Issuer Direct Corporation
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to your Issuer Direct Second Quarter 2017 Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Steve Knerr. Sir, the floor is yours.

[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’ll 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 with an announcement of the financial results and then turn it over to Brian for his operational review and outlook, followed by a Q&A session. Issuer Direct had another solid quarter as we were able to continue making progress with our platform product and generate increased revenue. Total revenue increased 10% to $3,443,000 for the second quarter of 2017, as compared to the same period of the prior year. And revenue of $6,298,000 for the six months ended June 2017 decreased 2% compared to the same period of 2016. However, it is important to note that revenue for the six months ended June 30, 2016, including onetime benefit of $316,000, due to the reversal of an accrual related to unused postage credits for ARS customers acquired as part of the acquisition of PrecisionIR. Excluding this onetime benefit, total revenue for the six months ended June 30, 2017, would have increased 3% over the same period of the prior year. Platform and technology revenue increased $577,000 or 51% to $1,704,000 during second quarter of 2017 and increased $1,045,000 or 50% to $3,117,000 for the six months ended June 30, 2017, compared to the same periods of the prior year. Platform and technology revenue increased to 49% of our total revenue for the quarter, compared to 36% during the second quarter of last year as we continue to focus on developing and increasing this revenue stream. Again, our Accesswire product is the main driver of the increase as revenue increased 92%, and 93% for the three months and six months ended June 30, 2017, respectively over the same periods of 2016. We continue to devote significant efforts to this product in terms of product enhancements, additional distribution, and developing and growing our sales path. These are all efforts we will continue to make this year and in the foreseeable future. We also experienced increased revenue from licensing of other products within our platform, most notably our transfer agent, whistleblower, Blueprint, and webcasting platforms. In a few minutes, Brian will talk further about development and enhancements we are making to our platform. Services revenue decreased $268,000 or 13% to $1,739,000 during the second quarter of 2017, and decreased $1,158,000 or 27% for $3,181,000 during the six months ended June 30, 2017, compared to same periods of the prior year. The decreases are primarily a result of a decrease in revenue from our Annual Report Service due in parts to continued attrition as customers leave the service, decrease hard copy requirements or transition to digital delivery. Additionally, on a year-to-date basis, decrease is attributable to the onetime benefit of $316,000 included in revenue, the six months ended June 30, 2016, which I noted earlier. We also continued to experience the client and revenue from our compliance services as the market becomes commoditized as well as the decrease in print and proxy distribution services due to the timing of certain projects. Platform and technology gross margins 84% and 83% for the three months and six months ended June 30, 2017, respectively, as compared to 83% and 82% for the same periods of the prior year. The slight increase in gross margins was due to increase in revenue, partially offset by higher amortization of capitalized software. Gross margin from our service revenue stream was 64% for both the three months and six months period ended June 30, 2017, compared to 69% and 72% during the same periods of 2016 respectively. Excluding the onetime benefit noted earlier, gross margin percentage would have been 69% for the six months ended June 30, 2016. The decrease in gross margin was due to lower revenue associated with the fixed cost of delivering ARS, print, proxy and stock transfer services. Moving down the income statement, operating expenses decreased $43,000 and $125,000 during the three months and six months ended June 30, 2017, respectively as compared to the same periods of the prior year, primarily as a result of the decrease in amortization cost due to certain intangible assets, which became fully amortized during 2016, partially offsetting these decreases were increases in G&A, sales and marketing and product development expenses due to an increase in professional fees, headcount and trade show cost as we look to further expand our offering. For GAAP purposes, we recorded net income of $493,000 or $0.16 per diluted share for the second quarter of 2017, as compared to net income of $357,000 or $0.12 per diluted share for the same period 2016. The six-month period ended June 30, 2017, net income was $817,000 or $0.27 per diluted share compared to $850,000 or $0.29 per diluted share during the same period of 2016. Excluding the onetime benefit recorded in 2016, we were able to increase net income by increasing revenue, maintaining gross margin percentages and lowering operating costs. Looking at some non-GAAP metrics. Non-GAAP net income was $590,000 or $0.20 per diluted share for second quarter of 2017, compared to $577,000 or also $0.20 per diluted share for the same period of 2016. Non-GAAP net income for the next six months ended June 30, 2017, was $995,000 or $0.33 per diluted share, as compared $1,105,000 or $0.38 per diluted share for the same period of 2016. As a percentage of revenue, EBITDA was 26% or $901,000 for the second quarter of 2017, compared to 28% or $878,000 in the prior year. For the six months ended June 30, 2017, EBITDA percentage was 23% or $1,429,000 compared to 29% or $1,975,000 for the same period of the prior year. Excluding the onetime benefit noted earlier, EBITDA percentage would have been 26% or $1,659,000 for the six months ended June 30, 2016. Moving to the balance sheet and cash flow statement, we continue to focus on generating positive cash flow from operations as we generate the $810,000 during the second quarter of 2017. Increasing our cash balance to over $6 million. We also continued focus on developing our cloud-based products and as a result capitalized an additional $314,000 and $680,000 during the three months and six months periods ended June 30, 2017 respectively. Due to increased licenses of our platform and technology products, deferred revenue increased to $1,040,000 as of June 30, 2017, compared to $859,000 as of March 31, 2017. Lastly, on July 7, our Board of Directors declared a quarterly cash dividend of $0.05 per share, making it our eighth consecutive quarter for paying dividends. Overall, we remained focused on our platform and technology products and committed to continue to invest resources to further development, increased distribution in bolstering sales path in order to drive revenue, gross margin, and EBITDA. I will now turn it over to Brian, who will discuss operational strategies and product enhancements to watch out for in 2017.

