Red Violet, Inc. (NASDAQ:RDVT) Q4 2022 Earnings Call Transcript

Red Violet, Inc. (NASDAQ:RDVT) Q4 2022 Earnings Call Transcript March 8, 2023

Operator: Good day, ladies and gentlemen. And welcome to Red Velvet, sorry, Red Violet’s Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Camilo Ramirez, Vice President, Finance and Investor Relations. Please go ahead.

Camilo Ramirez: Good afternoon and welcome. Thank you for joining us today to discuss our fourth quarter and full year 2022 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 the subsequent 10-Qs. During the call, we may present certain non-GAAP financial information relating to our adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin and free cash flow. Reconciliations of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measure 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 amount may be discussed as 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: Thanks, Camilo. And good afternoon to those joining us today to discuss our fourth quarter and full year 2022 results. We are pleased to announce a strong fourth quarter, which produced another record year for Red Violet. Despite 2022’s uncertain economic environment, Red Violet continued to drive healthy double-digit percentage revenue growth, while experiencing, excuse me, while expanding gross margin and generating solid cash flow. We continue to strategically invest in our robust product roadmap and execution against our growing sales pipeline. Further, even with the investments made in 2022, we generated our first full year of GAAP profitability without a one-time gain. We remain intently focused on the execution of our long-term strategic plan and our industry-leading teams continue to outperform.

Now turning to the numbers, for the quarter, total revenue was $13.1 million, a 16% increase over prior year and a record fourth quarter for Red Violet. Platform revenue increased 19% to $12.9 million. Services revenue decreased 54% to $0.2 million. We produced $10 million in adjusted gross profit, resulting in adjusted gross margin of 77% in the fourth quarter, up 3 percentage points. Adjusted EBITDA for the quarter was $1.5 million, up 16% over prior year. Our IDI billable customer base grew by 148 customers sequentially from the third quarter, ending the fourth quarter at 7,021 customers. FOREWARN added over 6,900 users during the fourth quarter, ending the quarter at 116,960 users. Over 235 realtor associations are now contracted to use FOREWARN.

For the year, revenue increased 21% to $53.3 million, generating adjusted EBITDA of $12.9 million. We generated $0.6 million in net income in 2022, our first full year of GAAP profitability without a onetime gain. Recall, our 2021 net income of $0.7 million included a onetime gain of $2.2 million from the forgiveness of our CARES Act loan. We continue to convert our larger enterprise prospect pipeline into wins. We had 67 customers contribute over $100,000 in revenue in 2022, a 43% increase, compared to 47 customers in 2021. As well, our existing customers continue to spend more with us year-over-year. With 2022 behind us, we are excited about 2023 and beyond. While many companies are retrenching and right-sizing their organizations given the current climate, we are in the enviable position of being able to advance our long-term strategic plan.

This consists of converting our healthy cash flow and solid balance sheet into innovative solutions, enhanced capabilities, entry into new markets and increasing market penetration. This is a delicate balance of pressing investments for future growth, while exercising financial prudence to maintain the strong financial profile of our business. We have a robust product roadmap of planned releases throughout 2023 and the next several years. These releases include enhancements to existing solutions and new solutions in identity, fraud prevention and detection, background screening support, commercial real estate analytics, marketing services and public sector. These innovations are designed to improve customer outcomes for current use cases and to address customer need where they — there are presently no solutions or current market solutions are inadequate.

As you can imagine, developing solutions to address complex problems often takes time and multiple iterations between us and pilot project participants. Importantly, our target markets remain resilient and we expect strong demand for existing and new solutions for the foreseeable future. The secular tailwinds that our business has are firmly in place, a digital transformation in its infancy, cybercrimes and fraud that are omnipresent, demand for integrated solutions that drive efficiency and more. Our solutions are mission-critical. They are used to manage risk, gain efficiency and acquire customers, all essential especially in a challenging economic environment. On the whole, we are pleased with our performance in 2022. Notwithstanding the economy, we are making solid progress against our strategic plan and nothing has altered our view regarding our product roadmap and our expectations around adoption by our target markets.

Given this and the strong start to the year we are experiencing here in the first two months, we remain very optimistic about our prospects for 2023 and beyond. With that, I turn it over to Dan to discuss the financials.

