Intellicheck, Inc. (NASDAQ:IDN) Q2 2023 Earnings Call Transcript

Intellicheck, Inc. (NASDAQ:IDN) Q2 2023 Earnings Call Transcript August 13, 2023

Operator: Good afternoon, welcome to the Intellicheck Q2 2023 Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Gar Jackson, Investor Relations. Thank you. Please go ahead, sir.

Gar Jackson: Thank you, operator. Good afternoon and thank you for joining us today for the Intellicheck second quarter 2023 earnings call. Before we get started, I will take a minute 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 works 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 as 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 in the company’s filings with the Securities and Exchange Commission. Statements made on today’s call are as of today, August 10, 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 Q2 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 Bryan.

Bryan Lewis: Thank you, Gar and welcome, everyone, to the Q2 2023 Earnings Call. Before I speak about our results, some highlights and some of the things we’re doing to raise awareness of Intellicheck, I’d like to give a brief overview of who we are [indiscernible] to renew our story. Intellicheck has taken its place as an industry leader and we continue to distinguish ourselves as an exceptional identity validation company because our technology solutions are exceedingly accurate and extremely fast. Many of you on this call are familiar with us but for our newcomers and those of you who could use an update, we are evolving, we are growing and we continue to be focused on refining at every level to expand our penetration in key market verticals.

I believe that this growing reputation for excellence has led to our use by some of the largest banks and credit card issuers in the United States and Canada at their teller workstations, call centers, online and in their stores to validate their customers’ identities. We are currently in approximately 30,000 retail locations and over 4,800 bank and lender branches, not counting the pilots and adoption continues to grow. I feel equally confident that our demonstrated superior speed and accuracy is key to the fact that 28 state-level law enforcement agencies use Intellicheck to validate IDs. And keep in mind that while law enforcement are the only people that can directly connect with every DMV in North America to validate an ID, they choose Intellicheck.

Against speed, accuracy and ease of use are the distinguishing factors. Not to stop there, we’re also much more than just ID validation for bars, restaurants, retailers, banks and law enforcement. For example, one of our verticals is our cannabis vending machine clients. To buy cannabis products, the customer scans a QR code on the vending machine screen with their mobile phone. That prompts our system. The ID is validated to prove it is real and you are of age. In [indiscernible] for facial recognition to show that you are the owner of the ID that you’re holding. And a person has been geo-located to prove that they are standing at the machine, pretty sophisticated. We are used by our clients because we simplify and speed the process allowing them to onboard more clients faster without making them feel like a criminal and almost as a byproduct, we virtually eliminate fraud.

And although I know there are many of you who may know our story very well but given the number of locations we’re in, I’m willing to bet that the majority of the people on this call have been run through our validation services and didn’t know it was us, whether opening a credit card, doing in-bank or online banking transaction, making a change to an existing account, buying a car or making a retailer or age-restricted purchase. We are increasingly an integral part of the process. Trusted by our customers to protect their business, reputation and you. So with all this in mind, now on to some of the financial highlights that Jeff will further detail later. I’ll start by saying that our trailing 12-month SaaS revenue continues to increase and has every month for the last 42 months.

Our momentum continued in Q2 of 2023 with SaaS revenue up 19% to $4.7 million from $3.9 million in Q2 of 2022. Gross margin improved to 92.5% and we were EBITDA positive for the quarter. All of this positions us to continue to invest in the growth of the business. Looking at some sales updates of note for the quarter. Financial services company number 3, ran through their scan allocations and renewed for another 2.5 million transactions. Turning to the pilots of the 2 regional banks with 1,400 and 2,700 locations that will use Intellicheck in their bank branches, call centers and digital use cases. Here’s an update. The 1,400 location bank intends to roll out next month when they finish the software update on the remaining scanners in about 1/3 of their branches.

The 2,700 location bank is live in their contact call center for high-risk account openings with their much more expanded digital and online use case planning to go live later in Q3. The good news is that we are already in discussions on expanding to other partners in [indiscernible] which is exciting and demonstrates their endorsement of our products. Last quarter, I spoke about a channel partner who has incorporated Intellicheck into their platform and is working with his auto manufacturer with 2,700 locations. The manufacturers saw the early success of the pilot and decided that the launch had to be a big bag, because they had not adequately developed training materials or trained their trainers. That is being done now and they plan to launch in September.

