Red Violet, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Red Violet provides identity intelligence, risk mitigation, fraud prevention, regulatory compliance, due diligence and customer-acquisition solutions through its IDI and FOREWARN brands. The company operates as one reportable segment. This Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The financial statements are unaudited.
- IDI billable customers increased to 7,769 from 6,873 at September 30, 2022.
- FOREWARN users increased to 168,356 from 110,051.
- Pricing-contract revenue represented 79% of third-quarter revenue and 78% of nine-month revenue.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $15.8 million | $15.0 million | $45.1 million | $40.2 million |
| Gross profit | $10.4 million | $10.3 million | $29.4 million | $26.4 million |
| Gross margin | 66% | 69% | 65% | 66% |
| Income from operations | $1.8 million | $2.2 million | $3.4 million | $2.3 million |
| Net income | $12.5 million | $2.3 million | $14.6 million | $2.2 million |
| Net income margin | 79% | 15% | 32% | 5% |
| Adjusted EBITDA | $5.4 million | $5.2 million | $13.7 million | $11.3 million |
| Adjusted EBITDA margin | 34% | 35% | 30% | 28% |
| Operating cash flow | $5.8 million | $3.1 million | $10.9 million | $8.1 million |
| Free cash flow | $3.3 million | $0.8 million | $3.8 million | $1.7 million |
Cash and cash equivalents were $34.2 million at September 30, 2023, compared with $31.8 million at December 31, 2022. Total assets were $95.3 million and shareholders’ equity was $89.7 million. The balance sheet shows no outstanding borrowings or senior debt; liabilities primarily consist of operating lease liabilities totaling $2.7 million.
Nine-month investing cash outflows were $7.0 million, primarily for $6.9 million of capitalized internally developed software costs. Nine-month financing cash outflows were $1.4 million, including $1.3 million of common-stock repurchases. Management expects available cash and operating cash flow to fund operations and expected capital expenditures for the next twelve months.
Material changes versus the prior comparable period
- Third-quarter revenue increased 5% and nine-month revenue increased 12%. Base revenue from existing customers increased 15% in both the quarter and nine-month period.
- Third-quarter revenue growth was partly offset by lower new-customer and growth revenue because the prior-year period included approximately $1.8 million of one-time transactional revenue.
- Cost of revenue increased 8% in the quarter, causing gross margin to decline to 66% from 69%. Nine-month gross margin declined to 65% from 66%.
- Sales and marketing expense increased 28% in the quarter and 32% for the nine-month period, primarily due to higher salaries, benefits, commissions and bad-debt provisions.
- Depreciation and amortization increased 27% in the quarter and 26% for the nine-month period as internally developed software entered service.
- Net income benefited from a $10.4 million third-quarter income-tax benefit and a $10.3 million nine-month benefit resulting from the release of the valuation allowance on deferred tax assets. This is a material nonrecurring or unusual item and substantially drove the increase in reported net income.
- Interest income increased to $0.3 million in the quarter and $0.9 million for the nine-month period, primarily from money-market investments.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued investment in sales capacity, existing products and products under development, and believes future growth depends on increasing sales and sustaining positive operating cash flow.
- Florida Realtors agreed to purchase FOREWARN services for its 238,000 members beginning in January 2024.
- Material commitments under data-licensing agreements totaled $22.1 million as of September 30, 2023, with payments scheduled through 2026.
- The company’s largest data supplier represented 47% of third-quarter data-acquisition costs and 48% of nine-month data-acquisition costs, indicating supplier concentration risk.
- Management cites inflation, recession concerns and higher interest rates as potential factors affecting customer spending, service volumes and margins.
- Management stated that it may need to raise equity or debt capital in the future if revenue growth or cash generation is insufficient; any equity financing could dilute shareholders.
- The company had no material off-balance-sheet arrangements and reported no material pending legal proceedings. No material changes were reported to the risk factors in the 2022 Form 10-K.
- The corporate headquarters lease was extended through June 2029, resulting in a $1.9 million increase in right-of-use assets and lease liabilities.
- The company repurchased 70,037 shares for $1.3 million during the first nine months. Through November 3, 2023, it had repurchased 97,181 shares at an average price of $18.29, with $2.3 million remaining under the $5.0 million authorization.
Important facts for investors to verify
- Separate recurring pricing-contract revenue growth from one-time transactional revenue and assess customer retention, usage and expansion trends.
- Evaluate operating performance excluding the $10.4 million tax benefit from the deferred-tax-asset valuation-allowance release.
- Monitor gross-margin pressure from data-acquisition costs and the concentration of spending with the largest data supplier.
- Assess the return on the $6.9 million of nine-month capitalized software investment and the resulting future amortization burden.
- Review the $22.1 million data-licensing commitment, lease obligations and available cash relative to expected operating and capital needs.
- Confirm the timing and economics of the Florida Realtors FOREWARN rollout beginning January 2024.
- Consider dilution and share-count effects from stock-based compensation, unvested RSUs and the company’s Rule 10b5-1 arrangement to purchase up to 36,515 shares.