Issuer Direct Corporation
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Good day, everyone and welcome to the Issuer Direct Corporation Third Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode [Operator Instructions]. It’s now my pressure to the conference over to Steve Knerr, Chief Financial Officer. Please go ahead, Sir.

[Steve Knerr:]

Thank you, and good afternoon everyone. Before we begin, I need to read the following Safe Harbor statement. Statements or comments made on this conference call may be forward-looking statements that include financial projections or other statements of the company’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. Our actual results may differ significantly from those projected or suggested in any forward-looking statement due to a variety of factors, which are discussed in detail in our recent SEC filings. Further, we will discuss both GAAP and non-GAAP financial information on this call. We believe the presentation of non-GAAP information provides you with useful supplementary data concerning the company’s ongoing operations and is an appropriate way for you to evaluate the company’s performance. Non-GAAP results are, however, provided for informational purposes only. Please refer to the press release and related tables for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website, in our Investors relations tab, a description as well as reconciliation of GAAP measures to which we will refer on this call. With that out of the way, I’ll begin by going over financial highlights, and then turn it over to Brian for his operational review and outlook, followed by a Q&A session. This was another successful quarter for Issuer Direct, as we continued our transition to a cloud first engagement. The Q3 financial highlights with prior year quarter comparisons are as follows

[Brian Balbirnie:]

