Earnings Call Transcript - RDVT Q3 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Red Violet's Third Quarter 2021 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Camilo Ramirez, Director of Finance and Investor Relations. Please go ahead.

Camilo Ramirez, Director of Finance and Investor Relations

Good afternoon and welcome. Thank you for joining us today to discuss our third quarter 2021 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 subsequent 10-Qs. During the call, we may present certain non-GAAP financial information relating to adjusted gross profit, adjusted gross margin, adjusted EBITDA margin and adjusted EBITDA. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures 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 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.

Derek Dubner, Chairman and Chief Executive Officer

Thanks, Camilo. Good afternoon to those joining us today to discuss the results of our third quarter 2021. Red Violet delivered a very strong quarter, hitting records in revenue, gross profit and adjusted EBITDA. We also achieved our first quarter ever of GAAP profitability without a one-time gain. We experienced strong demand for our solutions across the board. Our team performed extremely well, driving and meeting customer demand with the differentiated assets of our cloud-native platform and unified data-driven solutions. I'm especially pleased with our execution against our multi-year strategic road map. As a result of our strong performance, we continue to leverage our cash generation to invest in the expansion of the business. We generated record revenue of $11.7 million, a 26% increase over the third quarter of last year. Platform revenue increased 26% to $11.3 million. Services revenue increased 24% to $0.4 million. Adjusted gross profit increased 35% to $8.9 million and adjusted gross margin increased to 76% from 71% compared to the same period of 2020. Adjusted EBITDA increased 73% to a record $3.6 million. We achieved our first quarter ever of GAAP profitability without a one-time gain, generating $1.3 million in net income, which translated into earnings of $0.09 per diluted share. We generated $3.5 million in cash from operating activities in the third quarter. And as of September 30, 2021, we had $13.4 million in cash and cash equivalents on our balance sheet. We added over 170 new IDI customers during the third quarter, ending the quarter with 6,314 customers. FOREWARN added over 6,700 users ending the quarter with 74,377 users. Over 165 REALTOR Associations throughout the U.S. are now contracted to use FOREWARN. As demonstrated by recent moves we have made, we are executing against our multi-year strategic plan, positioning the business for the future as we continue to penetrate existing and new markets. We are adding to our teams and our capabilities, leveraging our innovative platform, differentiated data assets, and customer-centric solutions to develop new applications for new segments of our business. As we highlighted on our last earnings call, several very talented individuals joined the team to lead our efforts in Property Solutions and Identity. Within Property Solutions, there are a number of opportunities that we have identified where we can solve for various challenges in the marketplace using our analytic capabilities and delivering derived insights from our data to the commercial and residential real estate sector. Within the broader Identity space, transactions continue to move online in an accelerated fashion due to the pandemic. And we see enormous opportunity to leverage our technology and Identity graph to deliver insights to the public and private sectors throughout the entire consumer journey, from onboarding to log in to transaction, all with the goal of frictionless commerce and fraud capture. Consistent with our company mission, we want to drive increased consumer access to services, including the unbanked and underbanked while capturing fraud and reducing the associated expense that is ultimately passed on to society as a whole. Executing against our plan, I would like to highlight a few recent moves we have made: During the quarter, we welcomed Justin Cleveland to head our expansion within the public sector. Justin is an accomplished executive with a demonstrable track record building and leading teams and rapidly scaling public sector businesses across federal, state and local verticals. The public sector is a significant opportunity given the convergence of various government programs and the ongoing digital transformation. We have all of the assets needed to package them up and to deliver targeted solutions to the public sector, which we believe will be a strong growth vertical for us. Recently, we welcomed Aju John to the Red Violet team to lead our financial services solutions. Aju, a former LexisNexis and Fiserv product executive, brings a wealth of knowledge and experience from the view of the financial services industry. We're excited to have him aboard as we enhance our current offerings and develop new solutions for enterprise financial services. Lastly, during the quarter, we announced the creation of our innovations in Identity Advisory Board, consisting of industry luminaries and accomplished executives from diverse industries to provide strategic guidance in support of the company's mission. As you can see from our progression throughout the year, as the economy strengthens so does demand for our solutions. We are utilizing our solid cash generation to position the company for 2022 and beyond. We are and will always be innovating at a rapid pace. And while I am extremely excited about our performance year-to-date and the road map ahead, I'm even more excited because we are still in the early innings of our evolution. I'll now turn it over to Dan to discuss the financials.

