Intellinetics sees 13.6% revenue decline in Q2; anticipates strong Q3 recovery and growth driven by backlog and strategic investments.

OPERATOR - (00:00:43)

Greetings and welcome to the Intellinetics second quarter 2025 earnings call. @ this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press Star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Roger Gramner. Thank you. Roger, you may begin.

Roger Gramner - Moderator - (00:01:12)

Thank you and good afternoon everyone. I am pleased to welcome you to Intellinetics 2025 second quarter conference call. Before we begin, I would like to remind listeners that during this conference call, comments made by management may include forward looking statements regarding Intellinetics Inc. That are not historical facts. These forward looking statements are based on the current expectations and beliefs of management and they are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. Intellinetics Inc. Undertakes no duty to update any forward looking statements. For more information about factors that may cause actual results to differ materially from forward looking statements, please refer to the press release issued today as well as risks and uncertainties included in the section under the caption Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations and Intellinetics' Annual Report on Form 10K or the Quarterly Report on Form 10Q filed today. Also, please note that on the call today management will discuss non GAAP financial measures such as adjusted EBITDA. Non GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and may differ and may be different from non GAAP financial measures presented by other companies. A reconciliation between GAAP and non GAAP measures can be found in the press release issued today. With all that said, I would now like to turn the call over to Jim Di Socio, Intellinetics' President and CEO. Jim, the call is yours.

Jim Di Socio - President and CEO - (00:02:56)

Thank you Roger. We have a lot of great things going on and I'm excited to provide an update. First, I'd like to address our temporary reduction in revenue volume in Q2. The major contributor to our Q2 revenue results falling short of last year Q2 is the reduction of digital transformation work showing up in our professional services revenue line. This reduction corresponds to the timing of our June 1st renewal of our five year contract with our largest customer. We use the word temporary intentionally. We have since the signing of the contract rebuilt our backlog with orders in hand that will provide transformation work back to historical levels before the end of Q3 and this backlog of orders and work will take us into Q1 26 without having to close another major contract, and we're not stopping. Our goal is to have an even longer Runway of backlog. In addition, we just completed successful testing on a large microfilm conversion project that will add more revenue in Q4 and beyond. Further, as a reminder, our June 1st contract renewal is for five years with an additional five year extension. That's a very good time horizon for us, but we're not resting there. We are working to expand sales through our other channels. We've had success there in recent years, taking our largest commercial reseller from $250,000 annual in annual revenue five years ago to over $750,000 in annual revenue in 2024. On the south side, we've grown revenues 12.6% in Q2 this year over last year. Q2 frankly, I'm disappointed. I wanted more growth than that. Two of our key target vertical markets have faced their headwinds this year, particularly in Q2. Construction and home building face stubbornly higher interest rates and the threat of tariffs causing them to Pause Major projects. K12 Education is worried about the impacts of cuts to public education. I want to be clear that we're not losing orders, but we are experiencing longer lead times on new sales. From these factors, a two month buy cycle can become three or even a bit longer. That said, we are currently seeing renewed activity and we are optimistic that customer decision makers are moving past the early pause button mentality and are seeing that our products save them time, money and provide expanded visibility into their critical performance data. We have modified our messaging to more crisply articulate that now is the time to realize the ROI that our solutions offer. More than ever, I continue to believe that now is the time to invest in sales and marketing and to enhance what we do in every aspect of the customer life cycle from initial messaging, marketing campaigns, sales material and sales process, and nurturing existing customers using a customer success model. Some specific successes include hiring industry and AI subject matter experts. Our enhanced industry expertise in the construction and home building space specific to payables automation has already resulted in key payables automation win and we have improved our messaging to key buyers in the home building market. Our strength in AI expertise expediates leveraging AI for more wins with customers and accelerated development. Our historical consolidating sales and market spend as a percent of revenue has barely broken into low teens, usually fast growing software companies or SaaS. Software companies spend 40% or more of revenues on sales and marketing. We're financing our growth out of current cash flow as we have been and I believe that even with these modest investments we can take our growth to the next level. Our investment in sales and marketing include identifying partners to expand our partner base customer acquisition model. Our increased infrastructure spending includes the development and implementation resources to programmatically bring on new partners, validate our solutions in the market and then accelerate integration. Our mission is to expand partner ecosystems and happy customers. Further, we're committed to leveraging AI in several ways which fall into three distinct core pillars. 1 new features including AI agents within our solutions 2 marketing and customer support and 3 leveraging existing tools to significantly accelerate our internal development, both in bringing new features to market faster and enhancing the customer user interface and ensuring behind the scenes data center efficiencies and compliance as you can tell from the excitement in my voice, we're at an inflection point. After successfully paying off $7.6 million in debt and earnouts the last few years, $6.3 million of that was from cash flow we generated and $1.3 million in equity. We are now positioned to invest in sales and marketing and development as we transform ourselves to grow more rapidly. Our solutions bring ROI efficiencies and executive transparency. On top of that, our implementations are low fit low change management relative to major players. Our customers win and we win. At this time I would like to turn the call over to our Chief Financial Officer, Joe Spain. Joe thanks Jim.

