Issuer Direct's (ISDR) CEO Brian Balbirnie on Q4 2017 Results - Earnings Call Transcript

Issuer Direct Corp. (NYSE:ISDR) Q4 2017 Results Earnings Conference Call March 1, 2018 4:30 PM ET

Executives

Steven Knerr - CFO

Brian Balbirnie - President and CEO

Analysts

Operator

Greetings and welcome to the Issuer Direct Fourth Quarter and Year End 2017 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Steve Knerr. Please go ahead.

Steven Knerr

Thank you. And good afternoon everyone. Brian and I would like to thank you for taking the time for participating in our call today. Before we begin, I need to read the following Safe Harbor statement. Statements or comments made on this conference call may be forward-looking statements that include financial projections or other statements of the company's plans, objectives, expectations or intentions.

These matters involve certain risks and uncertainties. Our actual results may differ significantly from those projected or suggested in any forward-looking statements due to a variety of factors, which are discussed in detail in our recent SEC filings.

Further, we will discuss both GAAP and non-GAAP financial information on this call. We believe the presentation of non-GAAP information provides you with useful supplementary data concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance.

Non-GAAP results are, however, provided for informational purposes only. Please refer to the press release and related tables for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website, in our Investor Relations tab, a description as well as reconciliation of GAAP measures to, which we will refer on this call.

With that complete, I'll begin by going over our results for the quarter and then turn it over to Brian, who will provide his operational review and outlook, followed by a Q&A session.

The fourth quarter marks another productive and successful quarter for Issuer Direct as we completed the acquisition of Interwest Transfer Company, began integration of their processes and customers and continued with our transition to a platform first engagement.

We were able to increase topline revenue as total revenue increased 22% to $3.399 million for the fourth quarter of 2017 as compared to $2.774 million for the same period of the prior year. Revenue of $12.628 million for the year ended December 31st, 2017, increased 5% compared to $12.059 million in 2016.

Revenue from recently acquired Interwest Transfer Company totaled $404,000 for the fourth quarter and year ended December 31st, 2017. Absent this revenue, organic growth for the quarter was 8%.

On a year-to-date basis, the increase in revenue attributed to Interwest was partially offset by a one-time benefit of $316,000 recognized in 2016 due to the reversal of an accrual related to unused postage credits for ARS customers acquired as part of the acquisition of PrecisionIR.

Our Platform and Technology business continue to aspire for growth with revenue increasing 40% to $1.661 million for the fourth quarter of 2017 and increasing 49% to $6.398 million for the full year of 2017.

Platform and Technology revenue increased to 51% of our total revenue for the year compared to 36% last year as we continue our strategy to focus on our cloud-based products.

The main driver of the increase was our ACCESSWIRE offering, whose increased 63% and 85% for the quarter and year ended December 31st, 2017 respectively over the same period of 2016.

We continue to be excited about ACCESSWIRE as the anchor of Platform id. and will remain focused on building growth throughout 2018. We also generated increased revenue from subscriptions of other components of Platform id., most notably our transfer agent and proxy offerings through the acquisition of Interwest and also our whistleblower disclosure reporting and webcasting modules. In a few minutes, Brian will talk further about our growth strategy to increase subscription to Platform id.

Services revenue increased 9% to $1.737 million during the fourth quarter of 2017 compared to $1.588 million during the fourth quarter of 2016. This increase is primarily the result of the addition of Interwest, which not only resulted in an increased revenue from our stock transfer services, but also from our Annual General Meeting management and proxy distribution services through our ability to cross-sell these services to Interwest customers.

These increases were partially offset by the continued decline of our legacy Annual Report Service due in part to continued attrition as customers leave the service, decreased hard copy requirements, or transition to electronic delivery.

Service revenue for the year ended December 31st, 2017, decreased 20% to $6.230 million compared to $7.765 million in 2016. This decrease is primarily related to the decrease in revenue from our legacy Annual Report Service, I noted earlier, as well as declines in revenue from our compliance services as the market commoditizes and we continue to face pricing pressure.

