Red Violet, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Red Violet provides identity intelligence, information, and analytical solutions through its IDI and FOREWARN brands. Its platform supports risk mitigation, due diligence, fraud prevention, regulatory compliance, customer acquisition, and related use cases. The company operates as one reportable segment.
This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparisons to the three months ended March 31, 2022. The company reported 7,256 IDI billable customers and 131,348 FOREWARN users at March 31, 2023, compared with 6,592 and 91,490, respectively, a year earlier.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $14.626 million | $12.729 million | Up 15% |
| Gross profit | $9.589 million | $8.087 million | Up 19% |
| Gross margin | 66% | 64% | Up 2 percentage points |
| Operating income | $0.401 million | $0.281 million | Up 43% |
| Net income | $0.716 million | $0.107 million | Up 569% |
| Net income margin | 5% | 1% | Improved |
| Diluted EPS | $0.05 | $0.01 | Improved |
| Adjusted EBITDA | $3.706 million | $3.220 million | Up 15% |
| Adjusted EBITDA margin | 25% | 25% | Flat |
| Net cash from operating activities | $1.531 million | $2.430 million | Down 37% |
| Free cash flow | $(0.786) million | $0.523 million | Declined |
Adjusted gross profit was $11.447 million and adjusted gross margin was 78%, compared with $9.559 million and 75% in the prior-year quarter. These are non-GAAP measures and exclude amortization of internally developed software from gross profit.
Cash and cash equivalents totaled $30.818 million at March 31, 2023, down from $31.810 million at December 31, 2022. Total liabilities were $4.900 million and shareholders’ equity was $73.420 million. The filing does not report outstanding debt or borrowings; liabilities primarily consisted of accounts payable, accrued liabilities, deferred revenue, deferred taxes, and operating lease liabilities totaling $1.124 million.
Investing cash use was $2.317 million, including $2.273 million of capitalized software costs. Financing cash use was $0.206 million, primarily for stock repurchases. The company stated that available cash and expected operating cash flow should fund operations and expected capital expenditures for the next twelve months, although future equity or debt financing may be required if growth or cash generation does not meet expectations.
Material changes versus the prior comparable period
- Revenue growth reflected an $0.9 million increase from new customers, a $1.4 million increase in base revenue from existing customers, and a $0.4 million decrease in growth revenue from existing customers.
- Cost of revenue was essentially flat at approximately $3.2 million, reducing cost of revenue as a percentage of revenue from 25% to 22%.
- Sales and marketing expense increased 63% to $3.9 million, primarily due to higher salaries, benefits, sales commissions, and a $0.6 million increase in bad-debt provision.
- General and administrative expense decreased 2% to $5.2 million, including lower professional fees that partially offset higher employee compensation.
- Depreciation and amortization increased 25% to $1.9 million as additional internally developed software became ready for use.
- Interest income increased to $0.286 million from an immaterial amount, primarily from money market fund investments.
- Operating cash flow declined despite higher net income, primarily because of working-capital uses, including increases in accounts receivable and prepaid and other assets and a decrease in accrued liabilities.
- The company repurchased 10,937 shares for $0.201 million during the quarter under its $5.0 million repurchase authorization. Through May 5, 2023, it had repurchased 44,766 shares at an average price of $16.88, with $3.4 million remaining under the program.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued investment in sales capacity, product development, and new markets, and expects cost of revenue as a percentage of revenue to decline as revenue scales. Management also stated that inflation, higher interest rates, recession concerns, and reduced spending by financial-sector customers could affect service volumes, pricing, and margins.
The company had $24.983 million of remaining commitments under data licensing agreements as of March 31, 2023, including $6.108 million for the remainder of 2023 and $7.548 million in 2024. Data costs were $2.361 million during the quarter, and the largest data supplier represented 48% of total data acquisition costs.
The company maintains a valuation allowance against deferred tax assets because of its history of operating losses. Its effective tax rate was a 4% benefit in Q1 2023, compared with a 62% expense rate in Q1 2022. The filing reports no material litigation or legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Unusual or notable items included a $0.668 million bad-debt provision, $0.286 million of interest income, $1.384 million of share-based compensation expense, and $2.273 million of capitalized software development costs. On May 8, 2023, the company extended the employment agreement terms for its chief executive officer, president, chief financial officer, and chief information officer from March 26, 2024, to March 26, 2027.
Important facts for investors to verify
- Whether customer and FOREWARN user growth converts into sustained recurring revenue and expansion revenue.
- The sustainability of the 66% GAAP gross margin and 25% adjusted EBITDA margin as sales and marketing investments continue.
- The effect of the $25.0 million data licensing commitments and the company’s dependence on its largest data supplier.
- Whether capitalized software development costs and related amortization will continue to increase, affecting GAAP earnings and free cash flow.
- The reason operating cash flow declined 37% and whether working-capital usage normalizes.
- The company’s ability to fund operations, software investment, repurchases, and contractual commitments without issuing additional equity or debt.
- The impact of the deferred-tax-asset valuation allowance and the company’s history of operating losses on future tax benefits.
- The comparability and limitations of adjusted EBITDA, adjusted gross profit, adjusted margins, and free cash flow, which are non-GAAP measures.