Joe Spain - Chief Financial Officer - (00:09:11)

I will now review our financial Results for the second quarter. 2025. Total revenue for the quarter ended June 2025 decreased 13.6% to 4.0 million, compared to 4.6 million for the same period last year. Following are the material components of our revenue presented on our statements of operations. SaaS including hosting revenue grew 12.6% to 1.6 million for the quarter from 1.8 million from last year. Primarily driven by continued early payables automation successes, Software maintenance services were down as expected, decreasing $24,000 or 6.6% from 2024. As a reminder, these maintenance revenues are from support agreements with customers. Continuing on our premise solution Professional services revenue decreased 29% to 1.9 million for the quarter from 2.7 million for the same period last year. Jim has already discussed the factors driving this decrease. As a percent of total revenue, professional services revenue was 49% of total revenue for the quarter compared to 56% last year. Margins have remained robust for each revenue line. Consolidated gross margin percent increased 328 basis points to 68% for Q2 this year compared to 64.7 for last year. The consolidated increase was driven by a favorable revenue mix, a result of reduced professional services volume. SaaS margins remained strong at 84.3%, consistent with 84.5% last year. The other revenue lines were similar, consistent each within 50 basis points of 2024. Operating expenses increased 21.1% to 3.6 million for Q2 25 compared to 2.9 million in Q2 24. The increase is driven by our investments in sales and marketing as well as infrastructure, which is reflected in admin. Jim has discussed these investments as part of our strategy to accelerate sales and enabling us to scale net loss for Q2 was 568,000 compared to net income of 75,000 for the same period last year. There were two primary drivers for the change 1 the temporary reduction in professional services 2 the increased spending levels in selling general and admin to enable us to achieve our growth goals later this year. In 2026 and beyond, loss per share was $0.13 per share compared to net income per share $0.02 per share. Last year. Our adjusted EBITDA in The quarter was 28,000 compared to an adjusted EBITDA of 698,000 for the same period in 2024. The difference is driven by the same professional services and investment factors just discussed. Next I'll turn to a Brief Overview of Intellinetics Balance Sheet At 6-30-25, we had cash of 2.1 million and accounts receivable net of 800,000. Our total assets were 17.1 million, including 8.9 million in intangible assets and goodwill as part of acquisitions made since 2020. Total liabilities were 5.6 million, including 2.6 million in deferred revenues reflecting signed SaaS and maintenance contracts and 1.9 million in lease liabilities as of 6-30-25. As of June 30 our balance sheet is very strong with no debt. I want to wrap up with our financial outlook based on our current plans and assumptions and subject to risks and uncertainties we described in our filings and this call. We are revising our guidance and expect that 2025 revenues will be less than 2024 revenues driven by weakness in professional services in the first half of the year. However, the Company expects to still grow SaaS revenues and maintain positive adjusted EBITDA. Our adjusted EBITDA guidance is unchanged from Q1, where we expect our 2025 adjusted EBITDA to be reduced by more than half compared to fiscal year 2024 due to increased investments in sales and marketing, intended to provide returns on those investments in late 2025 and beyond. With that, we thank you all for listening. And at this time, we'd like to open the call up to Q and A.

OPERATOR - (00:13:59)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. Confirmation tone will indicate that your line is in the question queue. You may press Star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing star keys. One moment while we poll for questions. And our first question comes from the line of Howard Halpern with Taglitz Brothers. Please proceed with your question.

Howard Halpern - Equity Analyst - (00:14:32)

Good afternoon, guys. Good afternoon. In terms of the professional services ramping back up to historic levels, should we also model out that margins will be relatively healthy at historic levels or maybe even a little better than historical levels?

Jim Di Socio - President and CEO - (00:14:56)

Jim, do you want to take that?

Joe Spain - Chief Financial Officer - (00:14:57)

I think they'll be. Go ahead, Joe. Yeah, they'll be.

Jim Di Socio - President and CEO - (00:15:03)

Yes.

Joe Spain - Chief Financial Officer - (00:15:04)

And then a little bit better. Yes, so we have a little bit better. That's what I was going to say.

Jim Di Socio - President and CEO - (00:15:08)

Yeah. The June 1st renewal, the five years plus the extension beyond that, that comes with some price increases embedded in there. So we would look to a little bit of improvement.

Howard Halpern - Equity Analyst - (00:15:20)

Okay. In terms of how many customers on the home builder side, how many of them are live and how many of them are maybe have paused and do you expect to go live in the next six months?