Revenue from our print and proxy distribution services also declined due to the timing of certain projects and the impact of one-time projects that occurred in 2016.

Overall, our gross margin percentage was 73% for the fourth quarter and year ended December 31st, 2017 compared to 75% for the same periods of the prior year. Platform and Technology gross margin was 82% for the fourth quarter and year ended December 31st, 2017 compared to 84% and 83% for the same periods of the prior year respectively.

This slight decline was due to increased distribution costs associated with our ACCESSWIRE business as well as increased amortization of capitalized software projects placed into production during the year.

Gross margin from our services revenue stream was 65% and 64% for the fourth quarter and year ended December 31st, 2017 compared to 69% and 71% during the same periods of 2016 respectively. The decrease in gross margin was due to lower revenue associated with the fixed costs of delivering ARS and print and proxy distribution services.

Operating expenses increased $441,000 or 28% for the fourth quarter of 2017 compared to the same period of the prior year. The increase is primarily attributable to less capitalization and increased product development expenses associated with ongoing maintenance and support costs of our cloud-based product that were placed into production during the year. As we continue to refine and improve Platform id., we expect to see this line increase over prior year, however, see an offset on the cash expenditures at our cap line.

Additionally, general and administrative expenses increased due to the acquisition of Interwest and increases in stock compensation and bad debt expense related to certain projects.

For the full year of 2017, operating expenses increased 1% over 2016. The increase is due to the same factors above, however, are, partially offset by a decrease in the amortization expense due to certain intangible assets that became fully amortized in 2016.

For GAAP purposes, we recorded net income of $745,000 or $0.24 per diluted share for the fourth quarter of 2017 as compared to net income of $510,000 or $0.17 per diluted share for the same period of 2016. For the full year of 2017, net income was $1.871 million or $0.62 per diluted share compared to $1.555 million or $0.54 per diluted share in 2016.

It is important to note during both the fourth quarter and full year ended December 31st, 2017, the company recorded tax benefits of $411,000 and $533,000 respectively related to accounting for the passage of the Tax Cuts and Jobs Act of 2017 as well as the adoption of a new accounting principle. This is compared to tax benefits of the same periods of prior year of $142,000 and $214,000 respectively related to the reversal of a valuation allowance on deferred tax assets.

That is a good transition to review some non-GAAP metrics. Non-GAAP net income was $546,000 or $0.18 per diluted share for Q4 2017 compared to $498,000 or $0.17 per diluted share for the same period of 2016. Non-GAAP net income for the full year of 2017 was $1.987 million or $0.65 per diluted share as compared to $2.006 million or $0.69 per diluted share for 2016.

As a percentage of revenue, EBITDA was 19% or $646,000 for the fourth quarter of 2017 compared to 24% or $667,000 during the same quarter of the prior year. The decrease being primarily attributable to higher operating costs I noted earlier.

For the full year of 2017, EBITDA percentage was 22% or $2.739 million compared to 26% or $3.092 million for 2016. Excluding the one-time benefit related to the reversal of the postage accrual noted earlier, EBITDA percentage would have been 24% for 2016.

Turning to the balance sheet and cash flow statement. We ended the year with a cash balance of $4.917 million as we continue to generate positive cash flow from operations, generating $417,000 cash flow from operations during the fourth quarter and totaling $2.512 million for the year. Additionally, on February 9th, we paid a cash dividend of $0.05 per share, making it our 10th consecutive quarter for paying dividends.

Overall, it was another successful quarter and year for Issuer Direct. As we continue through our transition from a services company to a cloud-based subscription business, we are excited to contribute to drive our organic customer growth through our strategic partnerships and increased sales staff.

We are hopeful this, along with the opportunity to strengthen our platform customer base by offering our entire platform and communication and compliance offerings to Interwest customers, will help us accelerate around the corner that the growth in our platform business will outpace any continued decline in certain areas of our service business. This will allow us to achieve our objectives of increasing revenue and earnings to maximize shareholder value.

