Issuer Direct Corporation (AMEX:ISDR) Q4 2022 Earnings Call Transcript
Issuer Direct Corporation (AMEX:ISDR) Q4 2022 Earnings Call Transcript March 2, 2023
Operator: Greetings. Thank you for standing by and welcome to the Issuer Direct Corporation Fourth Quarter and Year Ended 2022 Earnings Conference Call. Today's call will be conducted by the company's Founder and Chief Executive Officer, Brian Balbirnie and its Chief Financial Officer, Tim Pitoniak. Before I turn the call over to Mr. Brian Balbirnie, I'd like to read you the company's abbreviated Safe Harbor statement. I'd like to remind you that statements made during this conference call concerning future revenues, results from operations, financial position, markets, economic conditions, product releases, partnerships and any other statement that may be construed as a prediction of future performance or events are forward-looking statements, which may involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by such statements.
Non-GAAP results will also be discussed on the call. The company believes the presentation of non-GAAP information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. With that said, Mr. Balbirnie?
Brian Balbirnie: Thank you, operator. Good afternoon, everyone and thank you for joining us today to discuss the company's fourth quarter and year-end 2022 results. Shortly after the market closed, we reported record revenues of $7.1 million for the fourth quarter and $23.5 million for the full year 2022. This is a quarterly increase of 25% over fourth quarter last year and a 7% increase for the full year. It should be noted, we only recognized 2 months of Newswire's revenues in our quarterly and full year results. Customer accounts also hit record numbers totaling 4,691 for the quarter compared to 3,667 during the same period last year, a 28% increase. I will talk more about customers, our 2023 KPIs and subscription numbers later in the call.
I am encouraged by the entire team's efforts for our integration plans to combine both Newswire and ACCESSWIRE editorial, distribution, back office, and sales and marketing teams into one cohesive efficient operation. This work will enable us to recognize the full potential of growth and cost savings over the fiscal year. It was important for us to spend the first couple of months of our acquisition getting to know everyone, their day-to-day, the operations beyond what due diligence can do. By investing this time, it puts us in a good long-term position to have a full efficient operation, cohesive plan and an alignment of staff into them with the right departments. I personally recognize this does have short-term impacts on results. But as everyone knows, we are a long-term focused management team that has and will continue to build stable long-term profitable growth at ISDR.
Before I turn the call over to Tim for his prepared remarks, the quarter and full year, I want to provide an important update in regards to the short-term note we utilized to help finance the Newswire transaction. The $22 million 1-year 6% seller's note has a maturity date of November 2023. We have been focused not only on the integration of the assets we acquired, but also refinancing the short-term obligation, with a longer-term facility with a banking partner that meets the business needs today and in the future. The business has debt capacity, and we are looking to close what should be a 5-year facility that will enable us to positively impact our bottom line and balance sheet. Additional terms of the financing will be forthcoming this month.
There is a lot more to talk about today. So I'll turn the call over to Tim to cover the fourth quarter and year-end results. Tim?
Tim Pitoniak: Thank you, Brian and good afternoon everyone. As Brian mentioned, quarterly and year-end results were primarily driven by our acquisition of Newswire and growth in our ACCESSWIRE news brand, which resulted in our press release revenue increasing 65% over the prior year, while contributing to increased gross margin and enabling us to increase gross margin percentage to 74%. The Newswire acquisition further enforces our commitment to scaling our communications business as well as continue to execute our capital allocation strategy. I will now highlight some of the financial results we achieved during the fourth quarter and full year ended 2022. During the fourth quarter of 2022, we achieved record revenues of $7.1 million, a 25% increase from $5.7 million in Q4 of 2021.
For the full year, total revenue was $23.5 million, a 7% increase from $21.9 million in 2021. The increase in the quarter and year-to-date revenue was primarily driven by our communication revenue stream, partially related to the acquisition of Newswire, which is included in the communication revenues, as well as a 7% and 11% increase in revenues from our ACCESSWIRE news brand, respectively, due to an increase in average price per release. For the full year, we also have increased revenues from the licensing of our Investor Relations website and data feeds. These increases were partially offset by a decrease in events and webcasting revenue due to less demand of our virtual products as conferences and meetings began to move back to in-person during the current year.
