Intellicheck Inc

NASDAQ:IDN

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to the Intellicheck Q3 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gar Jackson. Thank you. You may begin.

[Gar Jackson]

Thank you, operator. Good afternoon, and thank you for joining us today for the Intellicheck Third Quarter 2023 Earnings Call. Before we get started, I will take a few minutes to read the forward-looking statement. Certain statements in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

When used in this conference call, words such as will, believe, expect, anticipate, encourage and similar expressions as they relate to the company or its management as well as assumptions made by and information currently available to the company's management identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management's current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. And the company undertakes no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements, whether resulting from such changes, new information, subsequent events or otherwise.

Additional information concerning forward-looking statements is contained under the headings of Safe Harbor Statement and Risk Factors listed from time to time and the company's filings with the Securities and Exchange Commission. Statements made on today's call are as of today, November 8, 2023.

Management will use the financial term adjusted EBITDA in today's call. Please refer to the company's press release issued this afternoon for further definition, reconciliation and context for the use of this term. We will begin today's call with Bryan Lewis, Intellicheck's Chief Executive Officer; and then Jeff Ishmael, Intellicheck's Chief Operating Officer and Chief Financial Officer, who will discuss the Q3 2023 financial results. Following their prepared remarks, we will take questions from our analysts and institutional investors. Today's call will be limited to 1 hour, and I will now turn the call over to Brian.

[Bryan Lewis, executive]

Thank you, Gar, and good afternoon, and thanks for joining us, everyone, today for our third quarter 2023 earnings call. It was another solid quarter of year-over-year growth with SaaS revenues up 17% versus the prior year quarter. I am beginning today's call with an update on some of the recent changes we have made as an organization. As I have shared with you before, I have continued to review organizational needs with an ongoing focus on staffing component in building our company and accelerating revenue growth. .

I continue to believe that key to our continued progress is putting the best people into operational positions that will enable us to drive growth and significant product evolution. Since Jonathan Robbins came on board as our VP of Engineering, he has made significant contributions and is engaged with our customers to really seek out what they need and address any issues or concerns that they might have. These efforts reflect our renewed focus on being proactive in partnering with our customers, recognizing that one size doesn't fit all.

Without getting too deep into the technical details, here are just a few highlights regarding what Jonathan and his team have accomplished so far. Recognizing that we need to reduce transaction abandonment, Jonathan led the team and the redesign of our digital user interfaces to simplify the customer experience during ID validation. We believe that this reduction in abandonment will drive additional revenue, but more importantly, will help our clients onboard additional clients faster and more efficiently.

The team has redesigned our API and servers to improve security and reliability. We are no longer dependent on only 1 cloud provider. We are now platform-agnostic and this provides a tremendous amount of flexibility that have been previously lacking. Again, this is something that we believe will benefit our customers and better position them to work more effectively. Additionally, this is expected to further reduce our platform costs in 2024. And Jonathan and the team have ramped up our data science and machine learning R&D with an eye toward creating new products and furthering our fraud detection expertise.

We believe this will lead to additional revenue opportunities in the future and will further position Intellicheck as top of mind when it comes to fraud prevention. We believe that this is only the beginning. As a result of the rapid strides he has made and the product and customer-first deliverables, Jonathan was promoted to the role of Chief Technology Officer in September.

Following up on point #3, we believe that there is a significant opportunity to monetize the vast amount of data that we collect on fraud, including when, where and how it is occurring. We believe that this data will be beneficial to many different organizations. With that in mind, during the quarter, steps were taken to advance our efforts. We are augmenting this team with data scientists, and we anticipate that we will start to be a revenue contributor in 2024.

It is important to note, however, that this data harvesting goes beyond monetary benefit. We believe this also solidifies our position as experts and thought leaders in the field of fraud and positions us to be an industry leader and [ speaker on ] fraud with exclusive material. During the quarter, we also announced the addition of David Jurgens, to our Head of our channel partner program and he really hit the ground running. Jeff worked with David in the past at Cylance and David was a standout there. He built out the successful channel program from scratch that was a significant contributor to their growth. We recognize that we are good at bringing in the age-restricted accounts on one end of the spectrum and [indiscernible] take time on the other end of the spectrum, the channel program, we believe, will be a good to augment mid-tier sales growth.