I will now turn it over to Brian, who will discuss more about integration of Interwest, operational strategies, and developments to watch out for in 2018. Brian?

Brian Balbirnie

Thank you, Steve and thanks to everyone for joining us today to discuss our fourth quarter and full year 2017. As Steve just highlighted, we posted a strong fourth quarter and overall growth for the year. And as a recap, 2017 fourth quarter revenues were up 22% compared to fourth quarter last year.

Sequential fourth quarter 2017 was up 16% for the third quarter of 2017 and full year revenues were up 5% over 2016. As a matter of fact, the fourth quarter was the best fourth quarter in revenues in almost five years, since 2013 when we acquired PrecisionIR.

Finishing 2017 strong was important for our overall momentum, but most importantly, a validation on our platform and our go-to-market strategy is beginning to pay off that customers are now embracing a one platform play option and this is key to our growth, this coming year and beyond.

Our platform business accounted for 49% of our overall revenues for the quarter and 52% for the second half of the year. On an annual basis, our platform business represented 51% of our overall revenues compared to 36% in 2016.

In order to keep this momentum and further expand our platform strategy, new customer acquisition is extremely important as well as expansion of ARPU from our current customers. This will allow us to maintain our higher margin business and continue to deliver on our platform commercialization to the market.

Speaking of customers. We saw, sequentially, net new client growth in both our platform and service businesses, led by the acquisition of Interwest Stock Transfer. The company had 1,819 Platform and Technology customers during Q4 of 2017 compared to 1,817 during Q4 last year and 1,582 during Q3 of 2017. That's a 15% sequential client growth. The company also had 579 service customers during Q4 of 2017 compared to 546 Q4 of 2016 and 493 during Q3 of 2017. Again, strong sequential growth of 17%.

We still see slight lumpiness in the frequency of our customers doing work consistently throughout the year. However, with a complete platform subscription focus, we believe customers will use our systems more frequently and will benefit from annualized bundling, thus giving us a better handle on our customer counts and our ARPU.

The end of the year was busy for us in several ways. We closed and announced the Interwest Stock Transfer acquisition, the OTC partnership, LSE expansion into our news business and expanded sales and marketing teams.

To expand a bit on each, first with Interwest, we're hard at work, finishing the integration to give our newly acquired customers the ability to gain access to the shareholders via our platform as well as clear upgrade options for our whole Platform id. suite.

We're happy to report that by the end of the quarter, customers began taking advantage of these platform benefits. There are even more of them in the current quarter that have realized a bundle approach to the compliance communication needs.

We have dedicated account managers and seven operations personnel in our stock transfer group today, which saw revenues grow 37% in 2017. There will be significantly more once we have a full year of ITC customers for 2018.

In terms of impact, the customers taking advantage of full suite platform upgrades today are moving their subscription ARPU spent with us from $3,900 to $11,940.

Second is the London Stock Exchange. A strong and value partnership that was expanded late last year and kicked off here in 2018 from just disclosure to include now news distribution. As previously announced, we look forward to leveraging this partnership and bringing our news offering to thousands of LSE-listed issuers.

And lastly, OTC, a tightly-integrated platform offering between both companies that is geared towards long-term issuer approach of good corporate governance and disclosure. Both OTC and Issuer Direct build custom subscriptions and exclusive offerings that can only found via the Issuer OTCIQ platform on OTC markets.

We are excited about this and believe that the -- of the 1,400 and growing OTCQX and QB-listed issuers, we can broaden penetration levels of as much as 15% to 20% or approximately 250 additional customers. Today, we are already working with an estimated 15% of the OTCQX and QB.

These new wins could garner up to $600,000 on annual contracts on top of what we currently have today, giving you some of the much needed momentum as the majority of these issuers are into our $5 billion less market cap segment, an area that we focus heavily on.

The focus of our direct salesforce will not change. These partnerships will just shine as obvious lights on our OTC client base and enjoying the OTC-listed professionals to ensure their marketeer clients have access to the best-of-breed solutions from Issuer Direct.