[Brian Balbirnie:]

Thank you, Steve, and good afternoon, everyone. Once again, we are excited to speak with you today. And Steve did a good job providing a detailed overview of our results for the quarter, which we are pleased with. Again on a year-over-year basis, overall revenues increased 10% in Q2 and 21% sequentially from Q1 this year. And on a stand alone basis, our platform business increased 51% year-over-year and 21% sequentially from Q1. For the second straight quarter, our platform business accounted for almost 50% of our overall revenues. We are confident that we can further this overall revenue mix over the remaining part of the year, resulting in higher percentage of our business coming from key platform subscription initiatives. Even though our service business continues to see declines, we remained confident in our ability to maintain and grow our overall gross margins and EBITDA margins long term. Platform customers increased 13% totaling 1,854 for the quarter compared to 1,644 for the same period last year. And on a sequential basis, Q2 was also up 5% from Q1 this year. Service claims were down 12% to 550 for the quarter compared to 622 for the same period last year. However, on a sequential basis, customer counts were up 6% from Q1 this year. Now I’d like to expand upon a few areas from our second quarter, and what we are seeing in terms of market activity and then the progress that we have made in furthering position the company. And then I’ll highlight some of our strategic priorities going forward. Following my comments, we will open up the call for questions. Our service business, as Steve and I said earlier, saw an 11% decrease in customers from 622 to 550, and 6% increase sequentially from the first quarter of this year. We spoke for all over year about our business transition and how we view the service components of our business and how it’s heavily tied to printed goods, fulfillment and commoditized compliance offerings. We continue to believe that this part of our business will become less of our overall revenues. Just over 2.5 years ago, we embarked upon expanding our communications business with the purchase of Accesswire. It seems like just yesterday and we’ve progressed significantly since then. The first quarter of 2015 was our first full quarter with Accesswire. And revenues accounted for 10% of our overall quarterly revenue back then. Today, Accesswire accounts for 30%. Clients have also grown significantly since then from less than 200 to over 1,230 in the second quarter this year. When we look forward another 2.5 years, we see Accesswire continue its momentum in the market both in clients as well as revenues and contributions. We are focused on continuing our efforts to expand distribution not only in North America but also globally and we will continue to work to expand our sales footprint and improve our platforms and client experiences. We’re also working on future – in the future by expanding our predictive analytics and machine learning techniques and we firmly believe will be a critical component of our platform long term. I bring this up because we feel another component of our business is about to ramp-up with very same way that Accesswire has. As spoken previously about our earnings – on our earnings calls, this component is a real-time engagement analytics. A single source real-time batch fort that gives customers the ability to view, analyze and target with stakeholders as they shape their message to the markets. When we strategically look at our business over the next several years, not just us, but everyone struggling with providing the market place the engagement analytics, insight in platform technologies to deliver a clear understanding on whom, what, where and when. Don’t get me wrong, today everyone delivers a PR report and a news – from a news article distributed to a client that shows where the article is picked up and in many cases the traffic and after the earnings event, teleconference providers generate a list of participants. IR side analytics show traffic down to the page and then everyone works for hours to pull together all the data so the participants can work the phones to deliver transcripts, replays on calls, copies of earnings and presentation materials and our schedule follow-up calls with the firms and individuals. Honestly I’m here tell you, most of this data in it’s raw form of information is just overload. It comes from several different systems it does not need to gather and provide anything more than superficial value to add-on and if you want to compare quarter-to-quarter or yearly data, you would end up using some manual spreadsheet and not connected to real-time information on your company or shareholders. Without real-time engagement analytics, all the time previously spent compiling this data is gone, not only to mention that, what this dashboard will provide but you’ll also get the insight into areas that previously have never been available. All of this starts with the company’s message. With pick in earnings event just like this one, just over six months ago we started broadcasting a few hundred of these biggest company’s quarterly calls and today we’re doing almost 2,000. I know what