Onvia, Inc. (NASDAQ:ONVI)
Q4 2016 Earnings Conference Call
February 28, 2017 16:30 ET
Russ Mann - President & CEO
Cameron Way - CFO
William Myers - Miller Asset
George Melas - MKH Management
Good afternoon and thank you for participating in today's conference call to discuss Onvia's Financial Results for the Fourth Quarter and Fiscal Year Ending December 31, 2016. Joining us today are Mr. Russ Mann, 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'd 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 and its yearly operating initiative and Onvia's future product and content offerings. Such statements are based on current expectations that 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 investment 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 March 28, 2017. 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 Chief Financial Officer, Mr. Cameron Way. Sir, please proceed.
Thank you, Tanisha. Good afternoon everyone and thank you for joining us today to discuss our operating and financial results for the fourth quarter and fiscal year of 2016. First, I would like to provide a brief recap of the results of our business model transformation that we began back in 2011. And then, I will share our financial results for the fourth quarter and for the full year. I'll then turn the call over to Russ Mann, our new President and Chief Executive Officer who joined us 30 days ago to comment on why he joined the company and the opportunity he sees for Onvia. Finally, we'll open the call to your question and we will be providing updates for our vision and strategy, if any, later in the year but not on this call.
Onvia has changed significantly over the last six years. We have transformed ourselves from being a provider of business leads to an emerging business intelligence system at the center of the B2G marketplace. I thought it would be helpful to recap the last few years of our transformation to help you understand how we are now well positioned for the future. Over the last six years, we have continuously improved our leading platform of B2G contracting opportunities. Access to targeted contracting opportunities such as bids and RFPs will always be a fundamental need of government contractors.
Over the years, we have constantly expanded our sourcing to provide what we believe is the most comprehensive coverage of state local and education or SLED opportunities available on the market. Comprehensive coverage is extremely important, but only if the opportunities are delivered in a timely enough manner to be actionable. The average opportunity is only open for an average of 19 days and is often as short as a few days, and we regularly deliver 90% of our opportunities the same day they are published by the agency. Our timeliness gives our clients the most time possible to prepare a winning proposal. We believe that our broad coverage of both SLED and federal content and the timeliness of delivery provides our clients with the best in class short term lead solutions.
The B2G market certainly needs leads, but also needs the intelligence to qualify these leads and inform strategic decision making. To begin to fill the need for more comprehensive information, we introduced forward looking intelligent solutions back in 2012 and 2013. These forward-looking solutions Term Contract Center and Spending Forecast Center help clients identify projects early in the procurement process, strategically target opportunities, build informed capture plan and improve their contract win rates. In 2014, we added Vendor Center, which provides insight into the activities of businesses participating in the public sector. Vendor Center provides a comprehensive view of vendor activity, which helps clients identify potential partners, identify relationships and track the competition.
As a result of these forward-looking solutions and our expansion of our core bid and RFP solution, we have significantly increased the volume of content that we ingest every day. As a result of this content growth, our content collection and curation processes could no longer scale efficiently to meet them much higher content volumes demanded by these new solutions. To address this challenge in 2015, we developed Onvia 7, which overhauled our content curation process. We now leverage leading technologies, advanced machine learning techniques, natural language processing. And we developed our own proprietary ontologies and business rules. This process tags every record we collect accurately, efficiently and consistently using our own proprietary taxonomy.
As a result Onvia 7 allows us to cost effectively scale our content curation process and significantly improve the value clients receive from our solutions. Clients miss fewer bids and receive fewer irrelevant projects, which are both inherent challenges with searching unstructured data sets using traditional key words, industry codes and categories. In 2016 all of our clients were migrated to the Onvia 7 search paradigm.
Over the last five years, Onvia has focused on companies that do business in a broad geographic area and are strategically committed to the public sector. These businesses are still core to our strategy. Onvia 7 and improvements in our technology platform have allowed us to effectively launch solutions to support both agencies and smaller businesses as well, which were underserved by our existing solutions. In 2016 we launched Onvia Exchange for agencies, and a self-service contracting solution for vendors to serve these markets. Onvia Exchange provides governments with access to our database of procurement intelligence to help them write better bids, identify potential vendors and procure more effectively.
And finally in 2016, we began development of Onvia 8, which we will release in phases over the course of 2017. Onvia 8 is intended to help clients better qualify opportunities using an improved user interface, workflows and analysis tools. Entering into 2017, our solutions now serve the main participants in the B2G marketplace, government agencies, and enterprise midmarket and small and disadvantaged business. With the phased release of Onvia 8 throughout this year, we will have built a platform that agencies and businesses alike can use to execute more efficiently, better qualify opportunities, begin to leverage analytics, and informed strategic decision making in the way that they work either at the office or on a mobile device.
Before I turn the call over to Russ, I'd now quickly like to provide an overview of the financial results of 2016. For the fourth quarter of 2016, subscription revenue grew 7% to $5.9 million compared to $5.5 million in the fourth quarter of 2015. Subscription revenue includes the revenue earned from our traditional consultative service model, as well as revenue from our new self-service lead solution. For the year subscription revenues grew 6% over 2015.
