers are experiencing the benefits of integrating our platform and solutions into their workflows. We feel distinctly positioned compared to what's out there and are optimistic about our future.

Great. Thanks, guys. Keep moving forward.

Thanks, Brandon.

One moment for our next question. Our next question will come from the line of David Polansky from Immersion Investments. Your line is open.

Hey, guys. Thanks for taking my questions. I want to talk about headcount a little bit. I think you are capping off your biggest year ever for hiring, you hired about 46 net new people. Are you ready for this year with the current headcount or should we expect similar hiring patterns in 2023, and then going off of that, can you discuss how that may or may not impact your margin profile on gross margin and adjusted EBITDA?

Sure. Thanks, David. You are right. We made significant hires last year and we looked around the organization and said, look, we see significant opportunity as we roll out the product roadmap and as we expand in certain verticals and as we enter new markets. So we made hires in various parts of the organization to, for example, bolster our infrastructure. While we add to our data science team, our product development team and build those products to add to sales and marketing, to get out there and to tell our story and to bring these fantastic solutions to market. So I would say there is going to be no repeat to the number of additions that we did. I think we are pretty well-positioned as far as who we have already added. So there’s no intention of significantly or even insignificantly adding to that position other than where we see we have nice traction. We have always said we will spend into that traction a bit to really get going. Dan, why don’t you talk a little bit about margins and what you can expect?

Yeah. Sure. Thanks, David. Great to hear from you. Look, I think this kind of sets for us kind of that new level, if you will, that gives us a lot of leverage over the next several years. Strategically, as Derek said, we will look at areas where we start to gain traction, potentially lean in, but the expectation is we would maintain around this level for most of the year. What that means for margin, the expectation is for this year, margins would be relatively consistent with what you saw in 2022, and then, ultimately, as we are leaving 2023 and seeing an increase in revenue, we will start to see that nice leverage in that margin profile and really start to see that margin profile extraction if you will going into 2024, starting to hit towards those targets that we have talked about in the past, closer to the 35%. So that’s kind of what the expectation is for 2023 and then leaving 2023 going into 2024.

So when you say consistent, do you mean sort of maybe in the mid-20s range, is that right?

Correct.

I just want to make sure I understand this, but if you are not making significant hires and you are largely a fixed cost business and presumably you would be growing revenue that should flow through at a pretty high incremental margin, where are you spending, if not in headcount, where, because my thought is that if you are not spending, we should see some pretty good operating leverage, but it sounds like we will still be sort of in the mid-20s range. So then can you talk about that a little bit?

Yeah. So, look, when we look at it, we look at it from a conservative standpoint. As I said, we are kind of leaving out of 2023 the expectation is you will start to see that nice leverage, right? So when you look at last year 2022 versus this year. Obviously, we added a good portion of the 46 kind of in moving out of the second quarter into the third quarter and fourth quarter, probably, add half in the beginning of the year, half in the second half of the year, so the run rate based on that is really leaving the year. So, yeah, I think the expectation is, from a conservative standpoint, we will look to be kind of in the mid-20s. But, ultimately, as we grow revenue, I think we have a lot of upside to that. I mean, last year, we guided around 20% to 25%, obviously, we came on the high side of that, closer to 25%. I would have the expectation that we have more upside in that margin than downside based on our revenue growth.

Okay. And then on topline, I know we have talked about this a bunch of times, but is your intent to still grow this business organically and are you seeing anything on the M&A front that gets you a little bit excited, because I am just trying to think of your bridge of some of these long-term targets that you laid out and I’d just like to get some commentary around that, that would be great?

Thank you, David. This is Derek. We approach each day with the aim of growing our business organically. However, we do have strong banking relationships that give us opportunities to explore. We've previously mentioned our interest in certain areas where we might acquire unique data assets or technology through a buy or build strategy, as well as front-facing solutions that are already well-established in the market and could be interesting acquisitions for us. We are always aware of dilution and have been cautious, especially over the last couple of years due to the valuations and seller expectations we've observed. Throughout 2022 and into 2023, those valuations have declined, with public markets generally adjusting quicker than private ones, which are also starting to seek capital access. We remain vigilant and occasionally review opportunities, but any potential acquisition must involve key assets at the right price and valuation. If those conditions aren't met, we will continue to focus on organic growth. As we transition from smaller and medium-sized customers to larger enterprise customers in both the private and public sectors, we see significant potential for revenue expansion in the longer term, provided the market and economy are favorable. We are very enthusiastic about the opportunities ahead and achieving our stated targets.

That’s great. And not to be too cute about it, but maybe you can use some of those good banking relationships to get some analysts on the call and some estimates out there and maybe get the liquidity on the stock up a little bit.

We hear your comments.

All right. Thanks, guys. I will pass.

Thank you very much.

Thank you. I am not showing any further questions in the queue. I would now like to turn the conference back to Derek for closing remarks.

Thank you. We are pleased to have reported another strong quarter and a record year for Red Violet. Notwithstanding the climate, we remain steadfast in operating our business with a long-term view. We continue to execute against this multiyear strategic plan that we have been discussing and our business is financially strong. We are very excited about the prospects for 2023 and beyond. Good afternoon.

This conference concludes today’s conference. Thank you for participating. You may now disconnect. Everyone have a great day.