Good day ladies and gentlemen. Welcome to Red Violet's Third Quarter Earnings Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this call is being recorded. I would now like to introduce you to our host for today's conference call, Camilo Ramirez, Vice President of Finance and Investor Relations. Please go ahead.

Good afternoon and welcome. Thank you for joining us today to discuss the third quarter 2023 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 this 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 risk 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 risk 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 subsequent 10 Q. During the call, we present certain non-GAAP financial information relating to adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin, and free cash flow. Reconciliations of these non-GAAP financial measures and their most directly comparable U.S. GAAP financial measure is provided in the earnings press release issued earlier today. In addition, certain supplemental metrics that are not necessarily derived from any underlying financial statement amounts may be discussed and 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. Good afternoon and thank you to everyone joining us today to discuss our third quarter 2023 results. We are pleased to report a quarter of record revenue and solid profitability. Notwithstanding the economic uncertainty, we continue to see strength in new customer onboarding and robust, consistent volumes throughout the quarter. We generated a record $15.8 million of revenue in the quarter, a 5% increase over prior year. To provide some additional perspective on this year-over-year increase, we had a tough comparison from last year as the 2022 third quarter included $1.8 million of one-time transactional revenue, which, as you may recall, reduced our percentage of contractual revenue to 68% in that quarter. This quarter, without the benefit of any material one-time revenue, we still generated record revenue, and our contractual revenue percentage reverted to 79%. Our continued commitment to operational excellence, including expense management, translated nicely into high margins, free cash flow, and profitability. Given our consistent performance, we continue to invest in our product roadmap, while still repurchasing shares and growing cash on our balance sheet. This is yet another quarter, further strengthening the foundation of the business while executing upon our long-term strategic plan. Now on to the numbers. For the quarter, total revenue was $15.8 million. We produced $12.5 million in adjusted gross profit, resulting in an adjusted gross margin of 79% in the third quarter. Adjusted EBITDA for the quarter was $5.4 million dollars, with a margin of 34%. We generated $3.3 million in free cash flow for the quarter and ended the quarter with $34.2 million in cash on the balance sheet. Our IDI billable customer base grew by 272 customers sequentially from the second quarter, ending the third quarter at 7,769 customers. FOREWARN added 21,819 users during the third quarter, ending the quarter at 168,356 users. Over 330 REALTOR Associations are now contracted to use FOREWARN. As it relates to IDI, we continue to see solid demand for identity and fraud solutions. Diving in a bit on segments. In financial and corporate risk, we drove double-digit percentage revenue growth driven by solid and consistent volumes throughout the quarter. Some of our competitors that have greater concentration in consumer financial transactions that are heavily impacted by high interest rates and inflation, such as auto, mortgage, and retail, experienced a slowdown in volumes in the back half of the third quarter. We did not experience that slowdown given that our solutions are used by a highly diverse set of end-users and for a variety of disparate use cases. Within our investigative vertical, we saw strong growth with solid contribution from law enforcement, an area that we have been and will continue to be highly focused on and where we are making nice traction. In collections, revenue increased a few percentage points. Note, this was the first quarter of collections revenue growth in over a year and the highest quarterly revenue mark since the first quarter of 2022. As we have discussed previously, collections was adversely impacted during the pandemic due to, among other things, government subsidies to consumers and moratoria on certain collections activity. With higher borrowing costs and inflationary impacts, consumers have worked off much of those excess savings and are becoming more reliant on credit, and delinquencies and repossessions are rising in certain low credit consumer populations. While premature in predicting a durable turnaround in our collections vertical, repossessions have been trending higher for some time. And we are now seeing increasing evidence of a recovery for this vertical. Our emerging market, which is comprised of multiple industries, was down by double digits on a percentage basis versus prior year, largely attributable to the one-time transactional revenue that I mentioned previously. IDI's real estate vertical, which does not include FOREWARN, remained relatively flat. As to FOREWARN, FOREWARN continues to demonstrate strength as the only proactive safety solution for the real estate industry. Over 330 REALTOR Associations throughout the U.S. are now contracted to use FOREWARN. We recently announced an agreement with Florida REALTORS, the largest state REALTOR Association in the United States, to purchase FOREWARN services for its 238,000 members, beginning January 2024. As well, in October, we announced that the Georgia Multiple Listing Service, the largest MLS in the state of Georgia, and one of the largest MLSs in the United States, contracted to provide FOREWARN services to its 52,000+ MLS subscribers. We begin recognizing revenue for Georgia MLS this month, November 2023, and for Florida REALTORS in January 2024. As to our stock repurchase program, we have purchased 97,181 shares of the company's common stock year-to-date through November 3, 2023 at an average price of $18.29 per share. We currently have $2.3 million remaining under the company's $5 million stock repurchase program. In sum, I am very proud of our team's performance in delivering a solid third quarter, continuing a string of consistently strong quarters, which demonstrate our ability to navigate an uncertain economic period, all while investing in and growing our business, strengthening our balance sheet, and buying back stock. These results reflect our team's dedication, our unwavering focus on customer satisfaction, and our commitment to delivering long-term value for our shareholders. We look forward to sustaining this momentum and continuing to deliver exceptional results in closing out the year and throughout 2024. Now I will turn it over to Dan to discuss the financials.

