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Edited Transcript of ISDR earnings conference call or presentation 1-Nov-18 8:30pm GMT

Q3 2018 Issuer Direct Corp Earnings Call

Cary Dec 3, 2018 (Thomson StreetEvents) -- Edited Transcript of Issuer Direct Corp earnings conference call or presentation Thursday, November 1, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian R. Balbirnie

Issuer Direct Corporation - Founder, President, CEO & Director

* Steven Knerr

Issuer Direct Corporation - CFO

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Conference Call Participants

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* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

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Presentation

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Operator [1]

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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.

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Steven Knerr, Issuer Direct Corporation - CFO [2]

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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 of 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. with 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 of Platform id., as we added an additional 33 subscriptions of 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 in the FSCwire acquisition as well as revenue from our transfer agent module due to the addition of customers acquired in 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 the 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 was 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 of Platform id., we've increased deferred revenue by 57% since 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 reinvestment in our business, specifically Platform id.; our sales and marketing team; as well as acquiring complementary businesses, products, technologies and/or assets, which 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.

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Brian R. Balbirnie, Issuer Direct Corporation - Founder, President, CEO & Director [3]

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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 our subscription business continues to expand, so does our deferred revenue numbers and backlog. With 1 quarter remaining, our total net new subscribers for the first 9 months totaled 89, with an 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 at 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% from 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 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. 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, 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 continue 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 had maybe expected. I think this holds true, in part, to 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 an entire compliance and operations team. As we said previously, we had 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 up 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, this was the first offering that we've done in our 11-year public history. This offering now [bolts] our balance sheet to almost $20 million in cash and further -- to further invest in our business, something that we have been focused on in the last couple of months and will continue here in the next -- in the near short term.

The end of the quarter marked the completion of our investor conference software for Platform id. This module add-on further expanded our platform subscription business to the professional conference organizers. And something you'll hear us talk about is just PCO, for short. So in the coming quarters, our platform business will become more refined and expanded, having specific platforms for public companies, private companies, for PCOs and investors. These 4 different platforms will make up our entire Platform id. subscription business in 2019 and beyond.

More specifically, this new PCO subscription module allows conference organizers to market their events, schedule and manage millions of one-on-ones held each year and at the same time adding the power of our webcasting technologies and newswire distribution to the entire ecosystem. Since this product was released in October of this year, we have seen a couple of deals already signed, but revenues will remain minimal in fiscal 2018, as these conferences are planned for next year. We anticipate that in 2019 this module will be a driving force for our expanding Platform id. product set and will provide a broader audience than today. And in some ways, this product has opened up the adjacencies to our current platform business. These types of innovations are critical to get our platform fully commercialized.

6 months ago, we talked about these planned modules and what they would do for us as a company in the future. The next phase of expansion is our insight analytics module. This will have a limited rollout at the end of this quarter this year, to be broadly available to our entire customer base as well as our new subscribers in Q1 of 2019. Insights are generated by investors and shareholders as they engage with earnings events, IR webcast content from our network and investor conferences, alerts, requests, investor registrations and subscriptions. Having this data in a one real-time platform that will allow our customers to segment their investors in several different ways so as to maximize targeting of the message more efficiently. This module will give us expanded ARPU for our current customers and higher ARPUs from new subscribers in the future. Two new platform add-ons are investments in our business we have planned for over a year. By investing in our technology, we have still been able to keep R&D at about 10% of revenues for the quarter, something we believe will continue as we bring to market these and other platform advancements.

[Absent] of our core technology, we have also made investments in improvements in other parts of our organization. We've recently promoted an 11-year veteran of the company to Director of Operations; and expanded our sales and marketing team by 3 additional headcount during the period, bringing our total sales and marketing to 22 at the end of the third quarter. And beginning this month, we are happy to report that Dick Bromley has joined our team as the Executive Vice President of Sales. Dick brings 17 years of sales management and industry leadership to Issuer Direct, with deep experience in communications and newswire. We are excited to have him and look forward to expanding our team as a result of his presence. Mr. James Michael, who previously served the company for 12 years in various capacities and most recently as our Vice President of Sales, will be moving to the Vice President of Business Development, where he'll be focused on our exchange partners, our new PCO business that we recently announced as well as our investor relations and public relations partners. I'd like to spend a minute on how we're refining and improving our offerings for 2019 and beyond.

With these planned upgrades to our Platform id., you will see us begin to offer subscriptions to public, private, PCOs and investors. These visible subscriptions will be purchasable right from our platform and designed based on each of our 4 segments just mentioned. By doing this, we feel that we can maximize our subscription modules best for our customers. I also think that this is vital to be able to further provide the necessary metrics of our business to our shareholders. Costs to acquire these types of customers and -- are drastically different, and conversely the spends from public to private are also different. 2 years ago, we began segmenting our customers who purchase platforms and services. And this past year, we have further detailed ARPU spends on new Platform id. subscriptions, as we talked about at the being of today, but this is not telling the full story. There are even more customers renewing individual modules each year, and this is why it's become necessary to further segment our customers' spend by both public, private, PCO and investors.

In closing. Although we're behind on our internal goals, top line revenues are 15% higher for the first 9 months of this year compared to last year. And customer growth has continued during these same periods. Fact is, even though we have messaged year-over-year growth, we expect a lot from ourselves and continue to work hard to push top line as we continue to invest in our business, which has had a short-term effect on operating results. We are encouraged by our continued client expansions, specifically the customers that are purchasing our platforms; and the investment that we are making in our business both on our new product development and our employee base, which will put us both in a unique position to have future growth and to scale our business. This concludes our prepared remarks.

Operator, can we please begin the question-and-answer session?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the light -- line of Mike Grondahl with Northland Capital Markets.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [2]

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The first question is just I know you were 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 timeline there?

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Brian R. Balbirnie, Issuer Direct Corporation - Founder, President, CEO & Director [3]

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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 as E*TRADE. So that will round out our broker terminal distribution.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [4]

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Got it. So just, Brian, let me paraphrase: You've gotten on the -- or you're testing getting ACCESSWIRE to AMTD, Schwab and Bank of America Merrill Lynch. And you hope to have that rolled out at year-end or 1Q formally. Is that -- did I hear you right?

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Brian R. Balbirnie, Issuer Direct Corporation - Founder, President, CEO & Director [5]

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Correct. That's correct, yes.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [6]

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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?

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Brian R. Balbirnie, Issuer Direct Corporation - Founder, President, CEO & Director [7]

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Yes, it's -- in 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 new 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.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [8]

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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?

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Brian R. Balbirnie, Issuer Direct Corporation - Founder, President, CEO & Director [9]

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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 to play a role in it that sometimes tend to do less work during certain periods that 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, 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 and it -- so -- but that doesn't mean in reflection that the pipeline has slowed down, 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. We're a group of guys and gals that work hard. We'll pick ourselves 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.

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Operator [10]

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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.

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Brian R. Balbirnie, Issuer Direct Corporation - Founder, President, CEO & Director [11]

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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.