Thank you Steve and good afternoon everyone. I’d like to begin by discussing our results and key performance metrics, and then detail an emerging opportunity we have with Reg A. Following that, I will provide an update on our core business segments while highlighting strategic partnerships and the enhancements we are making to our cloud based products which will begin to rollout toward the beginning of 2017. After that we’ll open it up for Q&A. Starting with the results and key performance metrics, as Steve just pointed out, the third quarter has been a continuation of the momentum that we are building upon from the first half of the year. Not only did we deliver margin expansion, we also grew our top line year-over-year revenues. And sequentially grew in the areas we expected. In the past, we spoke about our planned systemic transition, from traditional, printed and mailed IR products to a cloud-centric engagement focused on higher margin press release, platform and technology products. This transition is close to being completed, and is a key reason we are back on track to seeing growth, expansion in our profitability, further creating sustainable shareholder value. We still believe we are undervalued and will continue to work hard to tell our story to the investment community. As part of that messaging, one of the areas we tend to not talk about much is the diverse breadth we have in our growing customer base we serve today. During the third quarter, we preformed work for 920 customers in our core Issuer Direct business and 954 in our Accesswire news business. Our short term goal of reaching 2,000 customers is within our reach, and something we are both excited and confident about here at Issuer Direct. When you look at the types of clients that are buying our platforms and/or partnering with us, including the likes of Lincoln Financial, London Stock Exchange in our disclosure platform business, then in contrast dozens of PR agencies, and the legal community embracing Accesswire as a true news brand alternative, these are really some exciting times for us. The confidence and credibility we get from these marquee brands enable us as an organization to grow in verticals perhaps never afforded in previous years. That benefit is our platform subscription business. That subscription business will enable us to smooth the seasonality of some of our current and past years specifically in areas historically served. With that said, we are working hard to be in a position next year to report additional client metrics in a more reflective way, specifically subscriber numbers using our platform and ones that rely upon our services team, we believe this will be a strong forward-looking metric for investors to track. As such revenues will align with this thinking of our platform business and services business. Our platform business continues to deliver strong growth, on a year over year basis, revenues grew 89%. Part of this increase is fueled by our migration from traditional business into and with our platform business, a planned migration we have spoken about for several quarters. Also, the majority of our other platform subscriptions have also increased further expanding our clients in stock transfer, our IR direct website business and obviously our Blueprint and Classify systems. Accesswire continues its strong momentum, not only did we increase client count numbers on a sequential basis by 12% from 855 in the second quarter to 954 in the third quarter. But today, our news business accounted for 18% of our overall revenues in the third quarter and growing. Very similar to our platform and technology business now growing into the same percentage rates of our overall revenues for the quarter. These two areas of extreme focus for us and like we have said will lead to overall higher gross margins and EBITDA margins, but could conceivably account for up to 50% of our overall business in 2017; whereas in contrast when we started this pivot 18 months ago these businesses in combination accounted for less than 20% of our overall revenues. Turning to an identified emerging opportunity for us, Regulation A, one of the areas we have and will continue to spend sometimes, and for investors whom we have spoken to about this in the past. It is important we put some color on this opportunity. This market is still in its infancy and only been around for just a year. But over the last year, 200 companies file with the SEC seeking to raise capital under this new regulation, of those 200, only 50 have been approved or as they refer to it qualified. And as 50 qualified companies only 2 have had successful offerings and closed on their financing and went public. The first Elio Motors and Coastal Banking, both of which are traded on OTCQX, the later Coastal Banking has been a client of ours for over 8 years. Now this is not to mean there are not a dozen or more behind these two, and in fact we have a great pipeline of these potential companies here in this phase. In fact many of them we are already generating revenues this year. Specifically two most recent, GK Development and VidAngel both when fully closed in combination will have raised $100 million. VidAngel themselves raise their first $10 million in a week, most of which came in the first 36 hours. See when we looked at the regulation A space we quickly realized most of what Issuer Direct has built from a technology platform could be of significant use in this market. For example, as a transfer agent and escrow agent we understand the securities process and shareholder journey. And then couple it with our regulatory piece and general outreach we have a model that just works great for any company seeking to raise money and go public in the regulation A space. Lastly, the ARPU derived from these clients is promising and yielding more than 4 times that of our current levels on an annual basis. Something to be excited about YES, but something we will need to continue to foster and invest in being a leading platform for these companies. So as part of our commitment we have built a platform that is live today that follows the test the waters methodology of Security and Exchange Commission. And this new platform is something we feel is unique in the market as one of the only true test-to-invest platform available. So how do we make money with this platform. While we envision charging a one-time subscription fee for companies to place a profile listing of their company, clearly pitching their business opportunity under the SEC regulation of test the waters, if the indications of interest are meaningful, this is where our Issuer Direct engine kicks in and companies can then use our Blueprint, Classify, Accesswire and stock transfer platforms to meet the next steps in their quest of raising capital and seeking a public company market. I think its clear, the IPO market is showing no signs of rebounding and on a year-over-year basis the number of IPO’s and total book size of current deals continue to retract to almost record low levels. It is our belief as well as many experts in this space that Regualation A will help foster growth of the least this small-mid cap IPO marketplace. Moving along to an update on our key business segments, this month marked the two-year anniversary of us being in the newswire business by way of our Accesswire acquisition in October 2014. Looking back over this time, we have increased revenues 2.5 times and moved top line gross margins from the mid 70’s to 82% in the most recent quarter, and increased operating margins into the 67% range. As I have said in quarters past, we’re just beginning to hit our stride in the newswire business - we continue to add distribution, improve and enhance our analytics, and continue to expand our team with key hires. If I look back two years ago we had a handful of team members assigned to the Accesswire news business, today we have a full editorial and compliance team support our global clients, a dedicated and growing sales and marketing group, and world class partners we have worked hard to build go to market strateiges that will serve the Accesswire brand for years to come. We have set this business up to be fully independent of Issuer Direct, so that as it continues its growth we do not have an imbalance of operational needs internally, insuring Issuer Direct balance and brand is also equally staffed. Looking at our next key business segment, our shareholder communications business, we have been paying attention to both what the market is looking for most in a platform, but also what attributes we can provide clear values. Being early to market with our Classify platform has given us clear takeaways and knowledge to build upon. In the last quarter more specifically, we addressed both performance charting, peer review and detailed institutional holdings over sectors and a group of peers in our new classify enhanced dashboard. By doing this we have opened up the platform access fees to be much more scalable for our issuer clients pay for what you need model. But also giving the practioner’s the ability to harness the power of the system in a more robust scalable way. This approach will provide for an easier engagement to the issuers so that they can get the components most needed right at their fingertips. This new subscription model puts the power in the issuers hands to expand features right from their desktop without the need to undergo complex integrations and setup. Data can be added with a simple click and go. Add a competitor, compare a peer, or assess the financial position of that competitor in seconds. We anticipate this subscription service will drive Classify revenues and rates over the next in 2017 to the $8,000 average annual per year spend, thus giving us the opportunity to drive further the average revenue per customer. This ongoing development with Classify as well as Blueprint is something I enjoying keeping our shareholders up to date. And as a matter of fact, since Blueprint’s arrival to the market this year, there have been over 1,500 SEC filings successfully completed by using the Blueprint from our customers, a number growing more and more every day. We firmly believe that gross margins in our business will continue to improve as we continue to make progress in migrating current contracts with and into our subscription business, coupled with focus on new accounts in this area, as we see gross margins expanding next year, thus providing for further operating leverage and our EBITDA margins into the 20% plus range. As a result of our client, and margin expansion, we continue to reinvest in our business, and I’d like to highlight investments being made to our news platform. As we mentioned last quarter, we continue to invest in Accesswire being a fixture in the investor conference and trade show circuit. We remain committed to utilizing these venues to promote the brand where and when possible, as well as support the conferences where our partners and clients depend on exposure and engagement. So today I am happy to report Accesswire is now the leading news platform for conference presentation releases in the mid-small cap space. However, we clearly understand there is a lot of work to be done to continue our disruption of the market. And one area specifically is distribution and partnerships. We spoke on last quarter on something we would need to continue to work to expand and I am encouraged by our improvement here in the back half of the year, specifically with news distribution channels and strategic partnerships we have forged. These partnerships as well as the added distribution to our entire business they will provide is something we will begin to see result like Q4 and definitely early of 2017. These are precisely the things that are helping improve stickiness and decrease churn in our business. In closing, we have made major advancements to our overall brand, web properties and platforms, which are in the process of being rolled out beginning this month, something we’re very proud of here are Issuer Direct, I know our marketing team has been working hard day and night to get these improvements to market. And this will include the rebranding of our business refinement process, encompassing our new platform ID offering, which most of you know formally as our disclosure system. As well as our service component model to aligned with this we’ve added product managers to our platforms and solutions to assist in the brand identity of bringing platform ID to life. In summary, our third quarter was strong. Adoption of our platform continues to gain traction with new and existing customers and our sales pipeline continues to grow, specifically in the areas that drive the most profitable growth for us long terms and that’s our subscription business. We are excited about the multiple growth opportunities in front of us and as always, we remained focused on executing on our own initiatives. With that I’d like to turn the call back to the operator for questions. Operator?

