Onvia, Inc. (NASDAQ:ONVI) Q2 2016 Earnings Conference Call August 2, 2016 4:30 PM ET
Hank Riner - President and CEO
Cameron Way - SVP and CFO
William Meyers - Miller Asset Management
George Melas - MKH Management
Good afternoon and thank you for participating in today’s conference call to discuss Onvia’s Financial Results for the Second Quarter ending June 30, 2016. Joining us today are Mr. Hank Riner, the President and CEO of Onvia; and Mr. Cameron Way, Onvia’s Chief Financial Officer. Following their comments, we will open the call for your questions.
Before I continue, I would like to take a moment to read Onvia’s Safe Harbor statement. This presentation may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as believe, intend, plan, expect, should, indicate and similar expressions identify forward-looking statements. In addition, statements that are not historical should also be considered forward-looking statements. Forward-looking statements in this presentation may relate to, but are not limited to, statements regarding Onvia’s future results of operations, the progress to be made by the Company on its 2016 operating initiative and Onvia’s future product and content offerings. Such statements are based on current expectations and involve a number of known and unknown risks, uncertainties and other factors, which may cause actual events to be materially different from those expressed or implied by such forward-looking statements.
The following factors among others, could cause actual results to differ materially from those described in the forward-looking statements; Onvia fails to increase and retain contract value of customers. Onvia fails to execute properly on new products or customers fail to adopt these products or services. Onvia’s investments in the Onvia platform and new content fails to improve sales penetration and client retention rates, and changes made to Onvia’s technology infrastructure fails to handle the increased demands on its infrastructure caused by increasing network traffic and the volume of aggregated data.
Additional information on factors that may impact these forward-looking statements can be found in the Business Management Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors sections as applicable, in Onvia’s Annual Report on Form 10-K for the year December 31, 2015. The information contained in this presentation is as of the date indicated. We assume no obligation to update any forward-looking statements contained in this presentation as a result of new information or future events or developments, except as maybe required by law. I would like to remind everyone that this call will be available for replay through September 2, 2016. Please refer to today’s press release for dial-in replay instructions. The webcast replay will also be available at Onvia’s website at www.onvia.com.
Now, I would like to turn the call over to Onvia’s President and CEO, Mr. Hank Riner. Please go ahead sir.
Thank you very much, Robby, and good afternoon everyone, and thank you for joining us today to discuss our operating and financial results for the second quarter of 2016. I will now turn the call over to Cameron Way, our CFO, who will provide a financial presentation for the second quarter of 2016. I will then comment on the operating results and finally we will open the call to your questions. Cam?
Thanks, Hank. Good afternoon everyone. Thank you very much for joining us today. In the second quarter of this year, annual contract value or ACV for our strategic account clients grew 5% over the same period last year. Strategic accounts are those clients from our target market that have a long term strategic interest in the state and local government market. ACV for this segment continues to grow slightly slower than last year because of our focus on identifying a primary solution for new clients versus selling an entire solution suite. As we've previously discussed, this approach has negatively impacted ACV growth in the short term, but should improve long term due to more up sell opportunities across a healthier client base.
Our Annual Contract Value per Client or ACVC for strategic accounts increased 2% to $12,900, compared to the same period of last year. Growth in ACVC reflects the success in retaining our most strategic clients and upgrading existing clients into new and higher value solutions. For the 12 months ended June 30, 2016, dollar retention is 86%, compared to 87% last quarter, and 89% in the same period last year. Dollar retention is a measurement of how effectively the Client Success team has retained and expanded existing subscription contracts.
This measurement can fluctuate slightly from period-to-period due to the mix of first year and tenured clients expiring in each period, as well as the volume of pricing and contract expansions in a particular period. This decline is result of our initiative to increase adoption rates across our client base, which we implemented in the second half of 2015. We proactively removed services from our renewal contract if the client has not seen value due to an ineffective implementation. We then focus on improving the adoption of the core solutions to reestablish value with the client and once achieved, we will reintroduce additional services when the client can effectively use them.
Subscription revenue grew 5% to 5.6 million compared to the second quarter of 2015. Subscription revenue includes the revenue earned from subscriptions with our strategic clients and our legacy small business clients, as well as revenue from our new self-service small business solution. Our new small business solution is an online low cost model that targets small companies that are not part of our strategic target market which was launched earlier this year. Hank will be providing further detail regarding the new small business solution later in this presentation.