Although David has only been here just over a month, he's off to a solid start, and we are very excited about the program he is putting in place. Looking now at our third quarter results. Total revenues grew to $4,760,000 compared to 4,012,000 and SaaS revenue was a record $4,635,000 versus $3,970,000 when compared to the same period a year ago. And we continue the trend. Our trailing 12-month SaaS revenues have grown each month for the last 45 months. Real estate transactions continue to be a market vertical with significant fraud. As a result, we have expanded our market penetration to reach beyond title companies. We have now gone live with the leading digital closing platform that is used by title, escrow, real estate and mortgage lending professionals to transform home buying and selling into simple, secure, enjoyable experiences for millions of homeowners each year. Their platform provides a system of record for the real estate settlement ecosystem through a suite of workflow, accounting, reporting and collaboration products as well as its expansive product and service integrations.

We believe that this not only protects customers against fraud and transactions that can be very large and involves significant amounts of money, but also marks an important milestone because it further embeds Intellicheck into the real estate transaction ecosystem. We continue to see growth in the title business, the nation's second largest title company started a paid pilot that launched in mid-October.

Initially, they purchased a bucket of 50,000 transactions for their use in the Florida and Georgia markets. Looking at our continued efforts in the banking market vertical, the 2 regional banks that we have been talking about continue to make progress toward revenue generation. Both of the pilots we have spoken about with the 2 regional banks totaling over 4,000 branches are off to solid starts. Although this took longer than originally anticipated through Jonathan's team work on the technology side, we have evolved the product to better fit their needs.

As a result, we are seeing good velocity of use during this pilot period and extended use cases for both banks are anticipated. In the automotive market, we are working with the 2,700 unit auto dealership on some requested technology updates. Jonathan and his team have updated the front-end capture to work better fit their workflow. We continue to believe that the auto market is significantly underpenetrated and that is in another market where it doesn't take much fraud to add up to significant losses.

The manufacturer that this company is working with was hit very hard by the UAW strike, so the launch has been slower than both anticipated, but the technology is now being evaluated by 2 additional automotive manufacturers in their network. On the age-restricted front, we are continuing to build on the terrific success we had in Charleston, South Carolina. The extensive positive media coverage has reflected how well our public/private sector partnership has been, and it continues to receive high marks from the mayor, the city council and the business community.

We believe this program can be replicated in other communities struggling with the underage access issue that have had a negative economic and reputational impact on their communities. Right now, we are in discussions with the City of [ Clemson ], South Carolina. The potential program was discussed at the recent City Council meeting, and we are looking forward to seeing how their deliberations evolve. On another note, on our successful partnership with Charleston, this program is being recognized for its innovative approach to addressing underage access to alcohol.

I was honored to be a feature speaker at the Pennsylvania Liquor Control Board 2023 Education Conference where speakers roles are highly coveted. A highlight for me was when a Pennsylvania Liquor Control Board Officer spoke up during the Q&A. She offered to demo our technology saying they use it and love it. We are also continuing to make strides with the branding agency. We believe that raising awareness about Intellicheck will help drive interest and leads in markets where we know accuracy is important because the stakes are so high.

So as you can see, we're making significant progress on a number of fronts that we believe will accelerate our growth in 2024. I'll now turn the call over to Jeff.

[Jeffrey Ishmael, executive]

Thank you, Brian. I'm pleased with the continued progress we have been making across all levels of the organization as we continue our efforts to redistribute our spend and investment into the areas that will fuel our future growth and profitability. Our third quarter revenues were 19% higher versus the prior year, and we continue to report a higher average price per scan versus the prior year, and we continued our progression towards adjusted EBITDA neutral results for the year. .

We are pleased to see the continued trailing 12-month growth progression in SaaS revenues each month, which has been achieved consecutively for the last 45 months. Continuing to cast a critical eye to the metrics of our SaaS revenue, it's encouraging to see an 18% increase in our average price per scan versus the prior year as we've continued the rightsizing of legacy accounts and have enforced internal disciplines on CPI increases. This is especially encouraging as it continues to speak to the testament of the value realized by our customers and that we continue to have pricing power.

