Issuer Direct Corporation: Q2 2018 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. The filing identifies the registrant as Issuer Direct Corporation, which operates the ACCESSWIRE news distribution business. The report was filed August 2, 2018. Financial statements are unaudited and presented in thousands, except per-share data.
Business Context
Issuer Direct provides cloud-based shareholder communications, compliance, investor relations, transfer-agent, webcasting, document filing and news distribution services. Revenue is reported in two streams: Platform and Technology and Services. Management is transitioning the business toward recurring cloud-based subscriptions and digital distribution.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 | ||
|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | |
| Revenue | $3.799 million | $3.443 million | $7.329 million | $6.298 million |
| Gross profit | $2.769 million | $2.534 million | $5.278 million | $4.643 million |
| Gross margin | 73% | 74% | 72% | 74% |
| Operating income | $595,000 | $733,000 | $910,000 | $1.107 million |
| Net income | $366,000 | $493,000 | $686,000 | $817,000 |
| Diluted EPS | $0.12 | $0.16 | $0.22 | $0.27 |
| Cash flow from operations | Not separately provided | Not separately provided | $1.589 million | $1.457 million |
- Revenue mix: Platform and Technology revenue was $2.246 million in the quarter and $4.277 million year to date; Services revenue was $1.553 million and $3.052 million, respectively.
- Cash and liquidity: Cash and equivalents were $6.834 million at June 30, 2018, compared with $4.917 million at December 31, 2017. Current assets exceeded current liabilities by $6.561 million.
- Debt: The company had $871,000 of note payable, including $288,000 current and $583,000 long term. Its $2.5 million revolving credit facility was undrawn at quarter-end; the stated interest rate was 4.57%.
- Deferred revenue: Deferred revenue was $1.273 million, up from $887,000 at year-end 2017, and was expected to be recognized within one year.
- Dividends and equity: The company paid $305,000 of dividends during the first six months and received $709,000 from stock-option exercises. Shares outstanding were 3.103 million at June 30, 2018.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 10% in the quarter and 16% year to date.
- Platform and Technology revenue increased 19% in the quarter and 22% year to date, led primarily by ACCESSWIRE news distribution, bundled cloud subscriptions, Interwest customers and webcasting.
- Services revenue was flat in the quarter and increased 9% year to date, primarily because of transfer-agent activity from the Interwest acquisition. Legacy annual-report services continued to decline.
- Gross margin decreased from 74% to 73% in the quarter and from 74% to 72% year to date, primarily because of higher amortization of capitalized software.
- Operating income declined 19% in the quarter and 18% year to date. Net income declined 26% in the quarter and 16% year to date, reflecting higher sales and marketing, product development, general and administrative, depreciation and amortization expenses, and a higher quarterly tax burden associated with stock-based compensation.
- Product development expense increased 121% in the quarter and 130% year to date. No development costs were capitalized in 2018, compared with $314,000 in the second quarter and $680,000 in the first six months of 2017.
- The company adopted ASC 606 effective January 1, 2018. Total revenue was unchanged, but certain bundled shareholder-outreach revenue was reclassified from Services to Platform and Technology. The adoption did not require restatement of prior periods or materially affect liquidity.
Guidance, Outlook, Risks and Unusual Items
Management stated that demand for its platforms remained stable but expects continued migration from printed and service-based offerings to cloud subscriptions and digital distribution. It expects Services revenue to continue declining over the next several quarters while focusing on sales expansion, customer acquisition, migration of acquired customers, newswire distribution, technology investment, profitable growth and operating cash generation. No quantitative revenue or earnings guidance was provided.
- On July 3, 2018, the company acquired Filing Services Canada Inc. for total consideration of approximately $1.208 million, subject to a working-capital adjustment. The business was expected to be rebranded ACCESSWIRE Canada by the end of the third quarter.
- On July 10, 2018, the board declared a quarterly dividend of $0.05 per share, payable August 13, 2018.
- Management cautioned that future acquisitions or obligations could require additional equity or debt financing and that operating cash flow may not be sufficient for all expenses, dividends and obligations.
- ACCESSWIRE depends on several distribution partners; disruption of those relationships could materially harm results.
- Competition, customer attrition in legacy services, pricing pressure, adoption of digital products, general economic conditions and capital-market activity could affect performance.
- The company reported no material litigation, no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
- The company expects adoption of the new lease standard in 2019 to create right-of-use assets and lease liabilities, but stated the impact should be insignificant absent new or renewed leases.
Investor Verification Checklist
- Verify the filing identity and issuer name: the supplied filing is for Issuer Direct Corporation, although the request metadata references ACCESS Newswire Inc.
- Assess whether Platform and Technology growth, particularly ACCESSWIRE subscriptions, can offset continued attrition in legacy Services revenue.
- Evaluate the effect of higher software amortization and product-development spending on future gross and operating margins.
- Review the integration, revenue contribution and purchase accounting for the July 2018 FSCwire acquisition.
- Confirm the sustainability of operating cash flow, quarterly dividends and planned acquisition funding.
- Monitor the $2.5 million unused credit facility, outstanding Interwest anniversary payments and any future financing requirements.
- Review customer retention, subscription backlog and the $1.273 million deferred-revenue balance as indicators of recurring revenue.