Total revenues for the quarter were 6 million, up 2% compared to the second quarter of 2015. In addition to subscription revenue, total revenue includes other services such as content licenses and report revenue. Gross margin was 88% in the second quarter of 2016, compared to 86% in the same period last year. Our cost of revenue primarily consists of payroll-related expenses associated with the research, capture and enhancement of data in our proprietary database.
Operating expenses in the second quarter of 2016 increased by 8% to $5.4 million, up from $5 million in the prior year. The increase in 2016 is primarily related to an increase in payroll related investments we've made necessary to achieve our sales, marketing and product operating initiatives, such as the addition of new sales leadership and new marketing leadership hired in the last eight months. In addition, we began to accrue the cost of the CEO transition we announced in April of this year, a process we'll continue during 2017 until we find Hank's successor. Total CEO transition costs of $120,000 are included in operating expenses for the quarter.
For the second quarter of 2016, adjusted EBITDA was $439,000, compared to $653,000 in the second quarter of 2015. Adjusted EBITDA is down year-over-year as a result of the increases in operating expenses I just described. Adjusted EBITDA is defined as Earnings Before Interest, Taxes, Depreciation and Amortization, and non-cash stock-based compensation. Adjusted EBITDA is a non-GAAP financial measure.
Second quarter net loss was a $125,000 or $0.02 per diluted share in 2016, compared to net income of $80,000 or $0.01 per diluted share in 2015. On the balance sheet; cash, cash equivalents and available for sale investments increased by $1.1 million to $7.9 million -- excuse me, $1.1 million to $7.9 million as of June 30, 2016, compared to $6.8 million at the end of 2015. Cash flow is typically strongest in the first and fourth quarters of every year because the majority of our clients renew in these two periods. For further discussion of these results, our business and financial results, and risks and prospects for our business, please refer to our Form 10-Q, which we plan to file next week.
This completes our financial presentation. I’d like to turn the call back over to Hank. Hank?
Cam, thanks for reviewing the financial results. Our 2016 operating focus is to accelerate top line revenue growth and create leverage from our business model. As we have previously discussed, once our fixed costs are covered, we believe that adjusted EBITDA should grow faster than the growth rate of revenue and drive value for our shareholders. I can assure you that we have a relentless focus to accomplish this objective as soon as possible. Over the last year we've made significant investments in product, sales leadership and marketing leadership to ultimately drive more top line growth and higher ACV for our business. We believe that these investments are beginning to improve results.
First, we invested in new search technologies and on policy [ph] creation to build best in class search functionality for all of our clients. Onvia 7 ontologies have been completed for all of our verticals and all new clients are being onboarded with Onvia 7 today. We continue to migrate existing clients to our Onvia 7 platform which is going very well, and all clients will be migrated to the platform by the end of this year, if not sooner. We continue to get positive feedback from our clients that Onvia 7 improves their search results, and provides them with more relevant revenue opportunities than they received under Onvia 6.
Second we invested in product development to improve low product adoption by our clients, especially first year clients who have difficulty incorporating our intelligence into their existing workflows. In the last three months, we released enhancements which allow clients to import qualified leads and related documents directly into the two leading CRM solutions, namely Salesforce and Microsoft Dynamics. Integration with these CRM products should allow client pursuit teams to respond faster to opportunities to improve their win rates. The implementation process takes minutes and requires no additional customization.
These important product releases integrate Onvia's data directly into the clients' workflow and will allow them to more easily track how many Onvia opportunities convert to actual sales. Our clients will finally be able to measure the return on their investment in Onvia. Our product roadmap for the remainder of the year includes other solutions, focused on improving ease of use and integration of our data into client workflows, and we will share with you the information on those as we have those product releases.
Third we invested in sales and marketing leadership to improve the effectiveness of our sales teams. Our business development team has become more productive this year, and new client bookings increased 33% in the second quarter, compared to the same period last year. In addition, we're excited about our new brand point of view, that will roll out to the market later this year with our new website, which will be introduced in the fourth quarter of this year.
Fourth we invested in first year retention, which was critical to the long term growth of Onvia. In 2016 we created a first year onboarding team, focused on implementing our solution into our new clients' workflows. This team has been operational for more than six months, and we expect the most significant impact from this team will begin in 2017 when clients who are onboarded under this program for their entire subscription period begin to renew.