We also continue to maintain our focus on operating expenses to ensure that we achieve the expected return on our investments in this area. Within the Q3 period, we made additional changes to the product group. We saw the promotion of Jonathan Robins to CTO as well as new hires to increase the skill set of the group across the engineering, development and data science teams. We are continuing the implementation of our channel program to be completed by the end of the year, which I will provide more details on later in my remarks. We expect this program to have a noticeable impact in our 2024 pipeline growth and bookings. We believe that the combination of the efforts discussed above will provide the necessary support for the sales team to drive increases in customer engagement, bookings and revenues in 2024.

Turning now to our third quarter results. Total revenue for the third quarter of 2023 increased 18.7% to $4,760,000 compared to $4,012,000 in the same period of 2022. Our SaaS revenue for the third quarter of 2023 grew 16.8% to $4,635,000 compared to $3,970,000 during the same period of 2022. Gross profit as a percentage of revenues was 91.0% for the third quarter of 2023 compared to 91.1% for the same period of 2022. As we discussed during the first quarter earnings call, we continue to model gross margin performance at a range of 90% to 91%. While we continue to evolve our cloud resource infrastructure and may experience some cost overlap that could not only impact our current gross margin performance. We will continue to scrutinize our cost structure to maintain the 90% to 91% gross margin level.

Operating expenses, which consist of selling, general and administrative, marketing and research and development expenses increased $769,000 or 17.6% to 5,147,000 for the third quarter of 2023 compared to 4,378,000 for the same period of 2022. This increase was primarily driven by higher headcount-related expenses, primarily across the R&D team related to the full accrual of severance-related expenses. Excluding the $395,000 in severance-related expenses, operating expenses increased $374,000 or 8.5%. Included within operating expenses for the third quarter of 2023 and 2022 were $342,000 and and $729,000, respectively, of noncash equity compensation expense. We expect our total noncash expenses will continue to decrease and comprise approximately 10% to 11% of our operating expenses, the stock-based compensation comprising 90% of that figure. This compares to our prior historical trend of 13% to 15%.

We are continuing to implement aggressive expense reviews to ensure we are effectively allocating to the proper areas to support our growth initiatives. With respect to our Q3 operating expenses, we enacted personnel changes, primarily within the R&D group, that resulted in a Q3 severance accrual of $395,000, which was fully accrued within the quarter. From an annualized perspective, we do not anticipate a reduction in our R&D expense as the broader product team was recalibrated during the Q3 period. As we have discussed in our prior calls, we expect to continue realizing leverage in our operating expense structure and this quarter's 6-point reduction in expenses adjusted for severance reflects our commitment to ensuring we scrutinize and properly allocate our spend.

Turning to net income and EBITDA. The company reported an improved net loss of $644,000 for the third quarter of 2023 compared to a net loss of $724,000 for the same period of 2022. The net loss per diluted share for the third quarter of 2023 improved to $0.03 compared to the net loss per diluted share of $0.04 for the same period of 2022. severance-related expenses accounted for $0.02 of our EPS results. The weighted average diluted common shares were 19.3 million for the third quarter of 2023 compared to 18.9 million for the same period of 2022. We also continue to ensure we are properly managing our cash reserves, which generated $179,000 in interest income versus $7,000 in the same period of 2022. Adjusted EBITDA for the third quarter of 2023 was a loss of $271,000 compared to a gain of $75,000 for the same period of 2022. It's worth noting that $264,000 of the severance accrual was not adjusted out of the current quarter as these were not permanent reductions within the team.

Turning to the company's liquidity and capital resources. As of September 30, 2023, the company had cash and short-term investments in the form of U.S. treasuries that totaled $8.9 million. That's currently on deposit at Citibank and Capital One. Working capital, defined as current assets minus current liabilities of $8.1 million, total assets of $22.4 million and stockholders' equity of $17.1 million. It's worth noting that the U.S. treasuries will mature in December with a weighted average rate of 5.1%. The company has a $2 million revolving credit facility with Citibank that is secured by collateral accounts.

