Issuer Direct Corp

AMEX:ISDR

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Issuer Direct Corporation's Second Quarter 2023 Earnings Conference Call. My name is David Tadros. Host of Issuer Direct Hello, My Name Is, an employee-driven gets to know each other series, whereby we feature a new employee each week or something extremely cool happening at our company. Me doing this today is our way of ensuring our shareholders get to know all of us as well. Each quarter, we will feature one of our very own here at the company to introduce our executives and read the safe harbor language on each call.

It's my pleasure to introduce 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 the statements made in this conference call concerning future revenues, results from operations, financial positions, markets, economic conditions, product releases, partnerships and other statements 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, Founder, President, CEO & Director]

Greetings, everyone, and thank you, David, for today's introduction. Super cool for you to be doing this today and for all of your hard work on the Hello, My Name is series. I know when we first started talking about doing this podcast, it was employees first, but we do have plans to expand it and our brand to include customers and partners at some point. So keep up the good work sir.

We are pleased to everyone join us today to discuss our second quarter results. Our press release, which is accessible in our newsroom has just been released and provides the key takeaways on our performance for the quarter and first half of 2023. We are pleased with the second quarter results. Total revenue was up 67% year-over-year to $9.7 million, driven by both our business lines, something Tim will discuss shortly.

We also delivered solid performance on earnings for the quarter, something we spoke about in our last call and earlier in the year. EBITDA increased 7% year-over-year and 21% for the prior quarter. Customers subscribing to our products also grew over 5% for the quarter, and the average price per release in our core news business also increased.

These results were a direct effort of our entire team's ability to deliver on our operating plan and strategy for 2023. We recognize that we still have work to do here. Customer growth is still our #1 focus of our entire organization, and we're building up a strong quarter to deliver what will be continued success in the back half of the year.

As always, there is a lot more to talk about. So I will turn the call over to Tim to cover the second quarter results. Tim?

[Timothy Pitoniak, CFO]

Thank you, Brian. And good afternoon, everyone. As Brian mentioned, we were able to reach a new record high for quarterly revenue and generate increased cash flow and EBITDA over the prior year. I will now highlight some of the results we achieved during the quarter. Total revenue for the second quarter of 2023 was $9.7 million, an increase of 66% compared to $5.8 million for the same period of 2022. For the 6 months ending June 30, 2023, total revenue was $18.3 million, an increase of 65% from $11.1 million for the first half of 2022.

The increase for both periods was primarily driven by our Communications business, increasing $2.2 million or 61% and $5.4 million or 77% and for the 3 and 6 months ending June 30, 2023, respectively. Communication revenue represents 62% and 68% of total revenue during the 3- and 6-month period ending June 30, 2023, compared to 64% for the same period of 2022. The increase in revenue was driven by the acquisition of Newswire, for which all revenue is included in the communication revenue.

For the first half of 2023, we also generated increased revenue from our ACCESSWIRE business, which increased 10% compared to the same period of the prior year, primarily due to an increase in average price per release. The increase for the 3 and 6 months ending period June 30, 2023, was partially offset by a decrease in revenue from our webcasting and events business. Compliance revenue increased 76% or $1.6 million and 43% or $1.7 million during the 3 and 6 months ended June 30, 2023 compared to the same period of 2022. This increase was primarily related to an increase in revenue from our print and proxy fulfillment services business due to a few significant transactions which occurred during the period as well as an increase in revenue from our transfer agent services due to an increase in corporate actions and directed during the period.

Switching over to gross margins. Our overall gross margin percentage was 76% and 77% for the second quarter and first half of 2023, respectively, compared to 77% for the same periods of 2022. Gross margins from our communications business were 76% and 77% for the 3 and 6 months ending June 30, 2023, compared to 80% and 79% in the same period of 2022. The decrease in gross margin percentages for the period is primarily due to an increase in distribution costs as we continue to expand our global footprint.

Moving to operating income. We posted operating income of $1.7 million for Q2 of 2023 compared to $1.1 million in Q2 of 2022. Operating income was $2.3 million for the first half of 2023. And compared to $1.8 million during the first half of 2022. The increase in operating income is primarily due to an increase in revenue, partially offset by an increase in cost of revenue and operating expenses. I will not discuss the items impacting the change in operating expenses.

General and administrative costs increased 45% and 42% during the second quarter and first half of 2023, respectively. The increase is primarily driven by additional expenses associated with cost to operate the newswire business, onetime transaction integration costs, employee-related expenses and stock compensation expense. The increase for the first half of 2023 was partially offset by a reduction in recruiting fees.