Dan MacLachlan: Thank you, Derek, and good afternoon. 2022 was a great year for Red Violet. We executed well against our planned initiatives laid out at the beginning of the year. While continuing to strategically invest in the business, we solidly grew revenue, while maintaining healthy margins and cash flow. We added key strategic hires in several verticals and tactically built out our product development and go-to-market resources. As an organization, we added 46 team members in 2022, including 14 in sales and marketing and 27 in technology and product development. These significant additions will enable scalability across the organization. This time last year, we explained that we would leverage our strong balance sheet and healthy cash flow to reinvest in the business in the form of human capital, expanding the capabilities, depth and efficiency of our team.

We explained we could make these investments, while maintaining adjusted EBITDA margin in the range of 20% to 25%. We executed well against that expectation. We grew revenue by over 20% to $53.3 million in 2022, maintaining a 24% adjusted EBITDA margin, which produced $12.9 million in adjusted EBITDA. Importantly, 2022 was our first full year of GAAP profitability without a one-time gain, generating $0.6 million in net income, which resulted in earnings of $0.04 per basic and diluted share. The markets for our solutions continue to show strong fundamentals and increasing opportunity. We are releasing new features and enhancements on current solutions and developing new solutions to address additional use cases in identity, commercial property solutions, background screening support and marketing services.

With our higher tier opportunity pipeline strong and growing, we continue to make significant progress in moving upmarket in both size and volume potential. We are competing successfully, converting those higher tier private and public sector opportunities to wins. We had 67 customers contribute over $100,000 in revenue in 2022, a 43% increase over prior year. We remain confident in our ability to drive strong growth in 2023 and beyond. Turning now to our fourth quarter results, for clarity, all the comparisons I will discuss today will be against the fourth quarter of 2021 unless noted otherwise. Total revenue was $13.1 million, a 16% increase over prior year. Platform revenue increased 19% to $12.9 million. Services revenue decreased 54% to $0.2 million.

We produced $10 million in adjusted gross profit, resulting in a margin of 77% in the fourth quarter, up 3 percentage points. Adjusted EBITDA for the quarter was $1.5 million, up 16% over prior year. Adjusted EBITDA margin remained consistent at 12% for the quarter. Continuing through the details of our P&L, as mentioned, revenue was $13.1 million for the fourth quarter, consisting of revenue from new customers of $1.2 million, base revenue from existing customers of $10.6 million and gross revenue from existing customers of $1.3 million. Our IDI billable customer base grew by 148 customers sequentially from the third quarter, ending the fourth quarter at 7,021 customers. FOREWARN added over 6,900 users during the fourth quarter, ending the quarter at 116,960 users.

Over 235 realtor associations are now contracted to use FOREWARN. Our contractual revenue was 77% for the quarter, down 2 percentage points from prior year. Our revenue attrition percentage was 5%, compared to 4% 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 $0.2 million or 4% to $3.1 million. This $0.2 million increase was a result of an increase in data acquisition costs. Adjusted gross profit increased 20% to $10 million, producing an adjusted gross margin of 77%, a 3-percentage-point increase over fourth quarter 2021. Sales and marketing expenses increased $0.8 million or 36% to $3 million for the quarter.

The increase was due primarily to an increase in salaries and benefits and sales commissions. The $3 million of sales and marketing expense for the quarter consisted primarily of $1.8 million in employee salaries and benefits and $0.7 million in sales commissions. General and administrative expenses increased $0.9 million or 14% to $7.1 million for the quarter. This increase was primarily the result of a $0.6 million increase in employee salaries and benefits and a $0.2 million write-off of long-lived assets. The $7.1 million in general and administrative expenses for the quarter consisted primarily of $4.1 million of employee salaries and benefits, which included year-end bonuses as part of our company’s discretionary bonus plans, $1.4 million of non-cash share-based compensation expense and $0.9 million in accounting, IT and other professional fees.