[Operator:]

[Operator Instructions] We can take our first question from Scott Reed with Vict10n Capital. Please go ahead. Your line is open.

[Scott Reed:]

So I just had a question on it looks like your SG&A went up about $300,000 over Q2, if I’m not mistaken, and it sounds like you’re making a few investments this quarter that you expect to see yield results in the coming quarters. Could you comment on how the addition SG&A would break down between different investments versus overall cost structure and also on sort of timing when you expect to see some return from the investment in the sales force as well as the technology platform?

[Brian Balbirnie:]

Yes, it’s a good question, Scott. I think the majority of that expenses increase is attributable to our ramp up of our sales and marketing teams, right. So our product brand managers, additional sales folks in the field strategically and virtually doubling our sales size of our Accesswire news focus. That’s the majority of that expense. So we’re starting to see results now in Q4 happen as a result of these folks paying for themselves and believe that we’ll continue to see those strong results into 2017.

[Scott Reed:]

Great, great. Additionally then, when you anticipate EBITDA margins north of 20% going forward, is that sort of the result of just higher gross margins, perhaps, higher revenue or lower cost structure or perhaps even EBITDA add backs. How do you see that sort of building out?

[Brian Balbirnie:]

Yes. I actually think it’s a combination of a lot of it right at this. That we go through a refining process of moving a good amount of our current accounts into a platform subscription model. Our cost of delivery obviously is sharpened there. So we’re going to gain on that, but just purely subscription based businesses tend to have a much higher gross margin attributable to that segment as we’re in 80% plus range compared to our low to 70% gross margin range. So I think you’re going to see that that numbers grow as a result of those two things. We’re not going to decrease operational staff by any stretch of the imagination. We’re just going to get efficiencies of scale in that platform as would most subscription based businesses.