Jim Di Socio - President and CEO - (00:15:40)

We just had a very positive review. You know, every, you know, every week, every day, we're talking about our customers going live and 80. So 80% of our customers are live right now and the rest of them are moving to live dates very aggressively. So we're very confident now that, you know, this was a fairly new product. As the product has matured over the last year or so, we've added more feature functionality and customers are starting to use it and they're very, very happy. Again, I've said this in the past. I've never, you know, I haven't gotten any calls that people are dissatisfied, which is pretty unique. And in the software industry. And our customers are very happy in moving to live dates. And I would say the majority of them are referenceable too, at this point. So it's going very well.

Howard Halpern - Equity Analyst - (00:16:33)

And from this point forward, I know you said you were slightly disappointed with the 12% growth, but double digit SAS line should grow double digits. If nothing else out of the ordinary occurs and the pace you anticipate does occur. Quarters.

Jim Di Socio - President and CEO - (00:16:59)

Yeah, we have. The pipeline is very strong. We have not, as I said, lost any business. I talked to the CEO of our largest partner, who is Constellation Home Builders, and he uses the word uncertainty. So builders were just uncertain. And when there's uncertainty, you know, you don't make investments. But we see it coming. We see the whole market changing right now, and we think it's going to be a pretty good fourth quarter for us. And you're right. 12%, 12.6% SaaS growth year over year is pretty good. I think we can do better. We've also just launched our Payables Automation product into the K12 market. And we've also offered another service called Capture as a Service, which is all recurring revenue as well. We just negotiate. We're in the middle of negotiating a upsell of our products to our large K12 partner, Software Unlimited. So a lot of good things happening. I was out in Sioux Falls, South Dakota last week negotiating that contract with the management team of Software Unlimited. So we expect a big fourth quarter out of that part of our business as well.

Howard Halpern - Equity Analyst - (00:18:16)

Okay. I think, I recall on our last call, there was, I think, 3K through 12 utilizing, you know, the IPAs for that market. Has that pipeline grown or has it even gotten more live customers?

Jim Di Socio - President and CEO - (00:18:36)

Yep, we're now up to four live customers over there, which, you know, again, we launched that in March, April timeframe. So we've gotten four customers over there, and we are just actually signed. So there's two large partners in that space that we work with. One is Software Unlimited, who we've been partners with for five or six years selling our document management system. And we've just launched Payables Automation into their customer base. And there's another company called Skyward, and Skyward has 2,300 school districts throughout the country. And we just signed our first two beta sites over there. So they're, you know, they're probably a couple weeks away from going live, but we're also ramping up our marketing to go after that market as well. So, again, we already have 55 document management customers of sky with Skyward right now, and we just sold our first two Payables Automation customers there. So we're expecting some really good results on that side of the business as well.

Howard Halpern - Equity Analyst - (00:19:41)

Okay. And so I know you have your hands full with, you know, the home builders and the K through 12. But I guess can you talk about any progress being made on entering any new verticals, ERP verticals?

Jim Di Socio - President and CEO - (00:19:58)

We have you know, we do have a partner manager and we're working very diligently. We have a pipeline of partners that we've been working with, you know, not ready to divulge. We did sign Spring Brook up earlier in the year, but that's going a little slower than we would like. But we are every day calling on net new partners to bring into our ecosystem.

Howard Halpern - Equity Analyst - (00:20:23)

Okay, well guys, keep up the great work.

Jim Di Socio - President and CEO - (00:20:27)

Thank you, Howard.

Joe Spain - Chief Financial Officer - (00:20:28)

Thanks, Howard.

OPERATOR - (00:20:32)

Thank you. There are no further questions at this time. I'd like to turn the call back to Jim Dasocia for closing remarks.

Jim Di Socio - President and CEO - (00:20:41)

Thank you, Julian. I would like to say, very bullish on our company right now. It's been a, you know, with the tariffs out there and the uniqueness of our business with home builders and with K12, things are looking very, very positive for us as we go forward in the third and fourth quarter. We are ramping up. We will be back to where we were at the end of the third quarter with professional services revenue, which is very exciting as well. And we're just well positioned for continued success. We believe in our strong competitive position in growing markets and our diverse set of solutions with ample cross selling opportunities. And we further believe that it is absolutely the right strategy to reinvest our historically strong cash flow back into the company, specifically for sales and development. I mean sales, marketing and development, in order to accelerate our growth. We appreciate the continued support of our long term shareholders and aim to attract new investors as well by delivering strong, consistent financial results. Thank you all for joining us today. We'll speak again in the future. Thank you.

OPERATOR - (00:21:53)

Thank you. And with that, this does conclude today's teleconference. We thank you for your participation.

UNKNOWN - (00:21:58)

You.

OPERATOR - (00:21:58)

You may disconnect your lines at this time. Have a great day.

UNKNOWN - (00:22:03)

Thank you.