Depreciation and amortization increased $0.3 million or 24% to $1.8 million for the quarter. This increase was primarily the result of the amortization of internally developed software. Our net loss for the quarter narrowed $0.3 million or 13% to $1.5 million. We reported a loss of $0.11 per basic and diluted share for the quarter based on a weighted average share count of 14 million shares. Moving on to the balance sheet, cash and cash equivalents were $31.8 million at December 31, 2022, compared to $34.3 million at December 31, 2021. Current assets were $38.1 million, compared to $38.6 million and current liabilities were $5.4 million, compared to $3.5 million. We generated $12.5 million in cash from operating activities for the year ended December 31, 2022, compared to generating $8.9 million in cash from operating activities for the same period in 2021.

We generated $3.6 million in free cash flow in 2022, compared to generating $3.7 million in 2021. Cash used in investing activities was $8.8 million for the year ended December 31, 2022, mainly the result of $8.5 million used for software developed for internal use. Cash used in investing activities in prior year was $5.2 million. Cash used in financing activities was $6.1 million for the year ended December 31, 2022, mainly the result of two items; one, acquiring approximately 252,000 shares of company stock for $5.2 million from the net share tax settlement of employee restricted stock units; and two, purchasing 50,000 shares of company stock for $0.9 million under our stock repurchase program at an average price of $17.52 per share. These shares were withheld in treasury and retired prior to the end of the year.

During the same period 2021, cash provided by financing activities was $17.6 million. This was a result from the net proceeds of $20.9 million in gross financing raised through the sale of 552,915 shares of common stock at a price of $38 per share. This was offset by $3.3 million of cash used to acquire approximately 143,000 shares of company stock from the net share tax settlement of employee restricted stock units. As it relates to our stock repurchase program, we will continue to monitor prevailing market conditions and other opportunities that we have for the use or investment of our cash balances, and as applicable, strategically acquire additional shares in accordance with our repurchase program. In closing, we are pleased with our fourth quarter and full year results.

Despite the uncertain economic environment, we are excited about what we are seeing in the first two months of this year and expect 2023 to be another great year for Red Violet. With that, our Operator will now open the line for Q&A.

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Q&A Session

Operator: One moment for our first question. Our first question will come from the line of Brandon Osten from Venator. Your line is open.

Brandon Osten: Hey, guys. Happy New Year.

Derek Dubner: Hey, Brandon. How are you?

Brandon Osten: I am good. I am good. Obviously, a really good quarter, I mean, it only compares somewhat poorly to the ridiculous quarter you guys put up in Q3. So second best quarter ever.

Derek Dubner: Correct.

Brandon Osten: A couple of questions here, just can you guys remind — I know you grew by a good amount this year, can you remind me what the dollar value of that headwind you guys faced this year, because that customer that got acquired, because the growth rate is probably better than maybe what the stated growth rate is. I just can’t remember how much loss, was it like $0.5 million or something, I can’t remember?

Dan MacLachlan: Yeah. It was roughly $0.5 million a quarter, right? So annualized about $2 million.

Brandon Osten: Oh! Okay. So, I mean, we are really looking at, like, does this 12.8 basically, should I be comparing that 12.8 to like 10.2 or something, does that make or I guess 13 with 10.7, does that make more sense than apples-to-apples?

Dan MacLachlan: Yeah. Look, I think that’s a good way to look at it, right? It was a larger customer that we discussed, right? And so that was $500,000 a quarter that we needed to go get. So that’s a good way to look at it, for sure.

Brandon Osten: Okay. Okay. And just a few short ones here, because you guys put out a lot of detail anyways. Can you remind me — so just the seasonal impact of the EBITDA in Q4, is that just year-end bonuses for management and employees?

Dan MacLachlan: So, yeah, we have a company discretionary bonus plan and because of the discretionary nature, a lot of that falls into the fourth quarter based on performance and such.

Brandon Osten: Okay.

Dan MacLachlan: And then from a topline perspective and we have said this before, we always see a little bit of seasonality in the fourth quarter just based on less business days, right, when we are dealing with businesses. As a portion of our revenue still is transactional, right? With less business days and less business happening towards the end of the year, we still — we do see some seasonality at the topline as well.

Brandon Osten: Okay. And I guess, I mean, you guys alluded to a strong start to the year. I mean we have only got a couple of weeks left and I know you guys don’t like to guide. But is it fair to expect that Q1 is — Q1 revenues will be above Q4 revenues, is that a fair expectation without letting too much out of the bag?

Dan MacLachlan: Yeah. Brandon, I think, that’s a fair statement. Yes.