During Q4 2022 and full year 2022, communication revenue accounted for 78% and 69% of total revenue, respectively. In the prior year, communication revenue was 64% of total revenue during both Q4 and full year of 2021. Revenue from our compliance business decreased 22% for the fourth quarter and 5% during the full year compared to the same periods of 2021. The decrease was primarily related to revenue from our transfer agent business due to a reduction in market activity in corporate actions and a decrease in revenue from our disclosure reporting and legacy ARS service due to customer attrition. The quarter was also impacted by a reduction in revenue from our print and proxy fulfillment services due to large onetime projects that did not reoccur in the current period.
For the full year of 2022, these decreases were partially offset by an increase in revenue from our print and proxy fulfillment services due to large transactions and an increase in projects during the current year. Changing gears to gross margin, our overall gross margin percentage was 74% and 76% for the fourth quarter and full year of 2022 compared to 73% and 74% for the same periods of the prior year. Gross margins from our communications business decreased 3% for the fourth quarter, primarily due to higher webcasting and events revenue, which produced lower margins as well as additional revenue from Newswire, which currently has a lower margin than our ACCESSWIRE business. As we work through synergies of the integration, we expect gross margins between the two businesses to become aligned.
For the full year, gross margins for the communication business increased 1%, which is related to an increase in revenue from our high-margin ACCESSWIRE business as a percentage of communication revenue. Gross margins from our compliance business increased 4% for both the fourth quarter and full year of 2022 compared to the same periods of the prior year. This increase in gross margin percentage is primarily due to lower amortization costs associated with our disclosure software, which became fully amortized in the prior year, partially offset by an increase in print, postage and fulfillment costs associated with increased revenue from our print and proxy fulfillment services. Moving down to operating income. We posted operating income of $44,000 for the fourth quarter of 2022 compared to $698,000 during Q4 of 2021.
For the full year, operating income decreased to $2.7 million from $3.7 million in 2021. For both periods presented, the decrease in operating income, despite an increase in revenue and gross margin is related to an increase in operating expenses primarily amortization expense attributed to intangible assets related to the Newswire acquisition, coupled with an increase in bad debt expense. Additionally, we experienced increase in stock compensation expense, employee-related costs, recruiting fees and other sales and marketing expenses, all of which are associated with our continued investment for future growth. G&A costs increased 24% and 20% for the 3 and 12 months ended December 31 of 2022, compared to the prior year due to incremental costs associated with operating the Newswire business, as well as an increase in stock compensation, bad debt expense, employee-related costs and other corporate initiatives associated with future growth.
Sales and marketing costs increased 47% and 21% for the fourth quarter and full year compared to the same periods of 2021. These increases are due to incremental costs associated with operating the Newswire business as well as our continued investment in advertising digital marketing spend and automation enhancements. The increases compared to the prior year were partially offset by a reduction in sales commission, while the quarter was partially offset by a reduction in consultants. Product development costs increased 95% and 21% for the quarter and full year compared to the same periods of 2021, which is directly attributed to the additional costs associated with operating the Newswire business. It is important to note that we had an increase in depreciation and amortization costs for both the quarter and full year due to additional amortization associated with intangible assets acquired in the Newswire acquisition.
On a GAAP basis, we had a loss of $109,000 or negative $0.03 per diluted share compared to net income of $616,000 or $0.16 per diluted share during Q4 of 2021. Net income was $1.9 million or $0.52 per diluted share for the full year of 2022 compared to $3.3 million or $0.86 per diluted share in 2021. Looking at some non-GAAP metrics. EBITDA for the fourth quarter of 2022 was $589,000 or 8% of revenue compared to $987,000 or 17% of revenue during Q4 of 2021. For the full year of 2022, EBITDA was $3.7 million or 16% of revenue compared to $5.3 million or 24% of revenue during 2021. You'll notice in the release this quarter, we have added a few other non-GAAP metrics such as adjusted EBITDA as well as free cash flow and adjusted free cash flow.
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We feel these measures provide additional useful information when reviewed along with our other non-GAAP measures and GAAP measures to help analyze results of the company as well as identify any trends. With that being said, our adjusted EBITDA for Q4 of 2022 was just over $1 million or 14% of revenue compared to $1.3 million or 23% of revenue during Q4 of 2021. For the full year, adjusted EBITDA was $4.9 million or 21% of revenue compared to $5.5 million or 25% of revenue. Adjustments in this measure include adding back stock compensation, acquisition and/or integration expenses and other nonrecurring expenses. Non-GAAP net income was $665,000 or $0.18 per diluted share for Q4 of 2022 compared to $894,000 or $0.23 per diluted share during Q4 of 2021.