We are pleased to announce that Annual Contract Value, or ACV for strategic accounts, which are defined as clients within our target market grew $1.4 million, or 8% over the same period last year. The growth in ACV is primarily driven by the continued improvement in acquisition sales, demand generation from content marketing and improving contract up sales compared to the fourth quarter of last year. Total ACV represents the annualized recurring revenue value of subscription contracts, excluding our self-service lead solution as of the end of the quarter.
Our overall contract value per client for ACVC increased 10% to $8,024 compared to the same quarter last year. Growth in ACVC reflects the success in acquiring, retaining, and upgrading existing clients into new and higher value solutions. We are also pleased with the increase in the number of strategic clients added in the fourth quarter. The net number of strategic accounts increased 7% over the same period last year. This increase was primarily due to the acceleration of new client acquisition in the second half of 2016. Beginning next quarter, we will change our quite metrics back to the summary presentation we used prior to 2016. In 2016 we separated strategic accounts from small business to show the impact that the decline in the small business channel is having on our overall ACV, particularly early in 2016.
Our small business channel has stabilized. So we believe this presentation is less valuable to shareholders. And without this higher benefit to shareholders, we believe that our current presentation provides an unnecessary level of detail about our client base to our competition. For the 12 months ended December 31, 2016. Dollar retention is 89% compared to 88% in the same period last year. Dollar retention is a measurement of how effectively the client success team has retained, achieved price increases and expanded existing subscription contracts. This measurement can fluctuate 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.
Total revenue for the quarter was $6.3 million, up 6% compared to the fourth quarter of 2015. In addition to subscription revenue, total revenue include other services such as content licenses and report revenue. We historically entered into content license agreements to generate revenue for markets that we could not effectively serve ourselves, either by industry or by vertical market. Our largest content license provider worth $110,000 annually, notified us that they will not be renewing their content license beginning in 2017. Although we are disappointed in losing this long-term mutually beneficial relationship, our customer concentration risk has been significantly reduced and we believe our new self-service solution for small business will help offset some of this lost revenue in 2017.
Gross margins was 89% in the fourth quarter of 2016 compared to 87% in the same period last year. As a data and information business, our cost of revenue primarily consist of payroll related expenses associated with the research, capture and enhancement of data in a proprietary database. The improvement in gross margin is due to increased revenue and a reduced cost of content production due to efficiencies achieved related to process automation, such as the benefits of Onvia 7 which contributed to reduced payroll costs within the data team.
Operating expenses in the fourth quarter of 2016 increased by 11% to $5.9 million from $5.3 million in the same quarter last year. The increase in 2016 is partly related to the planned investments and product to support Onvia 8 and Onvia Exchange and in sales and marketing leadership. Without these incremental investments acceleration of the top-line would be slower consistent with past investment levels. In addition, we incurred unusual expenses related to accelerating the amortization of Internal Use Software, which impacted the quarter by $251,000 and costs related to our CEO transition in the amount of $201,000.
As a result of developing Onvia 8, we evaluated the impact of these future releases on our existing capitalized software assets. We determined that the software related to existing client processes and our overall user experience will be replaced. So we shortened the expected useful lives of these assets to coincide with the phased release schedule of Onvia 8. We accelerated the amortization of $962,000 in software costs, beginning in the third quarter of 2016 through the third quarter of 2017.
For the full year, operating expenses increased 8%, primarily due to planned investments in product and marketing and due to $487,000 in CEO transition costs and accelerated software amortization of $446,000. CEO transition costs will continue through mid-2017, as part of Hank Riner's transition agreement. For the fourth quarter of 2016, adjusted EBITDA was $602,000 compared to $513,000 in the fourth quarter of 2015. Adjusted EBITDA for the quarter and year does not include the full incentive compensation that could have been earned had the company achieved the results required to fund executive compensation arrangement. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, and amortization and non-cash stock based compensation. For the full year adjusted EBITDA was $1.9 million in 2016, which was consistent with 2015 results. Adjusted EBITDA is a non-GAAP financial measure.
Fourth quarter net loss was $215,000 or $0.03 per diluted share in 2016 compared to a net loss of $98,000 or $0.01 per diluted share in 2015. For the year net loss was $813,000 or $0.11 per share compared to a net loss of $486,000 or $0.07 per share in 2015. On the balance sheet, cash and cash equivalents and available for sale investments increased approximately $300,000 to $7.1 million as of December 31, 2016 compared to $6.8 million at the end of 2015. For further discussion of these results, our business and financial results and risks and prospects for our business, please refer to our Form 10 K, which we plan to file later this week.
So that concludes our financial presentation. And now, I would like to reintroduce you to Rush Mann our new President and CEO. In March of 2016, Hank Riner announced his retirement after leading Onvia as CEO for six years. Russ joined up in January and we believe that his vision and experience will help transition into a new era of growth picking up where Hank left off. I'd like to now turn the call over to Russ, who will share his early perspective on the company and the opportunities that he sees for Onvia.
