Issuer Direct Corporation
Q4 2016 Earnings Call Transcript

Published: 3 Mar 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Issuer Direct Corporation Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] Earlier today, Issuer Direct Corporation issued a press release that included certain cautionary language with respect to forward-looking statements. The company would ask you to review the language in the press release regarding forward-looking statements as they are equally applicable to any forward-looking statements made during this conference call. Today’s call will be conducted by the company’s Chief Executive Officer, Brian Balbirnie; and its Chief Financial Officer, Steve Knerr. I will now turn the call over to Mr. Steve Knerr.

[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 maybe 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 statements 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 will 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. Q4 marked another successful quarter for Issuer Direct as we continued our transition to a cloud-first engagement. The Q4 financial highlights with prior quarter comparisons are as follows. We achieved revenue of $2.8 million, which represents a 3% increase over the same period in the prior year. Gross margin percentage expanded to 75% compared to 70%. The company’s GAAP earnings per diluted share, was $0.17 per share compared to a loss of $0.10 per diluted share. EBITDA margin was 24% compared to 20%. Non-GAAP net income was $498,000 or $0.17 per diluted share as compared to $397,000 or $0.14 per diluted share. Once again, we continued our trend of generating positive cash flow from operations and increasing our cash balance over the prior quarter as we generated $741,000 of cash flow from operations. On February 10, we paid a quarterly cash dividend of $0.05 per share, making it our sixth consecutive quarter for paying dividends. Highlights for the year ended December 31, 2016 with prior year comparisons are as follows. We achieved revenue of $12.1 million compared to $11.6 million. Excluding a one-time benefit of $316,000 in Q1 2016 related to the reversal of an accrual for unused postage credits related to ARS clients acquired in the PrecisionIR acquisition, revenue would have been $11.7 million, up slightly from the prior year. Gross margin expanded to 75% from 70%. The company’s GAAP earnings per diluted share, was $0.54 compared to $0.06. EBITDA margin expanded to 26% from 20%. Non-GAAP net income was $2 million or $0.69 per diluted share compared to $1.8 million or $0.71 per diluted share. The decrease in non-GAAP EPS despite higher non-GAAP net income is a result of more shares outstanding due to the final conversion of the Red Oak note into 418,000 shares of the company’s common stock in August 2015. As I noted earlier, total revenue increased 3% to $2.8 million and 4% to $12.1 million during the 3 and 12-month periods ended December 31, 2016 compared to the same periods of the prior year. I will now discuss some of the contributing factors to the changes in revenue across our revenue streams. Disclosure management revenue decreased 5% for the quarter and 8% for the year. As noted in previous quarters, this decline is due to continued pricing pressure and competition in the Edgar and XBRL markets as well as a shift in some clients from our traditional services work over the licenses of Blueprint. However, partially offsetting this decrease was an increase in transactional revenue in our transfer agent business, primarily due to continued success with our community banking clients as well as new projects with Regulation A Plus clients. As Brian will talk about in a few minutes, we believe there is growth potential within the Regulation A Plus case that may benefit us from both the technology and services aspect as we work with these clients. Shareholder communication revenue decreased 10% and 5% during the 3 and 12-month periods ended December 31, 2016 respectively compared to the same periods of the prior year. Again, as we noted in previous quarters, we continue to experience declines of our hardcopy ARS services as companies transition to electronic delivery or like to leave the service altogether. Additionally, as customers have migrated from ARS to Investor Network platform, revenue has shifted into our platform and technology revenue stream. Accesswire continues to provide impressive results as revenue increased 44% for the quarter and 60% year-to-date compared to the same periods of the prior year. This success is attributable to expanding partnerships and investments of increased distribution and sales staff, which were made during the third and fourth quarters. We continue to focus on new opportunities and strategies for 2017 to continue the momentum built in 2016 with Accesswire. Also, our proxy and print distribution services grew by 50% in the quarter and year-to-date periods due to successful partnerships and cross-selling from existing transfer agent clients. Our platform and technology products also delivered increases as overall revenue for these products approximately doubled during the quarter and year-to-date periods compared to the same periods of the prior year. The primary reason for the increase was due to the shift of approximately 80,000 and 412,000 of revenue during the 3 and 12 months ended December 31, 2016 for electronic ARS customers to our Investor Network platform. Additionally, while marginal in size, licensing of each of our products in this revenue stream increased, namely our transfer agent, iR Direct, iProxy, whistleblower, webcasting, Blueprint and Classify platforms, again, showing our focus on building a cloud-first engagement through each of these platforms. Gross margin was 75% for the 3 and 12 months ended December 31, 2016 as compared to 70% for both periods of the prior year. The increase is due to increased revenue from our high margin Accesswire business as well as our continued transition to a cloud-based subscription model resulting in streamlined costs. Operating expenses decreased $604,000 and $438,000 during the 3 and 12 months ended December 31, 2016 respectively primarily due to a $547,000 impairment loss on intangible assets recorded during the fourth quarter of 2015 as a result of our annual review of impairment. Our review during 2016 concluded there is no such impairment. Additionally, slight increases in product development and sales and marketing costs as a result of increased headcount were offset by a decrease in amortization costs due to certain intangible assets which became fully amortized during 2016. In addition to the decrease in operating expenses, interest expense decreased $626,000 for the year due to the final conversion of the Red Oak note in August 2015 and as a result, we no longer have any interest in expense related to the note. Due to higher revenue and expanded margins, EBITDA increased to 24% of revenue for the quarter and 26% of revenue on a year-to-date basis, which was an increase from 20% during both periods of the prior year. We expect EBITDA levels to remain above 20% for future quarters. For GAAP purposes, we recorded net income of $510,000 or $0.17 per diluted share for the fourth quarter of 2016 as compared to a net loss of $294,000 or $0.10 per diluted share for the same period of 2015. For the full year of 2016, net income was $1.6 million or $0.54 per diluted share compared to net income of $145,000 or $0.06 per diluted share during the prior year. We continue to focus on generating positive cash flow from operations as we generated $741,000 during the fourth quarter of 2016 compared to $865,000 during the fourth quarter of 2015. Overall, it was a successful quarter and year for Issuer Direct as we were able to increase revenue, expand margins and continue our focus on product development to not only enhance our current products but build new products as well. During the fourth quarter of 2016, we capitalized an additional $400,000 of software development costs related to Blueprint, Classify and Investor Network, bringing our total investment to $1.5 million for the year. And the fun is just beginning as Brian will now talk further about product enhancements and rollout expected during 2017. Brian?

