Issuer Direct Corporation
Q3 2017 Earnings Call Transcript

Published: 4 Nov 2018

[Operator:]

Greetings, and welcome to the Issuer Direct Third Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Knerr, Chief Financial Officer of Issuer Direct. Thank you, Mr. Knerr. You may begin.

[Steven Knerr:]

Thank you. And good afternoon, everyone. Brian and I would like to thank you for taking the time to participate in our Third Quarter 2018 Earnings Call today. 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 filing. Further, we will discuss both GAAP and non-GAAP financial information on this call. We believe that 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 Investor Relations tab, a description as well as a reconciliation of GAAP measures to which we will refer on this call. With that complete, I'll begin by going over our results for the quarter; and then turn it over to Brian, who will provide an operational review and outlook, followed by a Q&A session. The third quarter was another productive and progressive quarter for Issuer Direct, as we finalized the acquisition FSCwire in July; completed a secondary public offering in August; and continued to make enhancements to Platform id., resulting in the release of our conference management module last week. Focusing on the results for the quarter. Total revenue increased 11% or $324,000 to $3,255,000 for the third quarter of 2018, as compared to $2,931,000 for the same period of the prior year. Revenue for the 9 months ended September 30, 2018, increased 15% or $1,355,000 to $10,584,000, as compared to $9,229,000 for the same period of the prior year. Revenue from customers obtained from our acquisitions of Interwest Transfer Company and FSCwire totaled $526,000 and $1,325,000 for the 3 and 9 months ended September 30, 2018, of which $46,000 and $142,000 came from additional subscriptions to Platform id. and services cross-sold to these customers. Platform and Technology revenue increased $309,000 or 17% to $2,085,000 for the third quarter of 2018 and increased $1,077,000 or 20% to $6,363,000 for the 9 months ended September 30, 2018. Platform and Technology revenue increased to 64% of our total revenue for the third quarter of 2018 compared to 61% for the third quarter of 2017. The increase in revenue for the quarter is primarily the result of additional licenses with Platform id., as we added an additional 33 subscriptions with Platform id. with an annual contract value of $343,000, bringing our total to 89 net new subscriptions for the year with an annual contract value of $907,000. We also achieved growth in ACCESSWIRE revenue primarily due to the addition of customers acquired with the FSCwire acquisition as well as revenue from our transfer agent module due to the addition of customers acquired with the Interwest acquisition. These increases were offset by the continued decline in revenue of our shareholder outreach offering that are specifically tied to our annual report distribution services. Services revenue of $1,170,000 for the third quarter of 2018 increased 1% or $15,000 compared to the third quarter of 2017 and increased $278,000 or 7% to $4,221,000 for the 9 months ended September 30, 2018, compared to the same period of the prior year. The increases are primarily the result of an increase in transfer agent services due in combination to the addition of Interwest customers as well as an increase in activity of our longer-term Issuer Direct transfer agent customers. The increase in transfer agent revenue was partially offset by the continued decline of revenue from our legacy Annual Report Service as well as decline in revenue from our compliance services as we continued to face pricing pressure in the market from customers beginning to take advantage of our platform offering. It is important to note, when comparing results to previously filed reports, $157,000 and $550,000 of revenue during the 3 and 9 months ended September 30, 2017, respectively, which were previously reported as Services revenue, were reclassified to Platform and Technology revenue. This was the result of the adoption of a new accounting pronouncement as of January 1, 2018, that required us to separate the revenue in bundled contracts for our ARS or shareholder outreach offering, which included both electronic and physical hard copy delivery of our customers' annual reports. The reclassified amounts represent the allocation of contract value of electronic delivery of the annual reports. All results have been appropriately adjusted for comparison purposes. Switching to gross margin. Our overall gross margin percentage was 70% and 71% for the 3 and 9 months ended September 30, 2018, respectively, compared to 72% and 73% for the same period of the prior year. It is noted that there was an increase in cost of revenues of $117,000 and $373,000 for the 3 and 9 months ended September 30, 2018, respectively, due