you’re thinking, why? I will tell you, there is no better way to begin an analytics engagement plan than an earnings call. To further quantify this assumption, the last couple of quarters we’ve seen thousands of unique requests from stakeholders all over North America seeking to listen to earnings events just like this one. Since all events are announced via our Accesswire brand, we also gain brand awareness in the news business and credibility in our thirst for greater distribution. Then, our investor network delivers in each and every event where we tag, follow and analyze an audience to put us into a position to deliver deep analytics to our customers. These real-time engagement analytics that we’ve made available to our customers exclusively under subscription for a nominal increase from what they’re currently paying today. Issuers will be able easily compare quarter-to-quarter or yearly data without using some manual spreadsheets, which I mentioned before is currently the case. And finally you’ll be connected to real-time information on a company, it’s shareholders, it’s peers right from one platform. We feel very good about this long-term performance of our communications platform offerings, some of which I just spoke about. This does not mean other components of our platform business are not performing or we don’t have a path for growth. As a matter fact anything that touches a shareholder, we feel extremely confident that we can go from a customer side as well as build analytics and additional subscription revenues that will further unlock shareholder value for Issuer Direct. Also, it is important to understand, as our platform gains further traction in the market, we will be compelled to migrate some of our service customers into a subscription engagement. So not only will we continue to see part of our business in the services area decline due to print and video call initiatives, we will also see some of these clients migrate to our platform options. In closing, I want to spend a few minutes on some of our key strategic priorities by outlining them for year-to-date. As most of you know, we have been transition from a service business to a pure play-platform business and in under two years, we have moved virtually half of our revenues to our platforms. We messaged this would happen and we’ve delivered it. In that same time, we’ve built a newswire from virtually nothing to over 30% of our business today. Again, something else will be reinforced with confidence. And lastly, Issuer Direct stock has delivered and has suffered more than double since the same two-year period when we started this pivot. But we’re far from done. Now comes the next phase of our company. Our predictive analytics and machine learning aspirations are being fine-tuned not only with our proprietor development in back-end systems but also with partners and their knowledge in advance diagrams. This effort is not without difficulty but the key to this is data and good people, something we have. Thank you. We intend to expand our platform subscription business early next year with some of these new developments we have talked about briefly here today. And we expect this analytics add-on to return additional revenues per issuer and add significant value to our customers. Additionally, we believe these new analytic components will help us find new markets for our platform technologies. Such as institutions, commentary contributors, hedge funds and perhaps professional traders seeking to understand trends in market in real-time. And competitively, we feel confident that we will have a significant advantage with an end-to-end solution unmatched in the market. There are two examples of the things that you can expect from this platform expansion. For example, let’s take our current client and their perspective. Subscribers of this add-on analytics engine, when sitting for an earnings call, will be able to give them the ability to search our database of stakeholders that have interest in a particular industry and with a click of a button, market your event into a message to them directly with our platform, then in real-time, see the engagement happen consumption, audience trends, not only for the company or themselves but also their peers, for benchmarking purposes. In other words, how do I compare to my peers and am I getting the same results of interest that they are. From a new market opportunity, let’s say a small fund or family office. We’ll begin licensing our content next year under the trends in a particular sector that could assist the market investment decision for a fund and our the clients. This insight will further show a presumption of market sentiment in a particular company and/or sector. However, with all this going on we’re not taken our eye off, not now, not ever and we remained focused on continuing to expand our customers to our platform, expand the distribution points in our partnerships and our key team members when and where practical. Also, we remained very interested in finding opportunities to either bolt on, further or accreted that we feel cannot further build critical mass to our platform. With that, I’d like to turn the call back to the operator for questions. Operator?