For the full year of 2022, non-GAAP net income was $3.5 million or $0.95 per diluted share compared to $3.7 million or $0.96 per share in 2021. Switching over to cash flow metrics. We just completed our 32nd consecutive quarter of positive cash flows for the company. Cash flow from operations for Q4 of 2022 was $1 million compared to $1.4 million for Q4 of 2021. For the full year of 2022, cash flow from operations was $4 million compared to $4.7 million in the prior year. However, adjusted free cash flow was $2 million for Q4 of 2022 compared to $1.5 million for Q4 of 2021 and $5.1 million for the full year of 2022 compared to $4.7 million in 2021. As noted earlier, adjusted free cash flow is a new non-GAAP measure we have added that adjust for cash paid for acquisition and/or integration costs and other unusual items.
The current quarter and full year ended December 31 of 2022, includes $500,000 paid for rep and warranty insurance associated with the Newswire acquisition as well as $325,000 of payments related to Newswire opening balance sheet liabilities that were not recouped until Q1 of 2023. Lastly, our deferred revenue balance continues to climb. This is revenue we expect to recognize over the next 12 months, which increased to $5.4 million as of December 31 of 2022, compared to $3.1 million as of December 31 of 2021, an increase of approximately 75%. A majority of this increase relates to incremental deferred revenue associated with the acquisition of Newswire. I will now turn the call back to Brian, who will provide some updates on the business, our new products and everything else we have planned for the remainder of the year.
Brian?
Brian Balbirnie: Thank you, Tim. Appreciate it as always. You thoroughly highlighted the financials for the quarter and year, so I'd like to take everyone through the business, operations and other metrics I am tracking today and into the future. First, to touch on the Newswire transaction, I want to thank everyone at ISDR and Newswire that have been involved in the integration, the training and implementation and execution. We are ahead of our plans in many ways and now have our sights set on unlocking the value that we saw in this asset. Over the last 90 days or so, we have completed merging both organization's research and development teams, consolidated our sales and marketing teams into and with a new go-to-market strategy and our back office accounting and finance as well as HR.
And lastly, our client success and onboarding teams have all come together nicely. As a result, we have realized some cost savings in duplicate vendors and services. And on an annual basis, these duplicative cost savings between both organizations will be approximately $2 million. This also resulted in our headcount coming down at year-end from 137 to 121 at the end of February. With that said, we are going to continue to invest in our business, both in R&D and sales and marketing as we feel confident in our overall operations, strategy and business outlook. Specifically, on a product development team that is led by our new CTO, Mark Lloyd, our recent hire, his team includes 16 product engineers, DevOps and IT professionals. Mark's focus post integration of our platforms will be to lead innovation and execution from our strategic plan.
As such, R&D spend this fiscal year will continue to be approximately 5% to 6% of revenues. Innovations will come from product optimizations based on customer feedback and industry intel. It is important for us to bring to market impactful and highly sticky feature sets, like we have in the past with our targeting tools, our collaboration engines and our integrated new suite features brand asset manager and contact manager. This coming year, it will be more about our newly acquired media database monitoring and pitching tools. Once done, we will turn our focus to our new recommendation engine, a collaborative AI narrative-based suggestion platform for content optimization across all communication mediums. We look forward to sharing some of these advancements with you soon on our next call.
Moving on to sales and marketing. Jennifer Hammers, our EVP, who has led the team for almost 2 years, has approximately 40 talented and highly motivated professionals in our organization, both new business, client success, corporate and brand marketing. Jen's team continues to add new logos quarterly and is highly focused on both public and private organizations globally. Key accounts like Moderna, KnowBe4, Insperity, Kimberly-Clark and Bosch & Lomb have been won under her leadership, just to name a few. Additionally, James Michael, who has been in the organization for 17 years, has taken over our compliance business. There is no one I believe in more to lead this business. James' relationships in the legal, compliance and IR space have come to rely on James' ability to navigate transactional-based shareholder issues via our proxy and AGM platform, regulatory and stock transfer services.