Moving on to sales and marketing. Sales and marketing costs increased 49% for the second quarter and 68% for the first half of 2023 compared to the same periods of 2022. This is due to the addition of the Newswire sales team.

Finally, product development. Product development costs increased 149% and 167% during the 3 and 6 months ended June 30, 2023, compared to the same periods of 2022. This increase is directly attributed to additional cost to operate the Newswire business as well as the hiring of our new Chief Technology Officer. It is important to note that during the 3 and 6 months ended June 30, 2023, we capitalized $167,000 in costs related to building our new artificial intelligent writer that you know as AImee as well as upgrading our media database product.

Operating expenses were also impacted by an increase in amortization expense attributed to intangible assets acquired in the Newswire acquisition. On a GAAP basis, during Q2 of 2023, we generated net income of $1.4 million or $0.36 per diluted share compared to $841,000 or $0.22 per diluted share during Q2 of 2022.

Net income for the first half of 2023 was $1.2 million or $0.32 per diluted share compared to $1.4 million or $0.36 per diluted share during the first half of 2022. Net income for the 3 and 6 months ended June 30, 2023, and was impacted by operating expense items discussed previously as well as additional interest expense associated with the Newswire acquisition. These increases were partially offset by income resulting from the change in the fair value of our interest rate swap and interest income.

Additionally, the 6 months ended June 30, 2023, was impacted by a payment to extinguish our note payable resulting from the Newswire transaction.

Looking to some non-GAAP metrics. EBITDA for Q2 of 2023 was $2.9 million or 30% of revenue compared to $1.3 million or 23% of revenue in Q2 of 2022. For the first half of 2023, EBITDA was $3.6 million, or 20% of revenue compared to $2.2 million or 19% of revenue during the first half of 2022. Adjusted EBITDA for Q2 of 2023 was $3 million, or 31% of revenue compared to $1.5 million or 26% of revenue for the same period of 2022.

Adjusted EBITDA for the first half of 2023 was $4.9 million or 27% of revenue compared to $2.6 million or 24% of revenue for the first half of 2022. Non-GAAP net income for Q2 of 2023 was $2 million or $0.53 per diluted share compared to $1.1 million or $0.29 per diluted share during the same period of 2022.

Non-GAAP net income for the first half of 2023 was $3.3 million or $0.87 per diluted share compared to $1.9 million or $0.50 per diluted share during the first half of 2022. The increase in our non-GAAP metrics for the 3 and 6 months ended June 30, 2023, were driven by the positive results of the business as I discussed earlier in my remarks.

Switching over to the balance sheet and cash flow statements. Our deferred revenue balance, which is revenue we expect to recognize over the next 12 months, increased to $5.7 million as of June 30, 2023, and compared to $5.4 million as of December 31, 2022.

On the cash flow statement, we generated cash flow from operations of $1.7 million and $2 million for the 3 and 6 months ended June 30, 2023, and respectively, compared to $1.1 million and $1.6 million during the same period of 2022. Adjusted free cash flow was $1.8 million and $2.5 million for the 3 and 6 months ended June 30, 2023, respectively, compared to $1.1 million and $1.7 million for the same period of 2022. This is our 34th consecutive quarter of positive cash flow for the company.

I will now hand it back to Brian, who will provide some updates on the business, new products in the pipeline and everything else we have planned for the second half of the year. Brian?

[Brian Balbirnie, Founder, President, CEO & Director]

Thank you, Tim. Our second quarter was another record quarter of revenues and consistent gross margins, customer growth and sustained subscribers to the most important products in our product lineup. We could not be more pleased with the progress we're making and look forward to what is shaping up to be an amazing year for Issuer Direct. As Tim and I both mentioned, revenues for the quarter were $9.7 million, up year-over-year, partially because of the Newswire acquisition and up sequentially by 13% or $1.1 million.

This sequential increase was driven by our compliance business for the quarter. Conversely, our new distribution business drove just over $5 million in revenues for the quarter, up or 51% of our entire revenues. Conversely, up $2.3 million over the prior year, while still maintaining gross margins in the product range of 80%. Our news distribution business represents 84% of our communications business and 51% of our total revenues for the quarter.

Conversely, we also saw gains in our compliance business, up 76% year-over-year for the quarter. Absent of onetime projects associated with these results, our compliance business would have been in line with historical year-over-year and prior quarter results.