Thank you, Derek, and good afternoon. We posted a solid quarter that saw record revenue and continued strength in our profitability and cash flow. Despite broader macroeconomic challenges, we are seeing healthy volumes from both new and existing customers with those volumes gaining strength throughout the third quarter. Our $15.8 million in record revenue flowed nicely down the P&L, producing $12.5 million in adjusted gross profit and a record $5.4 million in adjusted EBITDA. We generated $3.3 million in free cash flow for the quarter, up nearly 300%. We recognized a one-time $10.4 million tax benefit in the third quarter with the release of our valuation allowance that was recorded against our deferred tax assets under ASC 740. The valuation allowance was released as a result of generating cumulative taxable income for the recent years. Our projections of future taxable income and the reversal of taxable temporary differences. Inclusive of the $10.4 million one-time tax benefit, our net income for the third quarter was $12.5 million, representing earnings per share of $0.90 basic and $0.87 diluted. With that, let's jump into our third quarter results. For clarity, all the comparisons I will discuss today will be against the third quarter of 2022 unless noted otherwise. Total revenue was $15.8 million, a 5% increase over prior year. We produced $12.5 million in adjusted gross profit, resulting in an adjusted gross margin of 79% in the third quarter, down one percentage point. Adjusted EBITDA for the quarter was a record $5.4 million, up 3% over prior year. Adjusted EBITDA margin was 34%, down one percentage point. We generated $3.3 million in free cash flow for the quarter compared to generating $0.8 million in prior year. Continuing through the details of our P&L, as mentioned revenue was $15.8 million for the third quarter, consisting of revenue from new customers of $1.4 million, base revenue from existing customers of $12.4 million, and growth revenue from existing customers of $2 million. Our contractual revenue was 79% for the quarter, up 11 percentage points from prior year. From a dollar perspective, this represented a $2.4 million or 24% increase from prior year. Our gross revenue retention remained consistent for the quarter at 94%. Moving back to the P&L, our cost of revenue exclusive of depreciation and amortization increased $0.2 million or 8% to $3.3 million, this point $0.2 million increase was a result of an increase in data acquisition costs and third-party infrastructure fees. Adjusted gross profit increased 5% to $12.5 million, producing an adjusted gross margin of 79%, a one percentage point decrease from the third quarter of 2022. Sales and marketing expenses increased $0.8 million, or 28% to $3.4 million for the quarter. The increase was due primarily to an increase in salaries and benefits and sales commissions. The $3.4 million of sales and marketing expense for the quarter consisted primarily of $1.8 million in employee salaries and benefits and $0.9 million in sales commissions. General and Administrative expenses decreased $0.3 million, or 4% to $5.2 million for the quarter. This decrease was primarily the result of a $0.3 million dollar decrease in employee salaries and benefits. $5.2 million in general and administrative expenses for the quarter consisted primarily of $2.4 million of employee salaries and benefits, $1.3 million of non-cash share-based compensation expense, and $0.9 million in accounting, IT, and other professional fees. Depreciation and amortization increased $0.5 million or 27% to $2.2 million for the quarter. This increase was primarily the result of the amortization of internally developed software. Our net income for the quarter was $12.5 million compared to net income of $2.3 million in prior year. As I discussed earlier, our net income included a one-time $10.4 million tax benefit recognized upon the release of our valuation allowance that was previously recorded against our deferred tax assets. We reported earnings per share of $0.90 basic and $0.80 diluted for the quarter based on a weighted average share count of 14 million shares basic and 14.3 million shares diluted. Moving on to the balance sheet. Cash and cash equivalents were $34.2 million at September 30, 2023, compared to $31.8 million at December 31, 2022. Current assets were $42.2 million compared to $38.1 million and current liabilities were $3.4 million compared to $5.4 million. We generated $10.9 million in cash from operating activities for the nine months ended September 30, 2023, compared to generating $8.1 million in cash from operating activities for the same period in 2022. Cash used in investing activities was $7 million for the nine months ended September 30, 2023, mainly the result of $6.9 million used for software developed for internal use. Cash used in investing activities for the same period in 2022 was $6.4 million. Cash used in financing activities was $1.4 million for the nine months ended September 30, 2023, mainly the result of purchasing 70,037 shares of company common stock under our stock repurchase program at an average price of $17.81 per share. During the same period in 2022, cash used in financing activities was $4.7 million, the result of acquiring 200,033 shares of company common stock from the net share tax settlement of employee restricted stock units. As it relates to our stock repurchase program, during the third quarter, we purchased 15,019 shares of our common stock at an average price of $20.64 per share. Through November 3, 2023, we have purchased a total of 147,181 shares of our common stock at an average price of $18.03 per share pursuant to our $5 million repurchase program that was authorized on May 2, 2022. We have $2.3 million remaining for additional purchases under the 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 results for the third quarter. Our balance sheet is solid, we are generating healthy income and cash flow. Volumes remain robust across verticals, and we are seeing great development within our opportunity pipeline. As we close out the rest of the year strong, we are looking forward to a great start in 2024. With that, our operator will now open the line for Q&A.