[Brian Balbirnie:]

Thank you, Steve and good afternoon everyone and thank you for joining us. Today’s call is also being broadcast live via our company profile and Investor Network. A link of which can be found in today’s earnings release, which was just filed a few minutes ago. You can also view the full text of our earnings release on our website in our Investor Relations section. In today’s call, I would like to cover a few topics in depth more so in our platform and business since Steve did such a great job reporting the numbers on a good year. First, I would like to talk a bit about some of our key events in 2016 along with a review of our progress towards our principal strategic objectives of our business transition to a platform first company. Platform ID is our newly branded client dashboard, formerly known for almost 10 years as the DMS or Disclosure Management System. Platform ID encompasses the very same components of our current business, but in a more unified and focused way. Leading the way of our platform is enabling our intuitive dashboards powered by Classify, it gives our client the ability to research their peers, get updates on shareholders and institutional movements as well as the performance charts and financial data with relevant news and research of companies. Speaking of news, Accesswire is one of the gems of our business. It’s growing faster than any other part. As we mentioned last quarter, we continue to invest in our Accesswire being a fixture in the Investor Relations trade show circuit and conferences and 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 the exposure and engagement. Accesswire remains the leading news platform for conference presentation releases in the small cap and smaller space. Additionally, this past quarter, we added additional distribution to our ever growing circuits, a commitment that we have had since inception and something we expect to continue to do well this year. Specifically, we had a key partner distribution in Europe with the LSC and other key EU-focused partners. And we already have expanded agreements underway in 2017 that will further ramp out our distribution offerings. Like in Accesswire, we have been committed to aligning and advancing the remaining part of our shareholder communications platform. As an example, our newly advanced webcast system was a key development for us in Q4. What has historically been an undisruptive market for over a decade is now a prime focus for us in 2017. Our webcast and development teams have advanced our current platforms and virtualized our systems, putting us on track to have one of the largest libraries of public company earnings events archived in the industry, which will all move on Investor Network. We intend to license this data in 2017 with the sole intent of building a brand for our properties. Just this quarter, we began broadcasting hundreds of company calls and next quarter, we intend to double that over 1,000. By the end of the year, we will have every earnings call available on our Investor Network platform. Typically, companies pay hundreds of dollars, if not more, each quarter to broadcast their calls live via the web, just like this one and in most cases, they get very little or no value for this. And our belief is that we can drive more traffic to a company’s webcast via our platform that has millions of subscribers already. This competitive advantage alone is something most webcasting companies can’t match. The resulting benefit will give us the analytic product licensing opportunities to each of the public companies as we align and expand our webcast business. A benefactor of many of these initiatives in 2016 mentioned above is our Investor Network. Early in 2017, we will retire many of our legacy platforms and drive all of our issuer interest from shareholders and prospective holders to our new ecosystem that is the hub for Investor Network analytics. I will say that we are looking forward to the commentary and news that will come out of our partner network that will drive further value for our Investor Network brand. Accesswire, our webcast platform, along with our entire shareholder communications system is the driving force behind Platform ID. We have made significant progress this past year and have some very exciting things to do in 2017, which I think was Steve’s point earlier, the fun is just beginning. Our transformation into a platform-first company is evident in our business, and this year we are going to see the rewards from that by introducing the industry’s first flat fee public company platform, whereby corporate issuers will be able to file their disclosure with regulatory agencies, create a release, update their IR platforms, schedule an earnings call just like this one and manage their shareholders, find new shareholders and virtually everything else an issuer needs to provide us the ability to sell them a platform for one flat simple fee. No gimmicks, no catches. This platform subscription will help us further expand our average revenue