There are no amounts outstanding under this facility, and the facility was not utilized during the quarter. Turning now to our internal initiatives. Our third quarter continued to maintain a focus on improving our operational effectiveness and ensuring that we have the proper team and foundation in place to achieve adjusted EBITDA neutral without compromising the necessary investment in the business. As mentioned in earlier remarks, we continue to leverage our cost structure, which when adjusted for severance improved 6 points versus the same period last year as well as improvements over the last 3 quarters.

During the prior quarter, we also discussed the early efforts regarding the formalization of our channel partner program, and I'm happy with the results that we are seeing. As Brian mentioned during the quarter, we announced the hiring of David Jurgens, as our Head of Channel and Technology Alliances. He is not wasting any time in his efforts to activate his network and secure discussions with potential partners. He's attended key trade shows in Miami and Las Vegas to further expand early conversations. We are also ready to go live with our new [ PRM ] platform where we will be onboarding new partners, conducting deal registration as well as providing our partners with the needed collateral for their success.

As Brian mentioned, I worked with David at Cylance and have seen what he can do to build and deliver on a channel program. In consideration to our expense management, we will continue to improve the ratio of our operating expenses to revenue as we continue our progression towards adjusted EBITDA neutral in 2023. We will continue to implement disciplines that will improve our expense ratio by approximately 800 basis points versus 2022, maintain our focus on gross margin performance of 90% and 91%, while continuing a fundamental shift in our expenses towards funding sales and marketing initiatives. In closing, we are committed to the continued improvement of our corporate performance. I'll now turn the call over to the operator to take your questions.

[Operator]

[Operator Instructions] The first question we have is from Michael Grondahl of Northland Securities.

[Mike Grondahl, analyst]

First question, I think you said that you saw an 18% increase in average price per scan year-over-year. Could you just explain that a little bit? Is that driven by some price increases? Is it driven by some newer clients, like maybe this real estate area where the amount you get per scan is a lot more than the average book. I'm just trying to, in my head, wrapping around an 18% increase in the average scan price.

[Jeffrey Ishmael, executive]

Yes, Mike, Jeff here. So this is an initiative and a process we've been going through well over the last year as Brian and Chris [indiscernible] have been working with existing clients, but we brought those contracts up to renewals, both at the lower end of the spectrum, including [ the ones ] that we have in the queue and addressing those legacy prices, prices that shouldn't have been written in the first place. And so as we start to anniversary and see the traction on this contract updates, that is the effective impact to our average price per scan.

[Bryan Lewis, executive]

Yes. And Mike, we're certainly increasing pricing on new clients. So it's not just that we're doing price increases on existing we are continually pushing the pricing. We think that because we are -- so easy to use. And the way we're looking at it, we're more than just fraud prevention. We're actually a way to gain more clients. And I think a good example of that is just today, my team was talking to one of those 2 regional pilots that we had talked about. And their goal, when they started -- when they used us for their online applications, they hope to increase customer conversions by 2%. The words they use were ecstatic because they're actually seeing customer conversions increase by 20%. So when you think about the fact that we're not just cutting fraud, but we're also adding clients with a very high LTV that's why we're certainly pushing pricing. We're more than just fraud prevention. We're customer acquisition.

[Mike Grondahl, analyst]

Good. That's great. And if SaaS revenue grew 18% and pricing was up 18%, Am I correct in seeing kind of volume flattish? Is that because maybe some you lost a couple of customers because you tried to raise price that you know what I mean, they didn't want to pay more? I'm just trying to understand volume and price a little bit.

[Bryan Lewis, executive]

I'd say that if I look at overall, certain things were up, and it really depends on the region or the industry that you're looking at. If I look year-over-year, for the full year, I should say, so first 9 months of the year versus the first 9 months of last year. Retail is up about 9%. And that's a really mixed bag. Electronics are flat. Some of the specialty women's apparel retail are down as much as 30%, and we also now have an increase over the same period of like 16% increase in retailers who are using us.