Moving along to subscription. They have grown 9% in the fourth quarter to 1,002 compared to 922 in the same period last year and sequentially up from 971 in Q3. We believe our subscription business will continue to grow at double-digit teen percentage rates throughout 2023, as we implement our complete communications platform components. Additionally, we have continued to drive average revenues per customer from $6,948 in Q4 last year and $7,154 in Q3 to $8,641 in the fourth quarter. This is a 24% increase year-over-year in subscription contract value. Of the 1,002 subscribers that account for approximately 1/3 of our overall revenues for the quarter and on a stand-alone basis, our news distribution business accounted for approximately 60% of total revenues up sequentially.
And further, our news distribution business accounted for approximately 80% of our communications revenue for the quarter as well. Our subscription business is heavily dependent on news distribution offerings, both domestically and globally, whereby customers bundled their news needs with our IR and PR product sets. Starting this quarter, we will be bringing to market new subscription plans in certain geographic regions. First will be into the Canadian market, where we feel confident that we will continue to make headway in building market share. Additionally, we will be rebranding one of our products newly acquired from the Newswire transaction called the Media Advantage Platform, or MAP for short, to what we are going to call PR Optimizer, or PRO for short, in several different levels and options.
They will be geared towards our current customers as well as new news distribution bundles as well as new customers that are looking to amplify their stories globally. As we move through the market over the next 12 months in news distribution, we have seen year-over-year growth in volumes slow slightly to single digits. This is exactly what we see in the top 3 other news providers as well. This industry-wide slowdown in volumes and new distribution is something we previously spoke about in our last call. As such, recognition of revenues might vary quarter-to-quarter as a result of customers' news distribution utilizations. This brings me to KPI changes I'd like to highlight. That said revenue from ACCESSWIRE our core distribution grew 10% sequentially from Q3 and 7% year-over-year.
This does not include additional revenues that we achieved in the acquisition of Newswire. It is important to point out that even though volumes in the market may have slowed, our revenues continue to climb as a result of our sales team's work on average stated pricing. Moving along and beginning in 2023, we will be looking to modify our customer count metrics. To account for customers who have active contracts during the 12-month period of measurement, whereas today, we only report customers who did work for us during the quarter reported period. Improving this KPI will give us a true sense of our annual customers and align with what our peers are doing in the market. We believe the changes in these numbers will allow us to have a consistent message on actual customers under contract and thus create a less lumpiness in reporting from new distribution revenues and gross margins associated with utilization compared to contract values.
That being said, at our 2022 customer metrics, customer numbers ended up at 4,691 for the quarter compared to 3,667 during the same period last year. These numbers include 1,196 from the 2 months of Newswire acquisition. As a comparison, ISDR had 3,144 customers in Q3 of 2022, meaning this was 351 net new customer wins or 11% increase for the Q4. Again, we feel confident in our ability to continue to win customers over the long term. Our objectives are clear, get more products into the platform and grow average revenues per customer, something the entire team is excited about and looking to accomplish this year. As such, 2023 will be a product innovation year for us. We have our sights set on innovating the storytelling process as well as amplifying and measuring the most important components of the story from an engagement perspective.
To accomplish this, we will be bringing to market this year a recommendation engine, driven heavily on the ChatGPT open-source methodology, whereby customers will be able to input their narrative, points and summaries into our engine and it will output recommendations based on tonality and messaging for news distribution first, and later blog posts and social messaging as well as other customer marketing. This could help us go down the hall in organization and expand our total addressable market in the future. Something else I think is important to point out. Over the last 8 years as a small reporting company, we have opted to report like an accelerated filer, something we have taken great pride in accomplishing and always filing on the schedule.
With that said, the business has changed and the reporting complexity has also changed. As such, we are going to be extending our reporting time line by 1 additional week going forward in 2023, meaning Q1 earnings that was originally scheduled for May 4 will now be May 11. We will publish the remaining quarters for fiscal 2023 in the coming days on our corporate website. I thank you for your time today, and I look forward to talking to you all and follow-up calls and also coming back with updates on our long-term capital allocation and balance sheet improvements in the coming weeks. We remain confident in the business, our team and our product platform. Our revenues, margins and customer wins as well as average revenue per subscriber, maintain or grow our brand is becoming more recognized globally, and our team is just hitting a stride and have produced sustainable growth for years to come.
I could not be happier about where we are headed, and I look forward to sharing 2023 results with you each quarter. Operator, can we please begin the Q&A portion of the call.
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