Red Violet, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022; filed November 7, 2022. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Red Violet provides identity intelligence, risk mitigation, fraud prevention, compliance, due diligence and customer-acquisition solutions through its CORE platform, primarily under the IDI and FOREWARN brands. IDI had 6,873 billable customers and FOREWARN had 110,051 users at September 30, 2022. The company operates as one segment.
Financial Highlights
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $15.0 million | $11.7 million | $40.2 million | $32.8 million |
| Gross profit | $10.3 million | $7.6 million | $26.4 million | $20.7 million |
| Gross margin | 69% | 65% | 66% | 63% |
| Net income | $2.3 million | $1.3 million | $2.2 million | $2.4 million |
| Net income margin | 15% | 11% | 5% | 7% |
| Adjusted EBITDA | $5.2 million | $3.6 million | $11.3 million | $9.6 million |
| Adjusted EBITDA margin | 35% | 31% | 28% | 29% |
| Cash from operating activities | $3.1 million | Not separately provided in the statements | $8.1 million | $7.0 million |
Q3 platform revenue increased 31% to $14.8 million, while services revenue declined 29% to $0.2 million. Pricing-contract revenue represented 68% of Q3 revenue and 74% of nine-month revenue, compared with 80% in both comparable 2021 periods.
At September 30, 2022, cash and cash equivalents were $31.3 million, total assets were $76.7 million, total liabilities were $4.6 million and shareholders’ equity was $72.2 million. The filing reports no debt outstanding; operating lease liabilities totaled $1.5 million. Current assets were $38.6 million versus current liabilities of $3.4 million.
Material Changes Versus Prior Comparable Period
- Q3 revenue rose 29%, gross profit rose 36%, net income rose 80% and adjusted EBITDA rose 43% year over year.
- Nine-month revenue increased 23% and operating income increased to $2.3 million from $0.3 million.
- Nine-month net income declined to $2.2 million from $2.4 million because the 2021 period included a $2.2 million gain from forgiveness of the CARES Act loan.
- Cost of revenue increased 10% in Q3, slower than revenue growth, reducing cost of revenue to 20% of revenue from 24%. General and administrative expense increased 32%, while depreciation and amortization increased 27%.
- Cash from operations increased to $8.1 million for the first nine months, but investing cash use increased to $6.4 million, primarily due to $6.1 million of capitalized intangible-asset costs.
- The company repurchased 21,000 shares for $0.4 million during the first nine months under a $5.0 million authorization. It reported 50,000 total shares purchased under the program through the filing date.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided in the filing. Management expects to fund operations and expected capital expenditures with available cash and operating cash flow for the next twelve months.
- Management expects idiVERIFIED transaction volume, which was affected by COVID-19 and has a lower margin profile, to return to pre-COVID levels in the first half of 2023.
- Material future data-licensing commitments totaled $28.7 million through 2026. Operating lease maturities totaled $1.6 million.
- Management states that recent operating losses support a valuation allowance against deferred tax assets. The effective tax rate was 10% for the first nine months of 2022, and all income-tax filings since 2018 remain open for examination.
- Key operating dependencies include data suppliers; the largest supplier represented approximately 48% of data-acquisition costs in Q3 and the first nine months of 2022.
- Management reported no material litigation, no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and effective disclosure controls as of September 30, 2022.
- Share-based compensation was $4.1 million for the first nine months and $1.2 million in Q3; $14.2 million of unrecognized compensation expense remained at September 30, 2022.
Investor Verification Checklist
- Verify whether revenue growth and improved gross margins persist as the mix shifts between pricing-contract, transactional and lower-margin idiVERIFIED revenue.
- Reconcile adjusted EBITDA and adjusted gross profit to GAAP results, particularly for depreciation and amortization and share-based compensation.
- Monitor cash conversion, accounts receivable growth, capitalized software spending and the company’s ability to fund $28.7 million of data-licensing commitments.
- Assess customer and FOREWARN user growth, retention and expansion relative to increased sales and marketing spending.
- Review concentration and pricing terms involving the largest data supplier.
- Confirm the remaining share-repurchase authorization and any subsequent repurchases, including the additional 28,527 shares purchased in October 2022.