You may have seen the press release about the success of the pilot program we’ve had with the city of Charleston, South Carolina Bar and Restaurant owners which now has become a permanent program. During the pilot, we detected 3,400 safe or invalid IPs. And I can tell you that bar owners and security staff love the system. My daughter live in Charleston and had her ID check at the venue. She asked the man what they were using and he said, Intellicheck. And she said, my dad is the CEO and it turned out he was the CEO of the security company hired by the venue. He gave her his card and it had the password to have me call him. I did and he couldn’t stop [indiscernible] about Intellicheck. We are now looking to replicate this program in other college towns or places with rowdy entertainment districts.

Last quarter, I spoke about the diversification of our client base. So to provide further color in that regard. I thought I listed some of the types of clients we sold in June in the quarter will help illustrate this progressive growth. We onboarded 17 bars and restaurants. We onboarded a event security company, an online marketplace for premium event [indiscernible], two more Canada’s vending machine companies, a credit union and a small online bank, an Internet child safety company, 9 more title companies and additional auto dealers. What I continue to see is there are a lot of business to be had in the $5,000 to $50,000 annual revenue market but our challenge has been, we still do not enjoy the brand recognition befitting the company with multi-market vertical success, especially with the pedigree of our clients.

As you know, we’ve engaged in a growing number of efforts to address this challenge. We still aren’t satisfied with where these efforts are standing so we have brought on board an agency to reramp and further develop our messaging. As part of this process, there’s been new clients across all sectors. We asked the head of fraud in one of our largest banks that we would be willing to speak to the agency. He basically told us he would love to because so many of our competitors only do about 20% of what they say they can do while Intellicheck does 100%. We said that anything we could do to help us improve our message and awareness and grow our business will be great for an industry that is trying to stop fraud. When a client of this stature makes such an endorsement and offers further support based on the value of our technology solutions, it speaks volumes.

We expect this branding work to be done in Q4 and be ready to launch early next year. 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. As part of our evolution and refinement, we made some personnel changes as well. We have promoted Jeff to Chief Operating Officer in addition to the CFO role. Jeff has a very strong growth focused, SaaS operational background and his assuming this role allows me to spend more time on important initiatives in areas like sales, marketing and branding. In his new position, Jeff will look to ensure our internal systems are all fully operational and properly integrated with each other. In addition, given his channel partner experience with Cylance which really accelerated their growth, he is tasked with building out the systems and programs needed to support this and I’ll let him speak more in detail about that shortly.

We have also brought in a new VP of Engineering, Jonathan Robins, we brought him on board for two reasons. First is to upgrade our technology stack which will reduce our dependence on Microsoft products and Azure. We believe this will reduce our overall IT costs in 2024. The other reason is his data analytics experience. In his most recent role, he worked with the Chicago Cubs to develop the database and AI for them to track players, even young players and build models with that would help them predict future success and therefore, who they should draft or trade for. That is important because we’ve been speaking about data and the power of the data in a community setting. Each of our clients use their own data, nothing more but we see it all.

Our clients are very enthusiastic about cooling the data and then using AI and machine learning to bring insights to be used in modeling. Some said that would provide significant value along with ID validation. Jonathan is in the process now of building out the data list that could make that happen. I am very enthusiastic about the exciting developments happening here at Intellicheck. We look forward to sharing more on our expanding efforts to perfectly deliver our messaging on point and about products such as the new effort being developed to tap into our data to help our clients stop even more fraud and therefore, generate more [indiscernible]. With that, I’ll turn it over to Jeff.

Jeffrey Ishmael: Hi, thank you, Bryan. On 2 years of continuous progress that we’ve been making across all levels of the organizations, we continue our efforts to redistribute our spend and investment into the areas that will fuel growth and profitability. Our second quarter SaaS revenue saw growth across our top accounts versus the prior year, 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. As Bryan mentioned earlier, we’re pleased to see the continued trailing 12-month growth progression in SaaS revenues each month which has been achieved consecutively for the last 42 months. Continuing to cast a critical light of metrics of our SaaS revenue, it’s encouraging to see a 14.7% increase in our average price per scan versus the prior year, while we continue to see sequential monthly growth in our transaction activity.

With 1 large customer whose activities are primarily predicated on parsing consumer data at the point of transaction, our average price per stand is up 17% versus last year when adjusted for this customer. I’m also pleased to see that our average price per scan has grown sequentially for the flat last 18 months and we will continue to maintain a focus on the development of this metric. This is especially encouraging as it continues to speak to the testament of value realized by our customers. We are maintaining a focus on ensuring that renewals across the entire customer landscape are including annualized CPI increases and that we continue rightsizing legacy customers that are entering renewal periods. As we previously shared, to drive revenues, we’ve been shifting our expense focus to have a greater emphasis on SG&A specifically our investment in sales and marketing.