[Scott Reed:]

Got you. And then finally, I know you commented that it looks like the IPO market has been in the doldrums, to say the least, for the last six quarters or so, I think is sort of the data I’ve seen. And there might be early indications that there’s a bit of an uptick occurring and whether that sustains, who knows. But how tight are you guys to the new issues market and if we see that market improve, how much do you think would sort of flow through to your business?

[Brian Balbirnie:]

Yes. We see the filings being made and the bookrunners running around, but there’s no priced offerings as of yet, but I think your point is right. There looks like that the first of the year could be a little bit of an uptick. So anything that sits within our partnered exchanges, the New York Stock Exchange, the London Stock Exchange, we’re going to see some direct revenue attributed from those and access to those clients to be able to pace our product platforms. As a result of that, that’s really where it ends for us. So if it comes from other exchanges, we’re just not in the market with them pre-IPO. Our opportunities for building pipeline with them come post-listing for those folks.

[Operator:]

Okay. I would be then we will go to Miles Jennings a Private Investor. Please go ahead.

[Miles Jennings:]

Good afternoon. I just had a few questions. First, has there been any pickup in new business opportunities as a result of the inline XBRL versus the full XBRL? Is there any way that it presents an opportunity to expand your business with this new requirement?

[Brian Balbirnie:]

It’s a good question, Miles. The iXBRL is a little early yet to see revenue attributable. We’ve got a lot of our larger cap clients are now beginning the discovery process to learn and understand the impacts of filing in this new way as a combined XBRL/HTML product offering. So for us, our focus has been on delivering current XBRL and Blueprint product platforms today with the understanding that iXBRL will be phased in more next year. I think where the revenue opportunity comes for us is a precursor to iXBRL insignificance and that the new taxonomy grouping mapping that the SEC will be releasing shortly. That will cause some of the corporate issuers have to remap some financials for deprecated tags and things that the technical side that we’re going to need to address. So we may see a little bit of a service uptick there from a consultative side of our XBRL teams, but the reality is iXBRL won’t – we won’t see an uptick in revenue or a client increase opportunity for us until mid-2017.

[Miles Jennings:]

Good. Thank you. And you mentioned this new dashboard for your cloud funding Reg A where companies can sign up with you and start using some of our facilities and then as they raise money, expand into other areas. Would you happen to have a sample of your dashboard for that product either in hardcopy or digital?

[Brian Balbirnie:]

Yes, it’s available online today. It’s just been put out as a beta test there. It hasn’t been promoted yet. I’ll give you the URL for it. It’s loadedangels.com.

[Miles Jennings:]

loadedangels.com, that’s great. Okay. And my last question is I’ve noticed that you have this investor network website and also you have an application for the same. And how this is – I’m trying to figure out how this really fits in to your business. Is it related to possibly some sort of stock service or is it just a matter of mining potential investors for your platform business? And if you give me a sense of timing for any sort of derivative products from this investor network link, I’d appreciate it.

[Brian Balbirnie:]

You’re correct. Right, the reality is that investor interest drives a lot of our communications business for our corporate issuers, whether large cap or small cap. It becomes a vital component to their outreach and their investor relations initiatives to find both retail institution and high net worth individuals. So we use our brand to company’s spotlight in investor network to help drive traffic from interested individuals in companies about earnings data, fact sheets, videos, corporate presentations and we utilize that database to promote to our clients and give them an outlet to reach that audience. So investor network is one of those brands this year that we’ve brought to market in a small way to highly focus upon certain verticals and certain clients that generates about 10,000 to 15,000 unique visitors every single day to each of it’s product pages and/or stock hold pages. And our hope is to continue and expand that as clients bring more data into our networks, we’re able to then stream that data by their permission to those potential interested investors. So it’s a lead-based management tool, in summary. But, it’s a vital component as part of our shareholder communications business.

[Operator:]

Thank you. And gentlemen, it does appear we have no further questions. I’ll return the floor to you for any final remarks.

[Brian Balbirnie:]

Thank you, Keith. I would like to thank everyone today for attending today’s call. As always, we look forward to talking to you again on our next earnings call. Meanwhile, if you have any questions, Steve and I both would be happy to speak with you at any time at your convenience. Thank you and have a great day.