However, this team has been managing all first year clients since January, including those renewing in 2016. While results are still early, we are very encouraged by the improvement in first year retention rates on clients this team has managed for only a short period of time. Consistently achieving planned retention rates of first year clients is a requirement to generate double-digit top line revenue growth, which will show operating leverage in our business model.
Fifth, in early 2016 we simplified our client success organization. Previously, you'll recall that we had separate roles for retaining and growing clients. Today our client success managers are responsible for both retaining and growing contract values with our clients. Since our client success team is organized by vertical market, our CSMs are in a best position to understand how their clients go to market for the public sector and the workflows required to identify, qualify and manage reads from Onvia. This really simplified structure puts us in a better position to add more value for our clients, increase client retention and ultimately increase our contract values from our client base.
Since Onvia 7 is now completed, we are in an excellent position to add more content without adding headcount, with automation and machine learning as opposed to manual categorization. For the first time in our history, our content expansion plans are truly scalable. In order to create more intelligence and insight for our target audience on strategic accounts, we need to acquire content that's not readily available in the public domain through [indiscernible] scraping alone.
During the second quarter we launched Onvia Exchange to help us accomplish this objective. The strategy behind Onvia Exchange is to obtain content directly from agencies, content that's not readily available on public websites. In exchange for this additional content, we will provide to the agency access to the Onvia platform. Government procurement professionals can use Onvia intelligence to improve the quality of their bidding process, identify potential new vendors for their products and services and benchmark their actual procurement against peer agencies. Onvia can obviously use the additional content to move our platform beyond lead notification and management into higher level business intelligence for our target market of strategic accounts.
And in June I'm pleased to announce that we did hire a new Director of Content Partnerships here at Onvia to help drive this initiative. As Cam mentioned previously, Onvia 7 offers us another major benefit that we couldn't take advantage of before. Under Onvia 6 our clients needed help from us to set up and revise their searches. This is no longer the case. In 2011 you'll recall we walked away from soliciting new business from the small business market because our high touch model and our platform weaknesses prevented us from serving this market profitably. Onvia 7 eliminates this weakness. Small businesses will no longer require a client success manager to serve their needs. They can now set up and revive searches on their own in a matter of moments.
In early 2015, we tested a new e-commerce solution that allows small businesses who're interested in the select market in three states or less to purchase the new small business solution online without speaking to anyone in Onvia. This is an automated self-serve solution. Our sales team will not be involved with this market. Small businesses always needed Onvia leads, and we now have a solution to acquire and serve them profitably. The hard launch for this solution has been earlier this year in 2016, and as Cam mentioned early results are encouraging.
That concludes our prepared remarks. I'll now turn the call back to Robby, so we can take your questions. Robby, please go ahead and provide the instructions.
Thank you, sir. [Operator Instructions] And we'll take our first question from William Meyers with Miller Asset Management. Please go ahead.
Lots of interesting things going on with you. I think what I'd most like to hear is the response of the government agencies so far to this idea of providing additional content directly to you. You call it Onvia Exchange?
That is correct. We're -- we've just started this effort, William earlier this year, but we're very encouraged by the response that we have received so far. I'm not going to give you exact numbers but we're in hundreds of agencies so far that have signed up for the program, and this is going to be one of the most important initiatives that Onvia has ever done because it will get us closer to our suppliers of content, as well as allow us to go out there and get a lot of other content that's not readily available in the public domain. So we're encouraged by this. We've started planning for it well over a year ago, one of our planning off-sites in early 2015, and we now have it -- getting access to our platform with a slightly revised interface to fit their needs, not a major change. But the results from the agency community has been very, very encouraging.
Okay. If I could follow-up on that just -- and on the client side, are they able to access this information yet? Are they aware this is happening? Where are you on the client side?
Yes, we've just started. We're collecting awards data, we're collecting big results, we're collecting plan holders lists. If you look at the kinds of information that's found on websites, it's very heavily solicitation oriented, bizarre fees and term contracts. This additional data will allow us to match and track the entire procurement cycle. So, we'll be able to match awards with bids in RFPs, awards with contracts, and this is only the beginning. This can be taken in many different directions for the Company.
[Operator Instructions] We'll take our next question from George Melas with MKH Management. Please go ahead.