per issuer, something that we have been working hard to increase over the last couple of years and something that we are all expecting to see. And finally, last quarter, I spoke a bit about the Regulation A Plus and how we are experiencing some growth here. We ended 2016 with revenues and a promising pipeline [ph], but we still view the market as highly undefined and fragmented. We quickly understood there was an opportunity to build some tech and to be able to go ahead and lead this market. So as agile as we are, late December, we did a quick build to something we call Transfer Link. It’s a very complex platform that has code that’s connected to banking platforms and anti-money laundering regulations and KYC, know your customers, end-to-end with a subscription document builder, all-in-one platform, very complex, very FinTech. The good news for us is we have ended up with a very strong pipeline and something we are very excited about this year. We ended the year on a high note in many areas of our business, many of which I just discussed, but one specific internal goal was to hit the 2,000 customer mark. We ended 2016 with 2,101 combined customers, better than expected. Our teams remain confident and excited about this fiscal year and getting closer to our goals of 3,000 customers in 2017. I will repeat everything Steve just reported, but a couple of takeaways I feel worth of expanding upon in our disclosure management business. We fully recognized the pricing pressures in the business, but in contrast, the services from our stock transfer business increased 38% for the quarter and 42% for the year, whereas we did see a decrease of 13% for the quarter and 17% for the year in our core Edgar and XBRL services business. This does not however, fully tells the story as some of our clients opted to transition to a platform subscription with Blueprint, helping contribute to some of our losses in this area, a reality but something that we are going to have to understand as we transition to a software platform company. As Steve also mentioned, our Accesswire news business was up 44% for the quarter and 60% for the year and on a sequential basis, the business was up 12%. We can’t say enough how excited we are about what the newswire business is doing for Issuer Direct, but we also understand that we have a long way to go and we have a lot of opportunities for us to grow into. But with that said, we should still continue to see gross margins at 80% and above in our Accesswire business quarter-after-quarter. And in fact we feel confident that our cross-selling abilities will begin to take shape this year now that the client count numbers are beginning to steadily grow. The natural subscriptions will be news rooms, IR platforms and targeted products, all part of our core Platform ID ecosystem. As a result, the efforts just mentioned and something we have said in previous calls, we expected to see margin expansion as a result of the growth that we are experiencing. In the fourth quarter, we saw margins expand year-over-year from 70% to 75% and 1% higher sequentially from 74% in Q3, a trend that we are motivated to see move even more. In closing, I wanted to give everyone a bit more insight into 2017 and how we will be reporting our revenues. As everyone knows, our business has been going through transformations not just on our regulatory business, but also in our shareholder communication space. And historically, we have had to spend a lot of time talking about each revenue stream and the components of it to give the investors the ability and opportunities to see inside of our business. The growth drivers and the areas of attraction sometimes becomes very complex. And so I am happy to tell in 2017, we will no longer be doing that. We will be instead be very clear and concise about our platform and our technology company as well as services components. Not much different than our peers. We firmly believe that shining a light in our business and the way it will help investors be able to clearly model subscription revenues, client count numbers, average revenues per user and of course average revenues per employee, which based on my research at a Software-as-a-Service company is around $200,000 per year per employee. And we are virtually there today, but our goal is to be far beyond that in 2017. I would like – with that, I would like to turn the call back over to the operator for questions. Operator?

[Brian Balbirnie:]

Steven, I would like to thank everyone for attending today’s call. It truly means a lot to us to have your continued support, belief and trust in us and as we navigate our company to the next level. This month, I was reminded that this February was our 11th year. Not any one of them the same, each one better than the year before. I guess it is true, time really does fly when you are having fun. Thank you all and have a good day.

[Operator:]

Thank you. This does conclude today’s call. We thank you for your participation. You may disconnect your lines at this time and have a great day.