Where Food Comes From, Inc. (NASDAQ:WFCF) Q3 2023 Earnings Call Transcript

Where Food Comes From, Inc. (NASDAQ:WFCF) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Greetings, and welcome to the Where Food Comes From Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder this conference is being recorded. At this time I would like to turn the call over to Jay Pfeiffer of Investor Relations. Thank you. You may begin.

Jay Pfeiffer: Good morning, and welcome to the Where Food Comes From 2023 third quarter earnings call. Joining me on the call today are CEO, John Saunders; President, Leann Saunders; and Chief Financial Officer, Dannette Henning. During this call, we’ll make forward-looking statements based on current expectations, estimates and projections that are subject to risk. Statements about current and future financial performance, growth strategy, customers, business opportunities, market acceptance of our products and services and potential acquisitions are forward-looking statements. Listeners should not place undue reliance on these statements as there are many factors that could cause actual results to differ materially from our forward-looking statements.

We encourage you to review our publicly filed documents as well as our news releases and website for more information. Today we’ll also discuss adjusted EBITDA, a non-GAAP financial measure provided as a complement to GAAP results. Please refer to today’s earnings release for important disclosures regarding non-GAAP measures. I’ll now turn the call over to John Saunders.

Aerial view of a large warehouse loaded with pallets and crates of food products.

John Saunders: Good morning, and thanks for joining the call today. As highlighted in our third quarter earnings release, this morning our core verification and certification revenue increased for both the third quarter and nine-month period, despite continuing headwinds primarily associated with smaller herd sizes related to the cyclical cattle trends. These increases were offset by lower hardware revenue, which resulted in a decline in total revenue for both periods. You might remember that on our last call in August, I mentioned that headwinds were likely to persist for a while so slightly lower overall revenue in Q3 was not a surprise. Nevertheless, we continue to generate a lot of cash and deliver solid profitability in the quarter and year-to-date period.

We also returned $855,000 in value to stockholders in the form of stock buybacks in the quarter with year-to-date buybacks, totaling nearly $3 million. So in the context of challenges we’ve been facing on multiple fronts in recent quarters we’re pretty pleased with our overall performance and as evidenced by our continued stock buybacks confident in our future prospects. Getting back to our verification and certification business, which is by far our largest revenue segment, we achieved 4% growth in the quarter and 8% growth through the first nine months of 2023. Within this segment, beef verification is the largest single component of revenue. As herd sizes have shrunk over the past year or so due to a combination of drought impact and normal cattle cycles, our tag sales have declined as well.

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Q&A Session

So as I said, the initial audit and tagging process is the first step in the revenue continuum that follows each animal along its path to the consumer. So again the current environment of smaller herd sizes there are fewer animals in the pipeline. And that along with lower tag sales is a big factor on why overall revenue was slightly lower year-to-date. The good news is we are steadily adding more cattle ranchers customers and our audit activity is at an all-time high. We have customer retention rate well over 90% that we believe is unmatched in our industry. In addition, because we now audit to dozens of standards, our revenue from non-cattle verification sources is also on the rise. This is something I’d like to highlight from time to time because the size and diversity of our services mix is really what sets us apart.

We are unique in the depth and breadth of our service base and that gives us an enormous competitive advantage that would be extremely hard if not impossible to duplicate. Now for some more detail on our Q3 results. Total revenue in the third quarter declined 4% to $7 million from $7.3 million in the same quarter last year for reasons I’ve already detailed. As previously noted, our flagship, verification and certification revenue was up 4% in the quarter to $5.4 million from $5.2 million. That increase was offset by product revenue that declined by $367,000 to $1.2 million from $1.6 million. Consulting revenue was $76,000 lower at $431,000. Gross profit in the third quarter decreased to $2.9 million from $3.2 million. SG&A expense was 9% lower year-over-year at $1.9 million versus $2.1 million in the same quarter last year.

Net income was $723,000 or $0.13 per diluted share compared to net income of $785,000 or $0.13 per diluted share in Q3 a year ago. Adjusted EBITDA in the third quarter was down slightly at $1.2 million from $1.3 million. Turning to the nine-month results. Total revenue did decrease 2% to $18.4 million from $18.8 million in the same period last year. In addition to the impact of smaller herd sizes and lower tag sales, this decline included the effect of a $0.9 million one-time consulting contract we booked in the first quarter of 2022 that skewed our year-over-year comparisons. Revenue mix through nine months included, verification and certification services, up 8% to $13.9 million from $12.9 million; product revenue down 10% to $3.1 million from $3.5 million; consulting revenue of $1.3 million compared to $2.4 million in the prior year period when we booked the aforementioned one-time contract.

Gross profit through nine months was $7.5 million versus $7.7 million in the year ago period. SG&A expense was flat at $5.7 million. Net income through nine months was $1.4 million or $0.24 per diluted share compared to net income of $1.5 million or $0.25 per diluted share in the same period last year. So, I’ll reiterate we’re pleased with our overall profitability in light of some of the headwinds we’ve been dealing with. Adjusted EBITDA through nine months was $2.5 million versus $2.8 million a year ago. Our cash and cash equivalents balance at September 30th 2023 declined to $3.8 million from $4.4 million in 2022 year-end due primarily to our investment in share repurchases. Further to that subject, on a year-to-date basis, we bought back more than $2.9 million of stock and we reduced our diluted share count by 432,000 to under 5.7 million shares.

Now, I’d like to switch gears and provide an update on our Smart Catch program, which has been an important strategic focus for us this year. Last week, we announced the acquisition of the Smart Catch program with the intention of accelerating the rollout and expanding the scope of the program. To recap Smart Catch was originally a program of the James Beard Foundation, designed to promote transparency and sustainability in seafood at the restaurant level. Specifically, it is designed to link chefs to place-based seafood sustainability initiatives. Since inception the program has been administered by our Postelsia division and going forward Postelsia will take the lead in driving our growth plan. We announced the acquisition a couple of weeks ago in conjunction with our sponsorship of the LA Chef Conference where we hosted a Sustainability Summit to discuss global sustainability trends.