……personal visits as well as going out to the trade shows and the associations to try to sign up multiple agencies at once. But they can go online in a matter of moments and sign up. We're taking content from the agencies. We'll ultimately take it in whatever format they have it, electronic or even paper and then we'll convert it. And the beauty of Onvia 7 and the production processes that we have right now is that we can categorize and classify all this additional content without adding cost. That's something that we were not in a position to do before. So we're pretty excited about it.
And this content, do you pull it or do you have to push it through?
Well it would be an electronic exchange. So they would post the content into our system and then we would take that content and take it through the manufacturing process to get it directly into our database. So, it would be a two-step process.
And they have to make a decision about what do its teams receive and what you couldn't need assistance, so then you can pull it?
Well we're asking for a specific kinds of data. As part of the agreement, as I said awards and bid results and plant holders lists, and potentially some other things that for competitive reasons I don't want to get into, but we're specifying to the agency specifically what we're asking for and if they provide that to us, then we will provide them access to the platform.
Okay. In terms of the integration with Salesforce and Microsoft Dynamic, do you have a sense of what percentage of your strength [indiscernible] roughly 1,300 [indiscernible] account use those CRMs, those two CRMs?
There's a lot of vertical CRM systems out there, that are smaller, especially in the AEC space. You see a number of players. There's about 11 or 12 of them as a matter of fact. It's very fragmented today. But when you get into IT and business services, our other two big verticals, Salesforce and Dynamics are 1-2 in the market. So if you look at market share statistics in the general market, I don't think our subscriber base is that much different than that.
So, there's modest levered initiatives in the last 12 months. Really it seems like to try this in a long term sort of sustainable growth, are you trying to instill client success, you're starting with smaller bites, and then make sure that the client sort of gets some ROI from that, even on the renewal, if they don't use [indiscernible] every module, you would eliminate them. It will show your renewal rate. So the real focus is on ensuring client success, which I think a business should focus above all on that. That's -- where do you see the encouraging signs for you that this is leading to what will become hopefully double-digit growth…
I agree George, and that is what the objective is here, is to get to that double-digit top line growth, because once we do that, we can create significant value with this business model and there are some signs I think that are very encouraging, and a couple of them I've mentioned during the call script. One of them is new business. new customers. New business is up 33% when you look at the second quarter '16 compared to the second quarter of '15. That's very encouraging. Second one is first year retention rates. First year retention rates have improved this year with our establishment of that new first year group. And our tenured retention quite frankly has always been -- for a last couple of years at least, has been fairly strong. We can still get better there but the incremental improvement there is a little bit less. So when I look at the new business and I look at the first year and continued strength in tenure retention, we had some excellent growth from the client base the last few months. All of those put together, will make this more than a 5% or 6% growth story.
The new customer sign up, up 33%, that's customer count, right? That's not dollar?
Dollars. Those are dollars.
Dollars, okay. Is there a way -- as we think of your business sort of with ACV, then you're going to have a high individual [ph] retention rates and then you have to basically do roughly $3 million in all your new revenue in order to stay afloat right? Is that sort of -- would that be a very simple side way of looking at the business?
Unfortunately, our connection is not too good George. But again the components are the new business, the retention and the growth from the existing customer base. And together, that's what's going to drive your top line. But I'm not sure if that's what you were referring to or not. But those are components.
And the growth from the new -- the growth from the existing customer base, gives in a model of starting with small bites and sort of ensuring client success, that should be a very important part of your overall growth?
It's a very important part because of our strategy and also because as our client base grows for strategic accounts, we're going to have more opportunities. And keep in mind that I think it's important to realize, a lot of our product development the last four or five years has been defensive and not offensive. It was getting the platform fixed. Onvia 7 is something we should have done years ago. That's a fundamental foundational thing. It should have been in the business. We've caught up to all of that. Our product development team, which is outstanding, headed up Chris Woerner here at Onvia; Chris joined us about a year ago is now going on the offensive with product development where we're creating solutions where we can capture higher contract values as a result of that. So our product is definitely getting much stronger.
[Operator Instructions] And we have no further questions.
Okay, well, thank you for your questions and Cameron and I will be available to answer any additional questions you might have. But thanks for joining us this afternoon. And we appreciate it. We look forward to speaking with you next quarter.
Thank you, ladies and gentlemen for joining us today for our presentation of Onvia’s second quarter 2016 earnings conference call. This concludes today’s call. You may now disconnect your lines. Thank you.
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