Intellinetics, Inc. (INLX) Earnings Call Transcript & Summary

Good day, and welcome to the Second Annual Winter Wonderland Best Ideas Conference. The next presenting company is Intellinetics, Inc. [Operator Instructions] I'd now like to turn the floor over to today's host, Jim DeSocio, CEO of Intellinetics, Inc. Sir, the floor is yours.

Good evening, everybody. How are you today or this evening? Joining me today is Joe Spain, our Chief Financial Officer, and welcome to the Winter Wonderland Best Ideas Virtual Investor Conference, last presentation of the day. Slides are a little slow. Here we go. Our forward-looking statement. Make sure I display that. And 325% is the amount that Intellinetics grew from 2019 to 2020. We had a great year from 2019 to 2020. We've continued to have a very good year, and it's really about our management team. Just a little bit about myself. I've been with Intellinetics for 4 years. I was the Executive Vice President of Global Operations for Lawson Software, responsible for all revenue coming into the company. When we did our IPO in 2001, when I took over as EVP of Global Operations, we were about a $100 million company. In the next 3 to 4 years, we grew substantially to $428 million. I was at Lawson Software for about 14 years. Another very good exit I had was with a company called XRS. I was the EVP of Field Operations, again, responsible for all revenue coming into the company. There was a little bit of a different play. We were in fleet logistics. We launched a new product in 22 months. We sold 462 new customers on that product, and then we were approached by Vista Equity, and Vista Equity purchased us for 4.5x revenue or $186 million. So it was a very nice exit for the company. I was with the company called Antenna Software for 4 years. When I started, we were $8 million of pure SaaS company. When we got done, we were $40 million. So I've got a very good run with running a number of different companies, been very successful. So as I said, I've been with Intellinetics for about 4 years now since 2017. We've gone through a lot of changes since then. We're about a $2.5 million company when I started, and we'll talk today about where we've been in the last 3 years. But I wouldn't be anywhere today if it wasn't for my management team, and we do have a very strong management team. Matt Chretien is the founder and is now our Chief Sales Officer and Technology Officer. Joe Spain is our CFO. He's been with the company for 5 years. Public company -- strong public company CFO. He's done a great job, not only with the corporate finances, but M&A work as well. Two other important people are just -- I don't know why it's not displaying the other folks on my slide.