to an increase in amortization of capitalized software placed in service in 2017. Platform and Technology gross margin percentage was 77% and 79% for the 3 and 9 months ended September 30, 2018, respectively, compared to 83% and 84% for the same periods in 2017. Again, there was an increase in cost of revenues due to the increase in amortization I noted earlier as well as additional costs as we continued to expand our news distribution capabilities. Gross margin percentage for our Services revenue stream was 57% and 60% for the 3 and 9 months ended September 30, 2018, respectively, compared to 55% and 58% for the same periods of the prior year. Moving down the income statement. Operating expenses increased $526,000 or 32% and $1,358,000 or 26% during the 3 and 9 months ended September 30, 2018 as we continued to invest in our business for top line growth. Majority of the increase is in product development, which has more than doubled over the prior year due to less capitalization and continued development of new products associated with Platform id., as well as modules placed into production during 2017. In a few minutes, Brian will talk further about our new conference management module and soon-to-come insight and analytics platform. General and administrative expenses increased 24% for the quarter and 15% year-to-date as a result of an increase in stock compensation as well as additional G&A expenses associated with both Interwest and FSCwire, some of which we hope to streamline as integration has now been completed. Sales and marketing expenses increased 18% for both the quarter and year-to-date due to an increase in our sales and marketing teams and costs associated with expanding our distribution capabilities. Lastly, amortization expense increased due to additional amortization resulting from intangible assets acquired as part of both the Interwest and FSCwire acquisitions. For tax purposes. We recognized income tax expense of $32,000 and $246,000 for the 3 and 9 months ended September 30, 2018, as compared to $174,000 and $438,000 during the same periods of the prior year. Lower tax expense is the result of lower pretax income as well as a decrease in the statutory rate in 2018, offset by a benefit in 2017 related to the exercise of stock compensation. For GAAP purposes. We recorded net income of $86,000 or $0.02 per diluted share for the third quarter of 2018, as compared to net income of $308,000 or $0.10 per diluted share for the same period of 2017. For the 9-month period ended September 30, 2018, we recorded net income of $772,000 or $0.23 per diluted share compared to net income of $1,126,000 or $0.37 per diluted share for the first 9 months of 2017. The decrease in earnings per share was due in part to the additional shares outstanding as a result of the secondary offering that closed during the third quarter of 2018. Looking at some non-GAAP metrics. Total EBITDA for the third quarter of 2018 was $473,000 or 15% of revenue compared to $663,000 or 23% of revenue during the same period of the prior year. On a year-to-date basis, EBITDA was $2,063,000 or 19% of revenue compared to $2,093,000 or 23% of revenues for the first 9 months of 2017. Non-GAAP net income was $411,000 or $0.11 per diluted share for the third quarter of 2018 compared to $445,000 or $0.15 per diluted share for the third quarter of 2017 and $1,531,000 or $0.47 per diluted share for the 9 months ended September 30, 2018, compared to $1,441,000 or $0.48 per diluted share for the same period during the prior quarter, again a decrease in non-GAAP earnings per share despite similar or in the case of the 9 months ended September 30, 2018, an increase in non-GAAP net income and due in part to the additional shares outstanding as a result of our secondary offering that closed during the third quarter of 2018. Changing to the cash flow statement. We continued to generate positive cash flow from operations as we generated an additional $564,000 during the third quarter of 2018 compared to $638,000 during the same period of the prior year, bringing total cash flow from operations to $2,153,000 for 2018 compared to $2,095,000 during the same period of the prior year. Also, due to our focus on selling subscriptions with Platform id., we've increased deferred revenue by 57% since the year-end, bringing the total to $1,389,000. As you may have seen in a recent press release, our Board of Directors have decided to discontinue the quarterly dividend in order to direct the funds on our balance sheet toward reinvesting in our business, specifically Platform id.; our sales and marketing team; as well as acquiring complementary businesses, products, technologies and/or assets. So we are committed to focus on it in the upcoming quarters. With that, I will turn it over to Brian, who will now talk further about our new products and outlook for the remainder of 2018 and beyond.