We have messaged and continue to feel our compliance business, not the growth driver for our business, whereas communications is. For almost the last year, we have been seeing industry-wide slowdowns in news volume, something we talked about last quarter. I would tell you that at the end of Q2, we are seeing this turnaround and continue in our collective brands and Q2 year-over-year news distribution growth was 14% and 15% sequentially over Q1 of this year.

This continued success is something we should be continuing to see and we believe we will be well back on track to our double-digit growth in our news business. We could not be happier to see this growth along with the synergies and the business combinations that are showing in our results on the bottom line.

Our product pipeline is maturing at a swift pace and we're looking forward to seeing several new products come to market here in the coming months. In our last quarterly call, we mentioned these products extensively to you, media database, pitching, monitoring and of course, AImee.

So I don't want to bother you today to go through all of that a little more time. But I would like to share some updates with you. AImee has been in production just for a couple of weeks, and almost 20% of our customers have used it. Pretty impressive as we have only launched into one of our product platforms to date with plans to hit our entire 10,000 customer database by year's end.

To summarize, AImee is our AI writer and recommendation engine that helps our customers create, improve and control the tonality of their stories. Our next step is to continue to grow customer usage, get the necessary feedback and lastly, measure the analytics that come from AImee assisted releases to illustrate the engagement benefits. This ultimately will lead us to a paid version coming next year. You will find AImee also sprinkled in other products coming to market in the coming months. The first will be our pitching platform, whereby our customers will be able to send campaigns to their list or our media list. Ask AImee to help improve their pitch to journalists, shareholders and other key constituents.

This pitching component on our platform will be part of our new annual subscription solution here in Q4. This is a feature, we did not foresee coming in our first release and are happy to see the hard work of our development team is delivering what we believe will be a sticky component to our ecosystem.

As we have said before, one of the benefits we received from the Newswire acquisition was some amazing technology, of which one component was the media database. We have invested heavily in people and process and interfaces to move this product to the top of our R&D team's focus this year and in fact, have built an entire data curation team of 14 people that are hard at work analyzing and updating records in almost near real time now.

As we all should know and expect a good pitch starts with the database of curated, accurate and up-to-date context. Our media database will be just that, with live curation support coming in early Q4. Along with monitoring, these subscribable products will help drive our ARR from our mid-8,000 range to over 12,000 and beyond. Speaking of subscriptions, we ended the quarter with 1,015 customers subscribing to our products with an average spend of $8,523 up from 966 subscribers and $71.65 in revenue. This is a 19% revenue expansion and 5% customer growth on a year-over-year basis. We firmly believe our new products will continue to help drive these metrics in the future.

We also have a good bit of headway in the market, not only by continually taking share from the incumbents, but also winning new business and of course, having a more comprehensive subscription platform will give our sales organization the ability to sell into the full TAM of the communication space.

Moving along to customers. Total customers grew to 10,449 from 7,440 last year. This total includes customers from the Newswire platform acquired. This 40% year-over-year customer growth another goal that we set when we talked last year of getting our customer accounts to 10,000 and beyond.

As always, it was nice spending time with you today and discussing the results for our second quarter. We look forward to talking to you on our follow-up calls. We remain confident in the business, our teams and our product platforms, our revenue margins and customer wins as well as average revenue per subscriber growing. Our brands continue to serve us well in the market, and we look forward to sharing more updates with you next quarter.

Operator, can we please begin the Q&A portion of the call.

[Operator]

[Operator Instructions]. Our first question comes from Mike Grondahl from Northland Securities.

[Michael Grondahl, Northland Capital Markets]

What's sort of your outlook in the back half of the year for Newswire and ACCESSWIRE? Sort of how do you see that trending?

[Brian Balbirnie, Founder, President, CEO & Director]

This is Brian. I'll answer that for you if you'd like. Look, like we talked about in the prepared remarks, there is an indicator here that we're seeing over the last few months that volumes are beginning to bounce back to normal levels with growth like we experienced last year in the prior years. So for our combined news businesses with our added and expanded distribution and our sales teams focused on that product with its new add-ons, we're very confident that volume will continue to expand both internationally as well as domestically.

[Michael Grondahl, Northland Capital Markets]

Got it. And then -- what are sort of like the next steps we should watch or listen for with AImee, your AI product? And if you could just also sort of address the cost side, maybe repeat what costs were capitalized and how you think about that investment going forward?