We’re maintaining our focus on operating expenses to ensure that we achieve the expected return on our investments in this area. Within the Q2 period, we initiated a complete overhaul of the customer success team, as well as the platforms they are operating on to better support our existing customers as well as ensure a smoother onboarding experience for new customers. We also signed and commenced the full brand strategy initiative that will be realized during the Q3 and Q4 periods. We are also beginning the recalibration of our digital advertising strategy to increase the quality of our lead generation efforts. We are finalizing the release of a co-branded industry case study and we’re now initiating the implementation of our channel program to be completed by the end of the year.

As Bryan mentioned earlier, we’re excited to putting in place a more formalized program that will support an expanded group of resellers, providing marketing and development funds to support their respective channels or regions as well as develop a collaborative approach with our existing sales team on increased lead generation efforts. We expect this program to have a noticeable impact on our 2024 pipeline growth and bookings. We believe that the combination of efforts discussed above will provide the necessary support from the sales team to drive increases in customer engagement, bookings and revenues in 2024. Turning now to our second quarter results. Revenue for the second quarter of 2023 increased 18% to $4.716 million compared to $4.008 million in the same period of 2022.

Our SaaS revenue for the first quarter of 2023 grew 19% to a record $4.663 million, from $3.928 million during the same period of 2022. Gross profit as a percentage of revenues increased to 92.5% for the second quarter 2023 compared to 90.9% in the same quarter of 2022. The increase was driven by a higher concentration of SaaS revenues, a nominal decrease in hardware revenue as well as continued improvements on our cloud cost structure. As we discussed during the first quarter earnings call, we continue to model gross margin performance at a range of 90% to 91% as we continue to improve our cloud cost infrastructure and may experience some cost overlap, thus not only impacting our current gross margin performance. While we continue to scrutinize our cost structure, we’ll continue to assess any specific impact.

Operating expenses which consist of selling, general and administrative, marketing and research and development expenses increased $392,000 or 8% to $5.137 million for the second quarter of 2023 compared to $4.742 million for the same period of 2022. The increase was primarily driven by higher general and administrative costs, specifically headcount-related expenses related to the full approval of severance-related expenses. Included within operating expenses for the second quarters of 2023 and 2022 were $323,000 and $446,000, respectively, of noncash equity compensation expense. While lower this quarter, we expect our total noncash expenses will continue to comprise approximately 13% to 15% of our operating expenses with stock-based compensation comprising 90% of that figure.

We continue to implement aggressive expense reviews to ensure we are effectively allocating the proper areas to support our growth initiatives. With respect to our Q2 operating expenses, we enacted changes to the team that resulted in the Q2 severance accrual of $417,000 which were fully accrued to employment agreements previously in place. From an annualized perspective, these personnel changes, along with additional changes will yield approximately $2.1 million in operating expense savings that we’ll be able to reallocate towards our investment in sales and marketing initiatives, specifically the brand strategy initiative and the launch of the channel partner program that will lay the foundation for the incremental revenues in 2024. The company reported a net loss of $777,000 for the second quarter of 2023 compared to the net loss of $1.098 million for the same period of 2022.

Net loss per diluted share for the second quarter of 2023 was $0.04 compared to the net loss per diluted share of $0.06 for the same period of 2022. The weighted average diluted common shares were 19.1 million for the first quarter of 2023 compared to 18.8 million for the same period of 2022. Adjusted EBITDA for the second quarter of 2023 improved by $619,000 or 106%, resulting in a gain of $36,000 compared to a loss of $583,000 for the same period of 2022. As a result of the expense initiatives, we continue to put in place, we’re able to realize improvement in our adjusted EBITDA results when compared to the same period last year as well as the prior quarter. Turning to the company’s liquidity and capital resources. As of June 30, 2023, the company had cash and short-term investments in the form of U.S. treasuries that totaled $9.1 million that is currently on deposit at Citibank and Capital One.

Working capital, defined as current assets minus current liabilities of $8.3 million, total assets of $21.6 million and stockholders’ equity of $17.3 million. It’s worth noting that the U.S. Treasury subsequently matured in July and we have rolled these over into a new tranche that matures in December with a weighted average rate of 5.1%. The company has a $2 million revolving credit facility with Cap — 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 second quarter continued to maintain a focus on improving our operational effectiveness and ensuring that we have the proper foundation in place to concentrate on revenue and the path forward towards being adjusted EBITDA neutral while continuing to invest in the business.