[Brian Balbirnie:]

Thank you, Steve. And thanks to everyone for joining us to discuss our third quarter 2018 results. As Steve just highlighted in his prepared remarks, our third quarter saw total revenue growth by 11% compared to Q3 last year. Platform and Technology growth continued on a year-over-year basis, and revenues were up 17% from the third quarter. As a percentage of total revenues, our platform business continues to expand. From 58% in Q1 this year and 59% in Q2, it has now reached 64% of our total revenues in the third quarter. As the subscription business continues to expand, so do the deferred revenue numbers and backlog. With 1 quarter remaining, our total net new subscribers for the first 9 months totaled 89, with annual contract value of $907,000. More specifically, we are seeing both new and existing customers subscribing to Platform id. And in Q1, for example, 29 of the new subscribers that we had, 19 of them came from current customers as a result of our focus on cross-selling of our Interwest clients that we acquired last year. During Q2, we had 10 current customers or 37% subscribe to our platform options. And in Q3, 33 of the new annual subscribers, 12 or 36% of those were from current customers. We are laser focused on continuing to increase new subscriptions for the overall periods, with the goals of ending the year with about 120. ARPU for the third quarter remained consistent with the first half of the year, averaging just over $10,000 per customer per year for these subscriptions. As a result, deferred revenue for the third quarter grew 9% sequentially and 57% on the end of last year, bringing the total to $1,389,000, which will be recognized within the year of the terms of those contracts. In summary. We saw sequential net new customers both in our platform and service businesses. We had 2,143 Platform and Technology customers during Q3 of 2018 compared to 1,996 in Q2 and 1,582 in Q3 of last year. This represents 35% year-over-year and 7% on a sequential basis, and sequential growth is primarily due in part to the FSC acquisition in July of this year. The customers acquired in that transaction, just for reference, were approximately 300, and of those, 174 did work with us during this last period. We also had 679 service customers during Q3 of 2018 compared to 567 in Q2 of this year and 493 in Q3 of last year. That 38% year-over-year gain came primarily from customers acquired and as part of the Interwest acquisition we did in Q4 of last year. Growth in pipeline is vital for us. And making the investments in our sales and marketing teams is also fundamental for that to happen by reinvesting short-term profits to help fuel long-term sustained growth, and market share is what we're focused on. This is evident in the dividend being suspended and, as we have messaged for some quarters, something that we feel is right for us to do at this time. Although our platform business has expanded and customer accounts continued to grow, we believe we could have done a better job in this quarter in top line revenues, more specifically with our shareholder communications and newswire business where we did not see the growth that we have maybe expected. I think this holds true, in part, of our service business as well being down due to pricing pressures. As we continue to transition our business to more of a subscription-based engagement, we are still party to seeing service engagements that are hard to predict, harder to predict and in some cases out of our control, as far as timing. As part of the growth and commitment to invest in our business was the FSCwire transaction previously announced in July 3. We are happy to report the integration has now been completed. Our editor teams - editorial teams are now located both in North Carolina and in Calgary, giving us 10 full-time editors backed up by the entire compliance and operations team. As we said previously when we announced the transaction, we're now focused on cross-selling until integration was completed and customers were well situated on our platform. We are now gearing out for this to occur in late Q4 and into early 2019. Like Interwest's success, we believe we will have similar success here with our FSC customers that are both TSX, CSE listed, as well as OTC. Our communications subscription will be the biggest value driver for these customers in the long term. The last couple of acquisitions of Interwest and FSC and the latest demonstrations of our solid track record of integrating accretive acquisitions. We continue to believe our industry is further able to consolidate, and as such, we are focused on additional accretive opportunities that are in the market. This is part of the reason why we raised additional capital, which I'd like to touch on briefly. During the third quarter, we completed a secondary offering of 927,000 common shares for net - for proceeds of just about $13 million after commissions and operating expenses. For those of you who didn't know us

[Operator:]

[Operator Instructions] Our first question comes from the line of Mike Grondahl with Northland Capital Markets. Please proceed with your question.

[Michael Grondahl:]

Yeah, thank you, guys. The first question is just I know you are working on some distribution wins with ACCESSWIRE and kind of expanding that product. How are those distribution wins going? And sort of what's kind of the time line there?