Daniel MacLachlan, Chief Financial Officer

Thank you, Derek, and good afternoon. As you can tell from Derek's commentary, we are extremely pleased with how the business is performing and very excited about the future. This is our third consecutive quarter hitting records in revenue, gross profit and adjusted EBITDA. As Derek mentioned, we also achieved our first quarter ever of GAAP profitability without a one-time gain, generating $1.3 million in net income, which translated into earnings of $0.09 per diluted share. These record numbers reflect strong demand for our solutions and outstanding execution from the entire Red Violet team. As we invest in talent and leadership to support expansion, we see tremendous opportunity to drive our solutions both up and across markets, which we believe will accelerate our growth in 2022 and beyond. As we talk about expansion and reinvesting our cash generation into the business, I want you to understand what that means to our P&L. We have done a great job driving the business over the past several years, including through the global pandemic. During that time, we have been pleased with the growth of the business both at the top and bottom line. As we have explained before, due to our fixed cost of revenue model, our growth in revenue has shown incredible leverage at the gross margin line, with each dollar of growth contributing nearly 100% in contribution. Those growth dollars translate nicely to the bottom line. You can see that leverage historically in the sequential improvement in our profitability metrics of adjusted EBITDA, cash from operations, and net income. We are tactically hardening our infrastructure teams, expanding our sales capabilities, and building out new areas for solution and market expansion, positioning us well for accelerated revenue growth in 2022 and beyond. We are confident we can make these investments and still see continuing improvement in our profitability metrics. With that said, let's dive into our third quarter results. For clarity, all the comparisons I will discuss today will be against the third quarter 2020, unless noted otherwise. Total revenue was $11.7 million, a 26% increase over prior year and our highest quarterly revenue ever. Platform revenue increased 26% to a record $11.3 million. Services revenue was up $0.1 million or 24% to $0.4 million. As we have stated for several quarters now, our services revenue continues to be impacted by COVID-related, government-imposed collections moratoria and forbearance programs, and as a result remains well below its pre-COVID highs of $1.1 million to $1.4 million per quarter. Our adjusted gross margin hit a record at 76% for the third quarter, up 5 percentage points. Adjusted EBITDA for the quarter was $3.6 million, up 73% over prior year. This was our third consecutive quarter of record adjusted EBITDA. Adjusted EBITDA margin for the quarter was 31% compared to 23% in prior year. Continuing through the details of our P&L. As mentioned, revenue was $11.7 million for the third quarter consisting of revenue from new customers of $0.9 million, base revenue from existing customers of $9.2 million, and growth revenue from existing customers of $1.6 million. Our idiCORE billable customer base grew by 173 customers sequentially from the second quarter, ending the third quarter at 6,314 customers. FOREWARN added approximately 6,800 users during the third quarter, ending the quarter at 74,377 users. Our contractual revenue was 80% for the quarter, a 12 percentage point increase over prior year. Our revenue attrition percentage was 5% compared to 10% in 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 $0.1 million or 3% to $2.8 million. This $0.1 million increase was a result of an increase in data acquisition costs. Adjusted gross profit increased 35% to a record $8.9 million, producing an adjusted gross margin of 76%, a 5 percentage point increase over third quarter 2020 and as I pointed out earlier, our highest adjusted gross margin ever. Sales and marketing expenses remain consistent with prior year at $2.2 million for the quarter. The $2.2 million in sales and marketing expense for the quarter consisted primarily of $1.2 million in employee salaries and benefits and $0.6 million in sales commissions. General and administrative expenses remained consistent with prior year at $4.1 million for the quarter. The $4.1 million in general and administrative expenses for the quarter consisted primarily of $2 million of employee salaries and benefits; $0.9 million of noncash share-based compensation expense; and $0.7 million in accounting, IT and other professional fees. Depreciation and amortization increased $0.2 million or 20% to $1.3 million for the quarter. This increase was primarily the result of the amortization of internally developed software. We are proud to be reporting our first quarter ever of GAAP profitability without a one-time gain. Our net income for the third quarter was $1.3 million compared to a loss of $0.9 million in prior year. We reported earnings of $0.10 per basic share and $0.09 per diluted share based on a weighted average share count of 12.7 million shares and 13.6 million shares, respectively. Moving on to the balance sheet. Cash and cash equivalents were $13.4 million at September 30, 2021, compared to $13 million at December 31, 2020. Current assets were $18.1 million compared to $16.7 million and current liabilities were $3.1 million compared to $5 million. We generated $7 million in cash from operating activities for the 9 months ended September 30, 2021, compared to generating $4.7 million in cash from operating activities for the same period in 2020. Looking at our free cash flow, which we calculate using adjusted EBITDA and subtracting the cash we use for capital expenses, we generated $2.4 million in cash during the third quarter 2021 compared to generating $0.7 million for the third quarter 2020. Cash used in investing activities was $3.8 million for the 9 months ended September 30, 2021, mainly the result of $3.5 million used for software developed for internal use. Cash used in financing activities was $2.8 million for the 9 months ended September 30, 2021, resulting from the taxes paid for the net share settlement of approximately 128,000 shares from restricted stock units. These shares were withheld in treasury and retired prior to the end of the third quarter. In closing, the numbers continue to speak to the quality of the business. Business is strong, opportunities abound and the team is executing. As we look to the fourth quarter, we have explained in the past that our fourth quarter historically presents some seasonal headwinds from our transactional customers in the form of fewer business days. However, our fourth quarter is off to a great start. We are excited to close out what has been a great year for Red Violet in 2021, and we are highly confident in our ability to have an even better year in 2022. With that, our operator will now open the line for Q&A.