We intend to ensure that issuers at OTC understand these offerings that are available under the partnership. Based on the basic compliance and communication needs, these clients spend a minimum $17,500 annually on their disclosure and communications.

Our life target is two critical components; one, to reduce the annual spend; and two, to decrease the complexities of maintaining compliance by integrating [Indiscernible] with one single interface. In this case, it's OTCIQ powered by Issuer Direct. In many cases, we will not see a full annual spend initially as some OTC client listed issuers through this partnership will choose to purchase select bundles beginning at $1,500.

The next phase of these partnerships will help us maintain our margins, grow our business, expand ARPU, and provide real opportunities to become an industry-leading platform.

Even though our service business continues to be lumpy, we remain confident in our ability to continue this transition and grow our overall platform business, which should have an impact on our overall revenues, margins, and EBITDA, which will further unlock shareholder value for Issuer Direct.

For a big part of 2017, absent of being focused on execution of customer growth, we were focused on gathering analytics and learning more about audiences, engagement, and the impact of those.

If you can tell we love what we do, which makes us more honored, in fact, so we can get to the next level of our business. Building a platform for our customers was a big step in this journey, but the next phase of expansion will show our maturity and understanding of the industry better than our competitors.

And bringing to market the insights customers will soon demand. This is something that we strongly believe will be value our customers and our practitioners, but also in the next growth phase of our business.

The analytics and engagement engines will give our customers access to their shareholders in as real-time as possible, laying out the journey of where our customer met their shareholder for the first time; maybe at a conference, where they became a shareholder, what content they're consuming, like earnings releases, transcripts, webcasts, and earnings calls, or any other of the financial data that they distribute.

In contrast, it will also then point out to as not consuming or engaging, so that our customers can then retarget or reengage these audiences. Obviously, the Investor Relations community has some of the data as do the corporate issuers. But they don't have it in a centralized place to query, analyze, and target. And as our engine gathers more market data, we can then provide screens to benchmark and provide engagement scores to our customers based on their peers.

Obviously, our network and breadth in the market is going to be critical here. Without a presence for content to be consumed, we will have no data to analyze and this is where our conference partnerships, our Investor Network platform, webcasting systems, and newswire platforms come into play.

As you're all aware, we've been delivering news to the investor conference circuit for well over a year and now, lately, in the last year, our webcasting platform. And in the coming year, a complete conference platform for investors to learn more about our customers via our partnership with conference organizers.

In closing, I'd like to highlight, again, the revenue trends that we're seeing in our overall business. In the back half of the year, our platform business accounted for 52% of our overall revenues, something we feel confident will grow even further this fiscal year and beyond. I think delivering on this data transition to our platform, first engagement speaks to the value of our shareholders are placing on Issuer Direct today.

We're also focused on further investing in the people, technology, specifically key management, sales and marketing teams, and the staff to deliver the next layer of growth. We believe we're on track to sustain planned growth, improve retention rates, and higher gross margins.

Key to these attributes will be to deliver our Platform id. subscription business, broader ACCESSWIRE distribution, expanding the markets we can serve, and additionally, we are inquisitive and believe that there are further bolt-on opportunities for our business that can help Issuer Direct get there faster.

As we discussed last fall, we expect to see progress from partnerships like OTC, consistent customer growth as a result of our sales and marketing expansion and additional benefits from the ITC acquisition. We're encouraged by the customer mix, specifically the new wins that are purchasing the entire platform, which is where our pipeline has grown the most.

In summary, we posted a solid quarter and demand remains healthy for our platforms, and we remain motivated on executing growth for this year.

We are now ready to take questions. Operator, could you please begin the Q&A portion of the call?

Question-and-Answer Session

Operator

If there are no questions at this time, I would like to turn the call back to Brian Balbirnie for closing remarks.

Brian Balbirnie

Thank you. And I'd like to thank everyone, again, today for taking the time to listen to Steve and I talk about our fourth quarter and year end numbers. If anybody has any follow-up questions after our Annual Report is filed this afternoon, we welcome an opportunity to speak with you again. Thank you. Enjoy the rest of your day.