[Brian Balbirnie:]

Mike, thanks for the question. We've got 3 major broker terminal distributions, as we've talked about in previous periods, those being predominantly the TD Ameritrade, the Schwabs and the Bank of America Merrill Lynch systems. Our feeds are live inside of their networks as of the end of Q3; and completing testing on their end, for release by the end of this quarter or the first of - first quarter fiscal 2019. So we're optimistic that we'll see that happen. We're confident based on what we have done in the previous quarters with expansion to groups like the Bloomberg system more broadly and Canada and the United States as well with E*TRADE. So that will round out our broker terminal distribution.

[Michael Grondahl:]

Got it. So just, Brian, let me paraphrase

[Brian Balbirnie:]

Correct. That's correct, yes.

[Michael Grondahl:]

Got it. And then secondly, could you talk a little bit about your acquisition pipeline and how busy you are kind of looking for acquisitions today and if you think you can close anything by year-end or the first quarter?

[Brian Balbirnie:]

Yes, it's a reflection of the quarter. It's interesting you asked that question. Steve and I looked at some of the things, the progress in the business, the investment that we're making, the acquisition announcement of FSC, the integration, completing the offering, launching a product, expanding the team. Absent of all that activity and still finding a way to get some year-over-year growth, although not maybe what we expected and wanted, we've still been busy, to - exactly to your point, looking at opportunities, conducting preliminary due diligence, trying to find opportunities that fit our business that are very accretive to our - an adjacency and/or our current operations. And we're really focused on shareholder communications, modules and components, right? So if we think about the webcasting, the IR website businesses; the newswire business, of course; and anything that enhances our analytics and insight opportunities for next year, those are the areas that we're looking at. Yes, I wish I could tell you that we've got something today that we'll close tomorrow. Obviously, it's something we can't talk about specifics, but we're optimistic that, by the end of this year, we're going to see some opportunities break loose for us. That's going to further give us an opportunity to gain access to additional clients to be able to be confident enough to walk in and sell them our platforms in the future. So rest assured we're hard at work on that. That's there's no doubt there.

[Michael Grondahl:]

Got it. And I'll, well, maybe ask one more before jumping in the queue. In the press release and the prepared remarks you kind of noted you were disappointed a little bit in the September quarter revenue. Can you just be a little bit more specific? What area were you disappointed in? Where did that arise from?

[Brian Balbirnie:]

Yes, it's as we said. We expect a lot, right? And when we forecast and we look at our businesses from a year-over-year perspective and our client counts and what we anticipate ARPUs to be on our customers, our bigger growth driver, as I think everybody knows, is our shareholder communications segments. And it's heavily driven by our newswire business, and there's a lot that's attributable to that, right? It's the distribution question you asked earlier. That plays a role in it. There's larger accounts that play a role in it but sometimes tend to do less work during certain periods and have variances on some of that. And candidly, I think we expected more growth there. And folks have examined our newswire business for the better part of the last 4 years now. Plus, since we've owned ACCESSWIRE, there has been tremendous year-over-year growth and in most all cases great sequential growth too. And we've said, as a company, that's hard to sustain, right? As we continue to build distribution or trying to work ahead with anticipation of being able to continue to do that, candidly, we just didn't get it, all right? It just didn't happen for us in the quarter. We look back at the 4-plus years in that shareholder communications business, as we've grown so fast, sometimes there is going to be a period in which you don't get what you thought out of those clients in it. So - but that doesn't mean and reflection that the pipeline has slowed down, all right? It doesn't mean that we're not seeing the opportunities in Q4 and in next year. And we are seeing those. So we're optimistic. And we're a group of guys and gals that work hard. We'll pick our shovels back up and we'll get at it again. And I think we feel confident that we're going to be able to see that growth coming forward.

[Michael Grondahl:]

Got it. Thank you.

[Operator:]

Thank you. [Operator Instructions] There appear to be no further questions at this time. I'd like to turn the floor back over to Mr. Balbirnie for closing comments.

[Brian Balbirnie:]

Thank you, operator. And I'd like to thank everyone for taking the time to listen to Steve and I talk about our third quarter results today. If anybody has additional follow-up, we'd welcome an opportunity, as always, to speak with you again. I wish you all a great afternoon. Thank you.