Operator, Operator

Your first question is from James Lee from Insight.

Unidentified Analyst, Analyst

My name is James. I have a quick question about some of these new verticals. Are you able to provide any color on the fintech and public sector spaces in terms of the upcoming sales pipeline and what the dynamics look like in some of these new verticals?

Derek Dubner, Chairman and Chief Executive Officer

Thanks, James. Appreciate it. This is Derek Dubner. Nice to meet you, and we appreciate the question. Yes, anybody who has been following the story understands that this is a multi-year evolution of the business of which we are in early days. As we continue to evolve, we are taking our innovative technology platform that we've built. This is the third time we've done this and successfully sold the platform twice before. This platform being cloud native with machine learning scalability and the throughput involved with this technology and the differentiated data assets that we have today, including those related to millennials and the unbanked and underbanked, gives us an incredible opportunity to expand the use cases that we're currently serving in our existing customer base. We are just now entering the public sector. We have a small presence there. There is a significant market out there to pursue, hence bringing on board Justin Cleveland, a thought leader in that space who is advancing our interest there. As far as fintech and the public sector, we have discussed the convergence of everything moving online and the need for every industry, not just public sector or fintech, to understand identity, noting the importance of understanding who individuals are as they move through the system to create a seamless experience for consumers while safeguarding the interests of the entity in either the public or private sector. We are currently performing identity verification for some of the leading platforms, with various private companies serving both public and private sector end users, and they are looking back to us, indicating they need more analytics generated through our platform and the insights we can glean from our systems. Many of these platforms are transactional and rely on third-party data, including ours. We have a robust asset in our data, enabling us to conduct in-depth analytics and perform identity verification like no other. As we continue generating healthy cash flow, we are reinvesting in the business and expanding in these areas. We are excited, with Jim Greenwell leading our efforts in Identity and Justin Cleveland in the public sector. It’s a very competitive market. We intentionally keep many specifics under wraps regarding our progress and success. However, the numbers will reflect our growth and achievements as we continue to expand the business.

Operator, Operator

Your next question is from Ryan Notvest from SEMCAP.

Ryan Notvest, Analyst

Just following up on James' question about expanding into new verticals and use cases. Is there anything in your contract with your largest data provider that would cause a reset of the cost structure to you as you expand and kind of repurpose the data that they're providing to you? Anything to be aware of on that front?

Daniel MacLachlan, Chief Financial Officer

No. We have a very flexible term with our largest data provider. This is Dan, and thanks for the question. We recently renewed our contract for another 5 years, solidifying that partnership and adopting a flexible model concerning how we use the data. We have significant flexibility in our use cases, and there is little concern regarding cost implications. The data we bring in-house can be run either one-time or multiple times at the same cost. This structure provides us with tremendous leverage. This will hold true as we enter the public sector and fintech space, allowing us to leverage our fixed cost model to increase revenue while maintaining profitability metrics.

Ryan Notvest, Analyst

Got it. Got it. You said you just renewed that. Anything to call out in terms of how the renewal went and the pricing that you're paying now that we should be aware of for modeling purposes?

Daniel MacLachlan, Chief Financial Officer

No, not really. I think when you look at the cycle for these long-term contracts—typically around a 5-year cycle. Our largest data provider's recent renewal was for another 5 years, generally at the same cost as before. So from a modeling standpoint, there are no material changes to data costs expected in the near to mid-term.

Operator, Operator

There are no further questions at this time. I will now turn the call over back to Mr. Derek Dubner.

Derek Dubner, Chairman and Chief Executive Officer

Thanks to everyone who joined us today. We delivered a strong third quarter and are very optimistic as we head into 2022 and beyond. We're executing upon a deep product road map that's guided by secular tailwinds of digital transformation, the increasing need for fraud capture and the ever-present desire to derive actionable insights from data. As a result of our solid cash generation, we are investing in our valuable assets in the way of people, innovative technology and customer-centric solutions with an eye towards accelerating our path to even greater opportunities. Good afternoon.

Operator, Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.