Thank you. At this time, we will conduct the question-and-answer session. Thank you very much. I would now like to hand the call over to Derek Dubner. I apologize, someone has just popped in. Standby one moment for question. Our first question comes from David Polansky of Immersion Investments LLC.

Hey, everyone. Great job on the quarter, especially considering the tough comparison from the third quarter last year. I was pleasantly surprised by that. Regarding FOREWARN, the deal in Florida that you signed and the recent Georgia deal you announced seem to have a significant impact on your financial statements. Could you discuss the impact and flow-through on the profit and loss for these two deals and when we can expect to see results from them?

Sure, David. This is Dan. Thanks for the question. And so obviously, with confidentiality agreements in place and such with our contracts and such, we can't really get into the pricing or kind of the overall revenue without being able to kind of back into those numbers. But as you can imagine, those are significant wins for us. We were really excited to announce that Florida State Association and Georgia MLS, two large organizations within the broader industry. So from a revenue recognition standpoint, as a company, we'll begin recognizing revenue for Georgia MLS actually this month in November. As it relates to Florida REALTORS, that will begin in January of 2024. So the expectation with our quarterly report for the first quarter of '24, you'll start to see that revenue flow through. And from a materiality standpoint, overall revenue, those are decent sized contracts, and we're really excited about it. But because of confidentiality, I can't really get into the revenue recognition in the dollar amount of those contracts.

In terms of incremental costs, though, on those, I mean if I just make some assumptions on your revenue per user, I mean, what are we thinking in terms of incrementals on that. Can you talk about that?

Sure. From a cost perspective, every dollar we generate contributes fully to our margin. For individual agents who approach us directly, we charge $20 a month for access to FOREWARN. For associations, depending on their size, the monthly fee is significantly lower due to volume. While I won't go into specific pricing details for these agreements, we are very excited about starting to recognize revenue, which we expect to see in the first quarter of 2024.

And David, it's Derek. Obviously, yes, obviously, I'm echoing the sentiment from both of you. These are very significant wins for FOREWARN. As I mentioned a couple of times, 330 associations have contracted for FOREWARN. Of course, we deem this the best proactive safety solution for the real estate industry. So for us to win several of the largest associations in the country, there's definitely a broad recognition amongst the real estate community of the need to provide this tool to their members to enable them to have safer engagements. So we're very excited about it.

Thank you. Regarding IDI, I don't have the exact FOREWARN revenue figure, but I can make a reasonable estimate. It appears that your spending per customer on IDI has been growing significantly, not only in the past few quarters but also over the last couple of years. I'm curious whether this growth is coming from new accounts that are larger or if existing customers are increasing their spending on your IDI solution.

Yeah, David, this is Dan again. The great part is it's a combination of both. Obviously, we've talked about historically kind of this model, you start with early adopters. And then over the last 12 and 24 months, we've really been focusing on moving up tier. And from an existing customer standpoint, when we're dealing with medium and larger enterprises, you have a lot more opportunity to grow within that revenue base. But even historically, with our small and medium-sized businesses, we've done a good job of growing the base. So when we look at revenue per customer from the IDI side and look at it over the past 12-24-36 months, that has been growing nicely from an annual percentage basis. And that's contributed to both the size of the new customer we're bringing in, but also the capacity to grow within that customer base. Because traditionally, when you win a medium or larger enterprise customer, you're not necessarily going to get all their volume right off the bat. Obviously, you grow with them in their current use case, but then you also understand and potentially look for additional use cases within the organization that allows you to land and expand. So it's been a combination of both the new customer size we're bringing in as well as being able to grow the existing base.