So I think a lot of it really depends on -- is it a legacy customer where some of that pricing, like Jeff said, never should have been written because it was done so so long ago, and we're still trying to bring them up. Banking is an area that is definitely growing for us. I look at 2 of our largest banks, their volumes are up as they use us in new places within the bank, one up 28%. The almost has over doubled. So again, mixed bag because some transaction volumes are up, but it might be somebody who's using us purely for parsing the data.

So even though the volumes aren't up, it doesn't have a huge impact on revenue because you can't charge as much for pure parsing as you do for both parsing and filling out the application and fraud prevention. So little bit of both if that make sens.

[Mike Grondahl, analyst]

And then just lastly, how do you feel about the pipeline, new customers.

[Bryan Lewis, executive]

It's funny. We had a Board meeting today, and we were talking about that a lot. I think that we have said pretty much all year that this was going to be somewhat of a growth year for the new sales team, and that we expected them to start bringing things in the back half of the year. I think that they are definitely, definitely doing that. If I look at just last quarter, we closed 27 age-restricted places. 9 title companies in addition to that software company that should hopefully get us to a bunch more. We did an online survey company, an online therapy company, a new auto finance company, a handful of automotive dealerships in addition to the ones brought into us by our resellers. So between what I'm already seeing and the pipeline, I think that the team is making good on what we said and what we anticipated and planned for.

[Operator]

The next question we have is from Rudy Kissinger of D.A. Davidson.

[Rudy Kessinger, analyst]

I just want to clarify, Jeff, on the R&D, so you're seeing those $395,000 of severance, but only $131,000 you back out for adjusted EBITDA.

[Jeffrey Ishmael, executive]

That's correct. Yes. There was only one position that ultimately we didn't replace. The rest was a recalibration and an uptick in the skill sets of that team.

[Rudy Kessinger, analyst]

Okay. Got it. That's helpful. Bryan, it sounds like you just mentioned quite a few deals that were closed in the quarter. But it seems like these are smaller deals. I guess what is the average contract of those deals signed in the quarter? And did you sign any larger deals in the quarter that could turn into 6-figure customers or no?

[Bryan Lewis, executive]

We -- what I'd say is part of our issue is -- I'll answer it in 2 parts. Some of these could be rather large because auto finance company can be pretty big. I think the software company that provides basically the backbone for most of the small and midsized title companies could be very big. We talked about the #2 title company in the country. So we've got a lot of things that I think are potentially be very big.

The other thing is a lot of our very, very large clients, which it's almost where -- that's where we always sort of have to show people don't want to be discussed at all. So I can say that I am very happy with the things that we've announced. I'm very happy with what the team is doing. And I think that as we said, we were building a lot into the second half of the year, continued growth going into -- I look at the pipeline, what we're doing, what the sales team is bringing in very, very, very robust. Then I also combine that with what Jonathan and team have done, now we can go out and in 2 seconds, white label our product to match what somebody who wants to make their product look like in a digital world.

It can be installed with absolutely almost no work just to redirect on the [ URL ]. Those are the types of things that speed up deals because it's basically almost -- it's turning what was a major integration into an almost near -- no integration onboarding. So yes, I would say that we have

[Rudy Kessinger, analyst]

Okay. And then -- on the 2 Southeast regional banks, it seems like those deals have continued to push quarter after quarter. Are those pilots generating revenue? And if not, when do you think those 2 deals will start generating revenue? And then just lastly, sneaking 2 in 1 here. Just what is your expectation for the seasonal strength in Q4 in scan volumes relative to past years?

[Bryan Lewis, executive]

So 2 parts. They certainly should start generating revenue in Q1 at the absolute latest. I mean, like we said on the call, they are both blown away by what they're seeing. They both told us that they were just getting destroyed by fraud. And now for both of them were not only stopping that fraud destruction, but we're also getting them new customers very quickly. So that's why they're now looking how do we get it all over the place. And I think [ Chris ] has been very busy with them trying to figure out how we get to everywhere they want to as quickly as possible. I will say that so far, I'm seeing -- I'm not seeing any reduction through basically kind of yesterday, in terms of volumes from -- in terms of the seasonality. So so far, so good.