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Next animation. Got it. Yes, there we go. Neil Campbell is our General Manager of -- one of our divisions, Graphic Science division. He's been with the company for 12 years, and we talk a little bit about our acquisition strategy. Neil moved from Ohio up to Michigan. He's done just a phenomenal job of running our Graphic Science, Inc. acquisition. And we did something new this year at Intellinetics. We hired a Marketing Director. So it's the first Marketing Director we've had in the company, and she's really making tremendous difference for our lead generation, our branding and everything else having to do with marketing our website, et cetera. So we're really happy to have Sandy on board with us over. Now we'll move. There we go. Next slide. There we go. Next slide. So I did talk about acquisitions, and we've made a couple of acquisitions since I've been with the company. In 2020, we bought 2 companies. One, Graphic Science, was a $7 million acquisition, very good company. They are in the digital transformation space. They take paper, scan it, digitize it, put it in the cloud. They also take microfilm and microfiche and put it in the cloud. They have a great contract with the state of Michigan, where we do business processing outsourcing, where we pick up 3,000 to 4,000 Medicaid applications every day. We scan those applications. We process those applications. We index them and send them back to the state in digital format for them to process them and then pay Medicaid to citizens of Michigan. So it's been a very, very good contract for us. The other company we bought was a company called CEO Imaging. We're only doing about $500,000 in revenue, but they did have 170 enterprise content management companies, which is what Intellinetics does as well, enterprise content management. So between the 2 companies, it has enabled us to stabilize Intellinetics, build a great revenue stream and more importantly, create a great profit for us to -- especially when we bought the companies in March of 2020, COVID hit and they started shutting down the country, the end of March of 2020. So those acquisitions enabled us to continue in business and to continue in growth. We'll talk a little bit about the success we had from a financial standpoint in a couple of minutes. But just a heads up that M&A is a key part of our strategy, and we're continuing to look at companies out there with our success with both Graphic Science and CEO Imaging. It makes sense for us to find a couple of other acquisitions that we can make to add to our portfolio. But in the same token, we will have very, very strong organic growth coming up in the near future for 2022. And why I'm confident about that organic growth is because of the market and what's happening out there in the marketplace today. Enterprise Content Management is a -- this year, it's going to be a $4 billion, $5 billion industry, and you can see over the next number of years, it's just continuing to grow. Companies are looking to digitize their data, digitize their documents, get their documents in the cloud, being able to access that data from any place, any time. So COVID has had a strong effect on our results as well because companies realize they have to work remotely and get to their key critical documents from anywhere that they happen to be working. As a matter of fact, Forrester has recently put out a very interesting report about government Enterprise Content Management, and the Forrester report, it's time for digital government, has driven is a testament to what's going on in the marketplace. The government has invested billions of dollars into digital transformation through their American Rescue Act and American Technology Act, which is putting money back into the or funding these transformation for government entities. 62% of the government decision-makers said, the pandemic force accelerated investment in digital transformation. 66% of those government decision-makers said, the agency will maintain accelerated digital transformation progress as the pandemic subsides. So we are in a somewhat of a tornado out there with what's going in the marketplace for companies realizing all these file cabinets, these brown boxes, the basements fold, their key critical documents need to be digitized, and they need to be transformed or digital transformation to allow access from anywhere, any time in any place. So with that said, what else does Intellinetics do? So we have a very strong SaaS model. We do cloud-based enterprise content management. We do workflow of documents to track where those documents are, send them to the right person for approval, and we can actually create e-forms. One of our drivers right now is, we're creating human resources onboarding for our K-12 customer base. So there's a great need for hiring teachers and getting them on board as quickly as possible. We've created an e-forms process, which actually facilitates that process where what are the resumes, what are their background, what are their certifications, what benefits do they need, and it gets these teachers up and running and on their system very, very quickly. Business process outsourcing is a big part of our business. I mentioned that before with the state of Michigan. As a matter of fact, we actually do the Governor of Michigan's mail. So we go pick up her mail -- Governor Whitmer. We pick up her mail. We bring it to our office. We then open it, copy it, scan it, index it and then send it to the Governor for her reading and for documentation or documenting that they should receive that information. And then digital transformation, document scanning. This is an area that's a big growth area for us because of all the billions and billions of documents out there that people realize they need the data from, they cannot get rid of it, they've got to bring it on board. As a matter of fact, if you -- we have 400-and-so school districts using our software. You have to keep student records for 99 years. So you can imagine the backlog of student information that's out there that we have the opportunity to go cross-sell into our customer base of digitizing all student records. As an example and this is a great example of what we've done with a very small school district in Michigan, Rivonia School District was a CEO Imaging customer. It's a school district up in Michigan, as I said. We're doing human resource recordkeeping for them, student records, Board minutes and special ed documentation. They had a couple of thousand dollar on-premise solution with CEO Imaging. We've converted them to our IntelliCloud product, which is in the cloud. We're now getting $30,000 of annual recurring revenue from them. But just as important, we got a giant -- a very nice sized contract with them for $411,000 from a digital transformation of all of their backfile documents. This one deal for $441,000 pretty much paid for CEO Imaging acquisition. With 170 other customers out there, you can see the opportunity for us to convert the CEO Imaging customers from CEO Imaging to our cutting-edge and telecloud product, but in the same token, go back and sell business process outsourcing, digital transformation, microfilm, microfiche conversion, all services that we offer to school districts. So it's been a very, very good acquisition for us and the opportunity. We're really just now with COVID hopefully starting to wind down really exploring the ability to cross-sell into our customer base. It's been about a year now, and it's really starting to take off. We also have a very robust partner program. We're selling through ERP software companies, and here's one great example. Software Unlimited is a company up in Sioux Falls, South Dakota. They have 1,200 K-12 customers. We have a 3-year relationship. We have very, very small cost of sale. They do all the selling and implementing to our customer -- to their customer base. They have already sold 110 new K-12 customers. 48 -- this is as of the third quarter last year, 48 last year, for a recurring annual revenue of $335,000. If we can penetrate 500 of their customers, we believe that we will do $1.6 million in recurring revenue with Software Unlimited. It is a great relationship. They send us the contracts. We're getting approximately 15 new contracts every quarter, and it just keeps coming in, and we hope to up that going forward as well. Since -- and the 9-month period from January 1 to September 30, 2021, we sold 235 customer logos. The real strong point of that is, we have 108 new logos. As we all know, we have always got to sell new logos that allows us to continue to sell and cross-sell multiple products now that we have into those customers. There's a great cross-section of what vertical we're selling in. A big part of our business is in the county and state business and also municipalities. That's why I thought the Forrester report was so important of the growth in digital transformation in local and state government. We closed 97 new K-12 orders. A bunch of them, obviously, 48 through the relationship with SUI, but also we have our own K-12 customers as well. 27 new health care orders and 57 other customers. And we also have a very, very low churn rate and excellent renewal rates of our contracts. I'll turn it over to Joe now, and he'll just go through our 9-month results from -- again from January 1, 2021 to September 2021.

