Intellinetics, Inc. (INLX) Earnings Call Transcript

Greetings. Welcome to the Intellinetics Second Quarter 2026 Earnings Call. [Operator Instructions]

Thank you. To begin, I would like to make a few forward-looking statements regarding Intellinetics, Inc. that are not historical facts. [indiscernible] materially from actual future events or results, and Intellinetics, Inc. undertakes no duty to update any forward-looking statements in the Intellinetics annual report on Form 10-K or the quarterly report on Form 10-Q filed today. Also, please note that on the call today, management will discuss the non-GAAP financial measure adjusted EBITDA. Non-GAAP financial measures are not intended to be considered in isolation or [indiscernible].

Thank you, Joe. Good afternoon, everyone, and thank you for joining us. Forward with urgency. Intellinetics has valuable assets. We have software solutions embedded in customer workflows, recurring revenue, strong customer relationships, and deep experience in markets where secure document management, workflow automation, compliance, and information access matter. We also have a document management system that is very important to us, and a document services business that gives us access to customers with complex, document-intensive processes, customers that can often benefit from broader software solutions over time. Our Q2 results reflect both the current state of the business and the opportunity in front of us. Our SaaS revenue grew 4.2% year-over-year, and software margins remained solid. The second half of 2026 is not representative of the execution profile we are building for the second half and beyond. In the first half of the year, we put several critical operating building blocks in place. We improved our forecasting visibility. We strengthened sales pipeline management. We established a more consistent management cadence. We improved project oversight, so key initiatives now have clearer owners, timelines, and accountability. And we are using better operating data to make more disciplined decisions around product, technology, sales, [indiscernible] planned management cadence, clearer ownership of key initiatives, a new digital presence in market, and an active product and technology priority, and for the larger transformation ahead. The second half of 2026 is all about execution. First, we are focused on SaaS growth. We continue to expect double-digit SaaS growth for fiscal 2026, and we are focused on converting software opportunities [indiscernible] discipline, better partner motions, and more consistent management of opportunities from pipeline to close. Third, we are sharpening product and technology priorities. We are evaluating where to accelerate, where to modernize, where to partner, and where to stop investing. Fourth, we are focused on operating leverage. As we grow recurring revenue and improve execution discipline, we expect to reduce [indiscernible].

Turning to our statements of operations. SaaS revenue increased 4.2% year-over-year to $1.6 million, driven primarily by new payables automation customers. Recurring software revenue continued to represent a growing component of our overall business mix. Software maintenance services were down, as expected, decreasing $39,000 or 11.7% from 2025. As a reminder, these maintenance revenues are from support agreements with long-time customers continuing on our legacy premise solution. Professional services revenue decreased 5.8% to $1.8 million for the quarter from $1.9 million for the same period last year. As a percentage of total revenue, professional services revenue was 45% of total revenue for the quarter compared to 47% last year. The decline reflects reduced scanning project activity in our document services segment, driven by the timing of customer projects and a lower backlog during the period. We have since taken orders to refill that backlog. Consolidated gross margin percent decreased 162 basis points to 66.4% for Q2 this year compared to 68.0% last year. The decrease was driven by professional services reflecting a product mix shift in document scanning and conversion projects. Importantly, our software margins in both SaaS and maintenance remained solid. Operating expenses increased 14.7% to $3.7 million for Q2 compared to $3.2 million for Q2 '25. The increase was primarily driven by a 24.4% increase in general and administrative expenses from higher variable compensation expense and increased engineering development personnel, as well as share-based compensation expense that increased approximately $229,000 year-over-year. These increases were partially offset [indiscernible]. Net loss for Q2 was $1.1 million compared to a net loss of $600,000 for the same period last year. The primary drivers were lower gross profit on reduced professional services revenue from our document services segment, together with higher G&A expenses, including the share-based compensation. Loss per share was $0.24 per share compared to a loss per share of $0.13 last year. Our adjusted EBITDA for the quarter was a loss of $331,000 compared to an adjusted EBITDA profit of $28,000 in the same period last year, reflecting approximately $108,000 of lower gross profit, again driven by the document services segment, together with higher cash operating expenses. Quickly turning to six-month results, total revenue for the first six months decreased 4.9% to $7.9 million as compared to $8.3 million last year. SaaS revenue increased 2.2% to $3.2 million, led by new payables automation customers. Professional services revenues decreased 10.3%, ending at $3.6 million compared to $4.1 million last year on lower scanning project volume in our document services segment. Consolidated gross margin was 64.9% compared to 67.3% last year. Same as Q2, the decline was driven by the professional services mix, partially offset by stronger storage and retrieval margins. As noted earlier, our software margins by revenue line remained solid. Operating expenses increased 9.3% to $7.4 million for the first six months of '26 compared to $6.7 million in '25. This increase is driven by two primary factors. First, general and administrative expenses increased 16.4%, including approximately $430,000 of non-recurring CEO transition costs incurred in the first quarter, as well as higher variable compensation expense and expanded engineering development personnel through the first six months. Second, partially offsetting that increase, sales and marketing expense decreased 13.8% and depreciation and amortization decreased 5.1%. Six-month net loss was $2.2 million compared to a net loss of $1.3 million last year. Net loss per basic and diluted share was 51 cents compared to a net loss per basic and diluted share of 31 cents in 2025. Six-month adjusted EBITDA was a loss of $659,000 compared to a positive adjusted EBITDA of $104,000 for the same period in 2025. The decline reflects approximately $453,000 of lower gross profit on reduced professional services volume and margin, together with higher cash operating expenses. Next, a brief overview of the balance sheet. At June 30, '26, we had cash of $1.7 million and accounts receivable net of $700,000. Our total assets were $15.6 million, including $8.5 million in intangible assets and goodwill as part of acquisitions made since 2020. Our liabilities were $5.8 million, including $2.9 million in deferred revenues reflecting signed SaaS and maintenance contracts. We had no debt as of June 30, 2026, nor any borrowings to date. I'd like to wrap up with a brief financial outlook, which is unchanged from our prior guidance. Based on our current plans and assumptions and subject to risks and uncertainties we described in our filings and this call, management remains focused on accelerating SaaS growth and currently expects double-digit year-over-year SaaS growth for fiscal 2026. And now back to Allison for some final remarks.

Thanks, Joe. Before we close, I want to leave investors with a key message. We are actively reshaping Intellinetics around the future opportunity we see in the business. In the first half of the year, we built a stronger operating foundation, better visibility, stronger pipeline discipline, improved project oversight, a new website, and a more consistent management cadence. In the second half, the focus is execution, converting software opportunities, strengthening commercial performance, and improving the performance of the software, making sharper product and technology decisions, and building a more scalable operating model. The opportunity over the next two to four years is meaningful. We believe Intellinetics can become a more focused software and services company with a larger recurring revenue base, better operating leverage, and a clearer path to improved profitability. Six months in, I am encouraged by the progress we are making. We have better visibility, stronger operating discipline, clearer execution priorities, and a more focused view of where we need to invest. We still have work to do, but we are moving with urgency and building momentum. I look forward to updating you on our continued progress. Sherry, we'll now turn the call back to you.

[Operator Instructions] There are no questions at this time, so I will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.