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Okay. Our first question comes from Eric Weinstein [Chancellor Capital]. Please state your questions.

[Eric Weinstein:]

Wow, that was good quarter. The transfer – transitioning and transformation of the business, seems like it’s really playing out. Obviously, platform and technology continues to grow like wildfire. The services business with a drag from that was a lot lower than I was expecting. So even excluding the onetime benefit from last year. The first quarter, down like 28% and I sort of sense guidance in the last call that, that might continue but it was down less than half of that in the second quarter and last year second half was kind of weak so I’m thinking of the drag effect on services and the total business seems like it’s either stable to declining. And that was – started to stream growth rate that was a little bit more what the platform and technology business is gaining plus some of these lose services with respect to the low time analytics platform we’ll be delayed. Can you talk – is that right? When can we start to see some stabilization in the services business as a drag?

[Brian Balbirnie:]

It’s a good detailed overview and question Eric. If there is two components that happened here right? As you know that typically Q2 for us and folks in the industry have a benefit of the annual meeting management and proxy process right? You tend to see a little bit of that happen more so in Q2 than you do any part of the year. So that’s a component that helps with some of this follow up or drag to your point and the legacy businesses happening so I think if you give light to that you still continue to see the same declines in service, however, as we talked about in the last call a little bit, some of it is intentional, of migration into platform business, right? We’re moving clients over. So we’re helping that transition, which results in converge these lower revenues in that segment and to they’re help offset by proxy to a degree but there’s still some of that headwind is still at us.

[Eric Weinstein:]

Okay. But I guess what I’m asking is, there’s decline in the low to mid-teens, is that sustainable? Modestly we’ll continue to see something declined but the teens as opposed to 25% to 30%?

[Brian Balbirnie:]

Yes, as the markets continue to be what they are here. We believe that, the mid-teen numbers are probably a safe assumption, right? Unless capital market equity changes significantly and we could be then the resulting factor of additional decrease but, yes, I would safe to say mid teens.

[Eric Weinstein:]

Great. And then your number $6 million in cash, what are you going to do with it?

[Brian Balbirnie:]

It’s a great question, right. I think we’re fortunate, we’re in a good position both from a balance sheet perspective right not only in cash but in any other regard whether such as long-term liabilities, nothing and a good cap structure. So I think we’re looking at the market saying there is opportunities for us, there’s technology developments that we want to further progress, there’s the opportunities for us to be very thoughtful about potential acquisitions and we continue to look at the space to seriously find opportunities that can further accelerate our platform. So we’re going use it wisely and as we always have, we’re going to do the right things, and help to be able to find something.

[Eric Weinstein:]

Great. Keep up, we want to know what you’re doing. Thanks.

[Brian Balbirnie:]

Thank you, Eric.

[Operator:]

[Operator Instructions] And it looks like that was the only question we had.

[Brian Balbirnie:]

Good. Well, thank you, very much. Steve and I’d like to thank, everyone to for attending today’s, and should you have additional questions after the review of our quarterly filing which will happen this afternoon, please feel free to give us a call. Have a great day. Thank you.