[Brian Balbirnie, Founder, President, CEO & Director]

Yes. And so as a product summary, right, from a capitalization perspective, we wanted to build the product to a very mature MVP, right, minimal viable product, get it to market to a segment of our clients. And what we're looking for now is to gather analytic upon the benefits of using AI written content compared to natural processing done by PR professionals and company professionals. So that -- the indicator of getting 20% of our customers using it -- they did releases in this measurement period, right? So the number of releases actually, gives us comfort that there's going to be a baseline to sample against. And so what we'll look for is what were the benefits of engagement from articles written by AImee compared to not by industry and sector so that we could break it out to provide customers a more premium-level service.

So at some point, we can then suggest to them based on the tonality if you make these changes, you could very well see an increased benefit in these industries and sectors and here's how. And that's what you're pay for. So that will be the paid version. If you want to think of it as a premium product, that's what that will be. Today, there is no cost for AImee for customers. We capitalized about $160,000, $170,000 during the period.

We've probably got about another $75 million to $100 million left here in this third quarter to complete that product. And the reason for the additional is because our developers were working late or just burning the midnight oil and figure out how to integrate AImee much quicker than we thought into our other products, like we talked about today. So it will go into pitching next giving our customers the ability to license and subscribe to the pitching product and media database and then have a plug-in from AImee to be able to help them write or recommend a better way the tonality to help their writing and engagement with media journalist shareholders and everybody else.

[Michael Grondahl, Northland Capital Markets]

Got it. And maybe lastly, what are sort of early thoughts on monetization. I know it's early. I know it's not until '24, but how are you thinking about it?

[Brian Balbirnie, Founder, President, CEO & Director]

Yes. I'm looking at it in 2 ways. So we're going to go to market in Q4, and I don't want this to be a leading indicator that we're building for suggesting revenue. We're going to go to market in Q4 to build a pipeline for a new subscription product that will be media database, analytics monitoring product, pitching products, newsroom and news distribution powered by AImee all for one flat fee.

But let's say it's $1,500 to $2,000 a month. We then believe that additional customers that don't subscribe will be able to take AImee, and we can monetize it on a per release basis. So if you sign up for your contracted press releases for U.S. National at $7.95 a release, you do 10 releases a year. you're pretty close to the average revenue per customer. We hope to then get another 10% to 15% to 20% lift on revenue on the customer by having them buy some of these items. And we've done this successfully in the past because remember, we used to sell media targeting back very early on the ACCESSWIRE days, and we were able to get double-digit 20%, 30% of our customers paying for upgrades on some of those things.

And so that's where we can move those customers into the database product, which will mean more revenue for us. And we will look to then monetize AImee as a per unit benefit to the customer and obviously to us.

[Operator]

The next question comes from Walter Ramsley with R Squared.

[Walter Ramsley, R-Squared]

Thank Brian, a pretty awesome report. No matter what metric you want to use, the profitability of the company is zooming 31% adjusted EBITDA for starters. I mean is that a sustainable number, you think?

[Brian Balbirnie, Founder, President, CEO & Director]

I think -- Walter, first, thank you, right? And we talked about this in the last couple of quarters that we believe the full synergy savings for our Newswire and ACCESSWIRE combined entities would truly fill through to -- and look, to be fair, right, we lived to that commitment and the numbers printed or illustration of that.

It's a great question to suggest are you providing guidance to suggest that this is going to be your new baseline going forward. And look, I would tell you, absence of investments made, absence of onetime charges, or absence of something bad happening in the market. As long as our revenue continues to grow the way it has, we feel comfortable that we're going to be in the high-end 20s and in some quarters hit into the 30s. So it's an EBITDA machine. It's a cash flow machine, and it's all dependent on what I said on the call, right? Our #1 focus is customers. As long as we continue to get the new customers that we want to get, yes, the answer is yes.

[Walter Ramsley, R-Squared]

Okay. That's all I have. Congratulations.

[Operator]

[Operator Instructions]. We have no further questions in queue. We've reached the end of the question-and-answer session. I would now like to turn the call over to management for closing remarks.

[Brian Balbirnie, Founder, President, CEO & Director]

Thank you. We appreciate everybody's time under 30 minutes, maybe a record for us today. But as always, we welcome the follow-up calls. We welcome seeing you at the next couple of conferences, we'll be at here in September and have yourself a safe and good evening.

[Operator]

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.