Business Context and Reporting Period
Red Violet, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The company provides identity intelligence, information, risk mitigation, fraud prevention, compliance, and customer-acquisition solutions through its IDI and FOREWARN brands. It operates as one reportable segment.
- IDI billable customers increased to 7,497 from 6,817 at June 30, 2022.
- FOREWARN users increased to 146,537 from 101,261.
- As of August 3, 2023, 13,913,491 common shares were outstanding.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $14.7 million, up 17% | $29.3 million, up 16% |
| Gross profit | $9.4 million; 64% margin | $19.0 million; 65% margin |
| Adjusted gross profit | $11.4 million; 78% margin | $22.9 million; 78% margin |
| Income from operations | $1.2 million | $1.6 million |
| Net income | $1.4 million; $0.10 diluted EPS | $2.1 million; $0.15 diluted EPS |
| Adjusted EBITDA | $4.6 million; 32% margin | $8.3 million; 28% margin |
| Net cash from operating activities | $3.5 million | $5.1 million |
| Free cash flow | $1.3 million | $0.5 million |
Cash and cash equivalents were $31.4 million at June 30, 2023, compared with $31.8 million at December 31, 2022. Total assets were $79.9 million and shareholders’ equity was $75.8 million. The company had no debt reported; liabilities primarily consisted of operating lease liabilities, deferred tax liabilities, accounts payable, and other current liabilities.
Investing activities used $4.6 million during the first six months, including $4.5 million of capitalized internally developed software costs. Financing activities used $1.0 million, primarily for $0.9 million of common-stock repurchases. Management expects available cash and operating cash flow to fund operations and expected capital expenditures for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased $2.2 million, driven by higher revenue from new customers, base revenue from existing customers, and growth revenue from existing customers.
- Six-month revenue increased $4.1 million, including a $1.2 million increase from new customers and a $2.9 million increase in base revenue from existing customers.
- Quarterly net income improved from a $0.2 million loss to $1.4 million of income; six-month results improved from a $0.1 million loss to $2.1 million of income.
- Adjusted EBITDA increased 58% in the quarter, while adjusted EBITDA margin expanded from 23% to 32%.
- Cost of revenue as a percentage of revenue declined to 22% from 23% for the quarter and to 22% from 24% for the six-month period.
- Sales and marketing expense increased 9% for the quarter and 34% for the six-month period, partly due to higher salaries, commissions, and bad-debt provisions.
- Depreciation and amortization increased 27% for the quarter and 26% for the six-month period, primarily due to internally developed software placed into service after June 30, 2022.
- Interest income increased to $0.3 million for the quarter and $0.6 million for the six-month period, primarily from money market funds.
Outlook, Commentary, Risks, and Unusual Items
- Management expects cost of revenue as a percentage of revenue to decline over time as revenue scales, while noting an industry range of approximately 15% to 30% at scale.
- The company continues to invest in sales capacity, current products, and new products under development, and uses a “land and expand” customer strategy.
- Material commitments under data licensing agreements totaled $24.5 million as of June 30, 2023, with scheduled payments through 2026.
- The $5.0 million stock repurchase authorization had approximately $3.2 million remaining at June 30, 2023. The company repurchased 55,018 shares during the first six months at an average price of $17.04 per share.
- Management cited inflation, recession concerns, higher interest rates, potentially lower customer spending, and reduced demand for credit as risks that could affect volumes, pricing, and operating margins.
- The company had $10.1 million of future revenue expected from unsatisfied or partially unsatisfied performance obligations under certain long-term pricing contracts, subject to timing variability.
- Management stated that there were no material changes to previously disclosed risk factors, no material legal proceedings, and no off-balance-sheet arrangements.
- Deferred tax assets remain subject to a valuation allowance because of the company’s recent history of operating losses.
- Share-based compensation expense was $2.7 million for the first six months, with $13.1 million of unrecognized expense remaining as of June 30, 2023.
- Disclosure controls and procedures were assessed as effective as of June 30, 2023, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the sustainability of revenue growth and customer expansion across IDI and FOREWARN.
- Assess cash conversion after substantial internally developed software capitalization and the resulting future amortization expense.
- Review the $24.5 million data-licensing commitment relative to projected operating cash flow and the $31.4 million cash balance.
- Evaluate the effect of higher bad-debt provisions, sales investment, share-based compensation, and future amortization on GAAP profitability.
- Monitor the remaining stock repurchase authorization and its effect on share count and liquidity.
- Review the valuation allowance on deferred tax assets and the potential variability of future tax expense.