We also continue to build out revenue and performance reporting to closely monitor the transactional health of our key customers and the key industries that we are targeting and serving. The focus will continue to be on driving revenue productivity across our key customers and ensuring that our sales team has the proper data and support they need. As I mentioned in the operating expense remarks, while we recognize the severance accrual within the quarter, this will ultimately lead to the reallocation of approximately $2.1 million towards our sales and marketing efforts, specifically the brand strategy initiative and the formal launch of our channel partner program which will help lay the proper foundation for incremental revenues in 2024. Employees also continue to be our largest internal asset and we are pleased to continue seeing an increase in our average revenue per employee which is up 14% versus the same prior year period as well as up at full — 36% versus 2021.

In reviewing other public companies in the $0 to $100 million revenue range in the technology services space which has 65 selected companies we were in the upper quartile regarding this metric. We believe that we are currently rightsized from a head count perspective and we’ll continue to watch this with caveat that the sales team will always have the latitude for opportunistic hires. In consideration of our continued 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 we expect will improve our expense ratio by approximately 800 basis points versus 2022, maintain our focus on gross margin performance of 90% to 91% while seeing a fundamental shift in our expenses towards funding sales and marketing initiatives.

In closing, we’re committed to the continued improvement of our corporate performance. We look forward to sharing our Q3 ’23 results in November. I’ll now turn the call over to the operator to take your questions.

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Q&A Session

Operator: [Operator Instructions] The first question is from Rudy Kessinger, D.A. Davidson.

Rudy Kessinger: Great. the sequential growth was very nice to see. I’m curious if you could kind of attribute that growth quarter-over-quarter to a couple of buckets, I guess, existing customers, scan volumes coming in maybe stronger or higher than expected. Obviously, you called out a few customers that came online. But could you just talk about in more detail the quarter-over-quarter growth that you saw?

Bryan Lewis: Jeff, you ran the numbers, do you want to take that for Rudy?

Jeffrey Ishmael: Yes, I can jump into that. So Rudy, on — as we mentioned on the call, happy to see the incremental transaction count. We’ve seen that grow every month and on a monthly basis as well as for the year. On the variance for prior year period, we were up almost 11%. So we saw pricing productivity with existing customers. We saw renewals in excess of — hold on, I just got that figure in front of me, too but in excess of 96%. So all the metrics we’re seeing right now on revenue side are solid.

Rudy Kessinger: Okay. And then could you talk about kind of the — you mentioned some severance and restructuring. I know Garrett departed. Could you talk about — was there anybody else you let go? Particularly I mentioned on the sales side, if any restructuring on that side as well?

Bryan Lewis: We did a restructuring in the marketing department. We swapped out some — on the sales side, we swapped out some account managers but nothing that I would call a major restructuring, I would say that we did a big round of hiring and you hope that 80% of the people are — you made the right decisions on them. But I’ve said all along that we’re going to watch people. If we don’t think we’re getting what we need out of them, we’re not going to spend a ton of time. We’re going to make sure that they’re productive pretty quick. But the main part of that severance was really Garrett and marketing.

Rudy Kessinger: Got it. Okay. And then just the last couple of years now, you’ve had a very strong sequential growth Q1 to Q2 and then Q3 has been effectively flat versus Q2. I know you’re not still giving guidance at this point but just directionally, how should we think about Q3 SaaS revenue versus Q2, given the visibility you have today into projects that are going to come online this quarter?

Bryan Lewis: I think it will be a matter of how fast we get some of the banks going. It is generally definitely a quieter period. But I think a lot of it is going to turn around to — part of the joy of working with large banks is they can be very big deals but it also — it’s sort of a hurry up and wait kind of mentality. So while we don’t give guidance, it’s not like — it typically isn’t a blowout quarter. But we still expect to see continued sequential growth.

Operator: The next question we have comes from Jeff Van Rhee from Craig-Hallum Capital Group.

Jeff Van Rhee: Sort of a — of Rudy’s question, I guess, as it relates to guidance. I know you don’t give the formal outlook here. But to the extent that — based on what you see in the pipeline and what’s in front of you at this point, does ’24 from a SaaS standpoint feels sort of like steady as she goes? I mean, we’re sort of printing 20% give or take each quarter. I mean is your mindset sort of in that ballpark? Or do you see things that suggest deceleration-acceleration? I know you don’t want to quantify specifically but directionally, maybe in those terms?