[Operator]

Next question we have is from Scott Buck of H.C. Wainwright.

[Scott Buck, analyst]

Bryan, I'm curious, you guys price the product differently when you're doing your work with auto or real estate versus the legacy store printed cards. I guess I'm just asking, given that I imagine the number of transactions is significantly fewer, but the dollar volumes we're talking about and the risk is significantly higher.

[Bryan Lewis, executive]

Yes, definitely. We sort of have a maybe 3 tiers is a way to look at it, volume being an indicator for part of the pricing. And then age restricted is always very different than fraud prevention. And then with fraud prevention, it's sort of the size of the fraud potential in there. So you've got age starting at a lower point for any kind of real volume than we would in fraud prevention. And then the lower the volume, the higher the cost and then the greater the potential loss, the higher the cost.

[Scott Buck, analyst]

Okay. Great. That's helpful. And I'm curious what -- obviously, the business has changed quite a bit since kind of pre-COVID in terms of diversification, how much of transaction volume is still coming from kind of the legacy store branded card business?

[Bryan Lewis, executive]

Definitely the majority of it is still there. Probably 93% to 95% we're getting our [indiscernible], so it makes it easier for us to break that out. But my goal is to reduce that as we get into some of these other markets and certainly other areas that are sort of recession-proof where you still need to authenticate yourself, which is one of the reasons we like some of the other markets that we have been moving into.

[Scott Buck, analyst]

Great. That's helpful. And kind of as a follow-up there, I mean, there's been a fair amount of news regarding credit tightening over the past several months and becoming more difficult for people to open new credit cards. Have you seen that on your end in terms of transaction volumes?

[Bryan Lewis, executive]

No. Like so far, not. I think more where I'm seeing changes in transaction volumes. It's because the retailer themselves is having problems because there are certainly some retailers who are up. And then again, like I said, there are some of the retailers that are very much down, 5% to 30%, but I'm also seeing other retailers that are flat and others that are up about 10%. So far, we're not, but that is certainly something that I'm keeping my eye on.

[Operator]

The next question we have is from Daniel Hibshman of Craig-Hallum.

[Daniel Hibshman, analyst]

This is Daniel on for Jeff Van Rhee. Just quick on the new data product. Any thoughts on pricing and/or how that would be priced? And any thoughts on the expected top line impact from that?

[Bryan Lewis, executive]

At this point in time, not yet, but we do look at it as doing a number of things. One is certainly strengthening the existing product. But we have talked to many of our existing clients about it, and they have all said that they would find it highly valuable. So we continue to work with them. Our first step was to get the data lake going. We've got a data scientist who's coming on board who can help us make a lot of sense of it.

We've already figured out a few things that we know we can already do, but I think you get somebody who really knows how to sift through the information, it's going to be even better. But certainly, that's the things that we're focusing on in early 2024 is to make sure that we get that plan in place. And again, it's going to be done in collaboration with our clients.

[Daniel Hibshman, analyst]

And then just on the cost reductions with moving cloud providers. Any thoughts on the potential cost reductions there, what that amounts to...

[Bryan Lewis, executive]

Meaning moving off of 1 -- you mean the cloud providers?

[Daniel Hibshman, analyst]

Yes.

[Bryan Lewis, executive]

Like Yes. I'd say that my CTO and Head of DevOps are promising me the sun in the moon, but I would expect something in order of at least 20%.

[Operator]

There are no further questions at this time. I would like to turn the floor back over to Bryan Lewis for closing comments.

[Bryan Lewis, executive]

So thank you all for joining us today. Hopefully, as you can see, we're focused on making changes, positioning resources and growing our market presence and penetration. I think all of our efforts reflect a common theme. We're continuing to work with new and existing clients to expand the ways we can stop identity theft with our proven technology solutions, right? And in addition to that, showing them how we can help them acquire more customers faster, right? And we take the between the 2 of those things, the best is yet to come as we solidify our reputation as an industry leader in both physical and digital identity. So with that, thank you, and good night.

[Operator]

That concludes today's conference. Thank you for joining us. You may now disconnect your lines.