This is Joe. I'm not going to go line by line. What I want to call out are some real takeaways here. One, in the box on the left, you can see, in 2019 in revenues, $2.5 million up to $8.3 million annually in 2020. That's the 300 -- 3x, over 3x sales growth. A big piece of that was certainly the 2 acquisitions, one very significant, clearly, more than tripling our business. The point there not to be lost in addition to the improvement in profitability is that we were able to do this to more than triple our size, and Jim has said this in some other presentations, I didn't hear at this time that of all the M&A he's been involved in, these integrations have been among the smoothest and the most successful. So I think that's a point we're taking away that we more than tripled and didn't choke and die on it. We're still firing on all cylinders and moving forward. And you see that when you look to the right, in the right box, and you look at the year-over-year. And the acquisitions occurred in the first quarter of '20, so there is a little bit of apples and oranges with the full year of all the acquisitions in '21, but we're still looking quite strong for these numbers as of Q3. Being public and not having filed yet, we can't talk about Q4, but I think if you kind of glance left to right and you look on the left, that full year 2020 was $8.3 million, and 3 quarters of '21 was $8.7 million. I think you can be very comfortable that we're going to do better in 2021. The great story that revenue is, it's also underscored by the very strong profitability story. We've gotten some of our accounting, transaction costs and unusual items out of the way as time goes by from the M&A and stripping that out to adjusted EBITDA, which is also detailed in the appendix. We're looking at $1.3 million on the $8.7 million through the 9 months, which we're certainly quite pleased with, but not resting on our laurels and looking for ways to continue to grow both those key end points on the P&L.

Thank you, Joe. We had a couple of questions come in. So let me take a second and answer a couple of them. One of the questions is, what is your plan on how you intend to grow recurring revenue customer base? Recurring revenue is extremely important to Intellinetics, and we have a great mixture of recurring revenue. We have our typical SaaS recurring revenue through the Intellinetics' IntelliCloud system. We also have our recurring revenue through the state of Michigan and also the state of Ohio. Have a number of contracts with the states that, again, Medicaid, as an example, we pick up their applications. We process those applications. We scan those applications. We digitize them, and then we send them back to the state. We also have a great contract with Rocket Mortgage, where approximately -- we store approximately 150,000 boxes for Rocket Mortgage. And we have a $950,000 contract with them on an annual basis, which is recurring revenue. So the recurring revenue stream is very big. And also, now that we're cross-selling into the Graphic Science's customer base, we're continuously trying to sell instead of delivering to digitize documents back to them on a server or on a CD, we're actually starting to include IntelliCloud as the delivery mechanism for their transformed documents. So that's another way where we're going to grow our recurring revenue base and more IntelliCloud licenses. And the other question was about potential for accretive acquisitions to accelerate overall revenue growth. And to what Joe just said and what I've said throughout the presentation, we've been very successful of the 2 acquisitions we've done. We've looked at a number of acquisitions and it's part of our strategy. So organic growth will be -- continue to be strong, but we do have an acquisition strategy as well. Okay. Next slide just breaks it down from a quarterly basis, showing you the first quarter. Total new deals, 82. Total contract value is very, very important to a SaaS company, very important to IntelliCloud. It's total contract value. So if we sell a document management license for 3 years, we try to say, what is the backlog. So the more total contract value we sell, the bigger the backlog, the better and easier it is to grow our recurring revenue stream. So as you can see here, the first quarter, we did 1.6. Average deal size was $20,000. Then 77. Total contract drivers [ 1.2 ], and then it went up to $2 million in the third quarter, with an average deal size of $26,000. So we've upped our average deal size. We've upped -- we're very consistent with the number of deals we sell and the total contract value is creating the backlog we need to continue to grow our recurring revenue stream very positively. Okay. That's what we have in Intellinetics. We, again, had a very good year. We've been very successful with our acquisitions. We have another question coming in. So let me just take that one now. It looks like it's a similar question. Are there other acquisitions in near term? And how many cash flow? Yes, do you have that, Joe?

Yes. So that's a tough one for us to answer in this sort of a forum. I can really only reiterate that it is definitely a part of our strategy. The second part of the question in terms of the multiples, that's also quite interesting. What we're seeing quite a mixed bag. I would say, 6 months ago, the multiples were quite steep. There were a lot of folks that opinioned quite overvalued to their companies, and we're not going to do something that's not accretive or we're just not going to do something foolish. And now there looks to be actually a little more reasonableness in terms of what's out there. So we're definitely optimistic -- cautiously optimistic that there's a lot more reasonable opportunities out there to be had.

Yes. We've looked very closely -- we look at a lot of deals. We looked very closely at probably 6, and the valuation was incorrect and wasn't right for Intellinetics, so we stepped back. So we're going to do the right deal at the right time for us to go forward, yes. Let me hit the refresh button, see if there's any other questions. So we have a minute left and all I can say is, it's been a very exciting ride for me and the team at Intellinetics. Took us a year or 2 to get our bearing where we wanted to go. We are on the way. We have a great growth strategy. We're very bullish on our organic growth and very bullish on our acquisition strategy, and we're going to have a great 2022. We look forward to the one-on-one conferences. I think we have 12 or 13 meetings already set up. So we look forward to the Thursday and Friday meetings, and we can answer any additional questions at that point. Other than that, have a great evening, and really thank you for your time.

Thank you.

Ladies and gentlemen, that does conclude the Intellinetics presentation. This concludes today's event. Remember one-on-one meeting requests are still open, so be sure to log into the conference platform and request more meetings. You may now disconnect.