Without setting any unreasonable expectations, I understand that your new business is targeting customers with much longer sales cycles. Could you provide an update on our progress in penetrating medium to large enterprises or government customers? I know you've made some hires in the last nine months. Can you share any insights on that?

Sure, David. It's Derek. We're still in the early stages of that. Over the past 18 months, we've brought in some thought leaders to guide specific divisions, such as public sector or identity, to help us enter larger enterprises. They have been shaping our strategy. We are making progress with these larger enterprises, which naturally have longer sales cycles. However, we are still very much in the initial phases. We are excited about the opportunities ahead, despite the growth we've experienced over the last 18 to 24 months. I would say we are in the early phases, and our teams are eager and moving quickly. We will not allow the uncertain economic environment to hinder our ability to start discussions with large enterprises, advance those discussions, and ultimately test our solutions against what's available in the industry, addressing any unique and complex challenges that may not be resolved today. So that's our current position and we see a lot of positive developments ahead.

I want to discuss something you've mentioned regarding the economic environment. I'm not sure if you're using that as protection against potential customer delays on new signings. Can you elaborate on how the economy affects your business? I've always thought that certain parts of your business are somewhat countercyclical. So when you mention economic impact, I don't necessarily see that as negative. Could you provide some insights on how you anticipate this might influence you over the next 12 to 24 months?

Yeah. That's a great question, David. Thank you. We do view our business as very balanced across the economy. It really doesn't tilt very strongly one way or the other, which is really a great thing as far as being balanced across many, many industries, many, many use cases. When the economy is very hot and there are a lot of new account openings, then you're going to see our systems put to use in the way of identity verification, risk mitigation, due diligence. And then when the economy cools as the Fed has bent upon doing today and hiking rates aggressively, we see that collections is now percolating. We've seen repossessions rise significantly. We've seen nice progress from law firms in the way of whatever they may be doing with lawsuits with debt collection, with going after assets suing parties and the like. We've seen law enforcement increase, and we've been very focused there. Law enforcement are avid users of E-Systems, and we've been making nice traction within law enforcement. So with a tilting economy into a more negative economy, even with a good economy, but more so in a bad economy, fraud tends to increase. And therefore, the reliance on our systems are very important. So we see those increasing as well. So again, it's one of those businesses where one side of the business doesn't fall apart to the benefit of another. It's very balanced, and we feel good about our business for the next 18 to 24 months for sure.

Great. Did you disclose a specific number on collections for the quarter? I know you mentioned that pre-COVID, collections were at 40%, and now they are at 20%. You've indicated it's been flat for roughly three years. Can you share any details on what that business has achieved in terms of percentage growth over the last quarter or two?

Yes, you're correct. For competitive reasons, we don't disclose the individual verticals, but we have previously indicated that pre-COVID collections represented as much as 40% of our revenue. Currently, it is below 20% of our total revenue. As we've noted, this segment has remained relatively stable for about six or seven quarters. However, as Derek pointed out earlier, we are beginning to see some positive movement within collections and encouraging signs in repossession activities. This quarter marked the first time we noticed a couple of percentage points increase compared to the previous year, making it our highest revenue quarter in over a year. We are optimistic because we view the collections vertical as an area of potential growth. Our largest segment, which encompasses financial and corporate risk, continues to show strong and healthy growth. Looking ahead to 2024, if we can see some recovery in the Collections area, we anticipate significant upside for the business.

Sure, David, it's Derek again. I want to clarify for those who might not be as familiar with the business as you are. The 40% of our revenue from collections originated in the early days when we first introduced some of our products. Collections is inherently an early adopter industry for these solutions. While collections provide a solid foundation for us, it hasn’t been our primary focus and has become less significant over the past few years as we’ve evolved and matured into supporting some of the leading identity verification companies today. Due to the impact of the pandemic, along with our aim to accelerate our long-term product strategy in enhancing background screening, identity intelligence, and fraud solutions in the market, our revenue from collections has decreased as a percentage, while financial and corporate risk has increased. This trend will remain central to our long-term strategic focus.

Great. Thanks a lot, guys. I'll pass it back.

Thank you, David.

Thank you, David.

Thank you very much. I would like to now turn the call back over to Derek Dubner for closing remarks.

Thanks again for joining us today, and I want to thank our team for delivering yet another record revenue quarter with strong profitability. Our business is performing quite well, especially given the challenging economic environment. We are dedicated to our strategic plan, which includes growth with continued strengthening of the foundation of our business. Given our performance year-to-date, we are well positioned for the remainder of the year and 2024. Good day.

Thank you very much. This concludes today's call. You may now disconnect.