I'll turn the call over now to Russ. Russ?
Thank you, Cam. I am glad to join Onvia with such an exciting opportunity ahead of us. I've been with the company for just over a month now and the reason I joined and what I have seen so far is that just as Cam has described, the company is prepared for a new phase of growth. First, we've a great team. Our executive team has a blend of several tenured team members with deep expertise and experience with the company as well a couple of new team executive team members added over the past year and a half with backgrounds from Microsoft in AT&T. The overall Onvia as well is well trained, highly customer centric and really passionate about helping businesses do business with government.
Secondly, we're in a large growing and exciting market space. The emerging category called gov-tech and also B2G contracting intelligence has risen in important through the transition of federal administration. The new administration in Washington DC even today was promising big infrastructure spending and we also see state and local spending on the rise and as enterprises, midmarket companies and small businesses including minority and women owned businesses, as they look to grow their companies through public sector sales. They will seek out the best sources of not just federal but also SLED, state, local and education data and the leader in this category is Onvia, where we have significant competitive differentiation.
This is the third reason for Onvia's accelerated growth prospects. Over the past year, we've leveraged machine learning and proprietary ontologies to improve the findability of our content, we released CRM integrations for the two leading CRM system salesforce.com and Microsoft dynamics to improve client workflow. And the next version of our platform will be rolling out later this year with many exciting enhancements. We provide the broadest, deepest, most timely and most historical coverage in the highly fragmented state, local, and education marketplace and we enjoy and appreciate our incredibly loyal and growing customer base with over 89% net dollar retention and expanding.
So thus the team, the market, and our expanding and innovative products are the reason I joined and see a positive opportunity for Onvia ahead. So that concludes our prepared remarks. I'll turn the call back over to the operator, so we can take your questions. Tanisha?
And we'll go ahead and take our first question from William Myers with Miller Asset. Please go ahead your line is open.
Hi. Thanks for taking the question. Could you talk about cash flow in the fourth quarter was it what you expected and how do you see it going forward?
Yeah, that's right. So typically our stronger cash flow periods are in the first and fourth quarters of the year. This year in particular we had a stronger end of the quarter, so we'll see stronger cash flow theoretically carrying forward into the next year. But I would expect that, we're not focused on cash flow as much this year as we are on like we've mentioned in the past driving that -- making the investments to drive that double-digit growth that we've been trying to get to over the last couple of years. So I would expect cash flow to stay relatively flat.
Okay. If I can ask one more question. How do you see the linkage between any increased infrastructure spending and your own revenue? Is that a very loose linkage or is there some way of predicting in general from what kind of increases in government spending there are, what kind of revenue increases you might see?
Yeah, I would say that. When you look at our client mix in the market in the B2G space. Our clients are distributed similarly to the way they are distributed in the B2G market which is 40% to 50% of all the customers out there that participate in the public sector are in the AEC marketplace. So naturally our clients will be related in particular to the way that those customers are represented in the marketplace.
Okay. Well, thank you.
Get that William.
Thank you. We'll take our next question from George Melas with MKH Management. Please go ahead your line is open.
Thank you operator. First of all, Russ welcome. I hope you have a great time at Onvia.
Thank you, George.
Cam a quick question. Last time we had sort of a big infrastructure spend which was in the -- I remember in the early part of the Obama administration. There was a whole lot of customers who joined Onvia. And then over a period of time those were not really strategic sort of dropped out [indiscernible]. You expect somewhat similar thing to happen this time around or could it be different or would it be a way to capture them?
I'm not sure, I'm just throwing this out there.
Yes, George. I can't anticipate, I wouldn't want to project what would actually happen as a result of that infrastructure spending. But certainly, when the government talks about it, growing their infrastructure spending it certainly is good marketing and branding for us. I think the challenge five, six years ago was the fact that or even longer than that was the fact that we didn't have a cost effective way to sell those smaller businesses when they came onboard. So now with Onvia 7 and with our self-serve platform, I think we're in a better position to be able to capture the entire spectrum of that market if we start getting more interest in the B2G space and the solutions that we can provide. Previously the challenge was we couldn't do it cost effectively and that's why we ran into the problem we did back in 2009-2010 with retention rates.
Okay. And thanks for the recap of the strategic development since 2011. That was very helpful. Good luck.
You bet. Thanks George.
And it does appear that we have no further questions at this time. I will now hand it back over to your speakers for any additional or closing remarks.
Thank you very much. Both Russ and I are available to take your any questions you might have. We appreciate all of your support and we look forward to having a very effective 2017. Thank you very much and we look forward to speaking with you again next quarter.
Thank you ladies and gentlemen for joining us today for our presentation of Onvia's fourth quarter and fiscal year ending December 31, 2016 earnings conference call. This concludes today's call. You may now disconnect your lines and have a wonderful day.
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