RDVT - Red Violet Increases Profitability As Revenue Growth Moderates

2023-10-19 17:56:17 ET

Summary

• Red Violet, Inc. sells identity verification technologies to omnichannel-oriented companies globally.
• The global market for identity verification is expected to reach $34.0 billion by 2030, driven by increasing identity fraud and adoption of digital services.
• Red Violet's recent financial trends show moderating revenue growth, positive operating income, and improving gross profit margin.
• With geopolitical risks increasing in a higher for longer interest rate environment, I'm Neutral [Hold] on Red Violet, Inc. stock for the near term.

A Quick Take On Red Violet

Red Violet, Inc. ( RDVT ) sells identity verification technologies to omnichannel-oriented companies globally.

I previously wrote about Red Violet with a Neutral [ Hold] outlook.

While recent U.S. non-farm payroll activity has been strengthening, geopolitical risks may weigh on hiring plans as interest rates stay higher for longer.

I remain Neutral [Hold] on RDVT in the near term.

Red Violet Overview And Market

Florida-based Red Violet provides software and services to enable companies to authenticate the identities of individuals in the United States.

The company is led by Chairman and CEO Derek Dubner, who has been with the firm since 2017 and previously was CEO of cogint and Interactive Data (acquired by cogint).

The company’s main offerings cover the following use cases:

• Due diligence

• Identity authentication

• Regulatory compliance

• Risk mitigation.

Red Violet seeks new clients through various direct sales and marketing efforts and through distributors, resellers and strategic alliances.

According to a 2022 market research report by Grand View Research, the global market for identity verification was estimated at $8.5 billion in 2021 and is expected to reach $34.0 billion by 2030.

This represents a very strong forecast CAGR (Compound Annual Growth Rate) of 16.7% from 2022 to 2030.

The primary reasons for this expected growth are the growing frequency of identity fraud and the increasing adoption of digital services by consumers and enterprises.

The chart below shows the worldwide identity verification market by industry vertical in 2021:

Major competitive or other industry participants include:

• Acuant

• Equifax

• Experian Plc

• GB Group PLC

• IDEMIA

• Intellicheck

• Mitek Systems

• Nuance Communications

• Thales Group S.A.

• TransUnion.

Red Violet’s Recent Financial Trends

Total revenue by quarter has risen unevenly; Operating income by quarter has returned to positive territory in the most recent two quarters.

Gross profit margin by quarter has trended higher recently; Selling and G&A expenses as a percentage of total revenue by quarter fell YoY in the most recent quarter:

Earnings per share (Diluted) have produced no obvious discernible trend:

(All data in the above charts is GAAP.)

In the past 12 months, RDVT’s stock price has risen 18.39% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) growth of 36.87%:

For balance sheet results, the firm ended the quarter with $31.4 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash flow was $12.4 million, during which capital expenditures were $0.2 million. The company paid $5.4 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Red Violet

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

RDVT’s most recent unadjusted Rule of 40 calculation rose to 22.9% as of Q2 2023’s results , so the firm has improved sequentially but is in need of further improvement, per the table below:

(Source - Seeking Alpha.)

Commentary On Red Violet

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted "continued strength in new customer onboarding, pipeline expansion from high-tier prospects and robust customer conversion at all levels."

The company saw new customer applications at 12-month highs for the past two quarters.

Notably, higher-tier prospects "appear to be more receptive to the idea of introducing new solutions into the workflows than they have been in the prior nine months."

On the subject of AI, management believes that its proprietary data assets will differentiate its AI and machine learning products from competitors.

Total revenue for Q2 2023 rose by 17.6% YoY while gross profit margin increased by 0.8%.

The company's gross revenue retention rate was 94% versus 95% a year earlier, and management expects it to remain between 90% and 95% in the near future.

Selling and G&A expenses as a percentage of revenue fell 9.0% year-over-year, a positive signal indicating increasing efficiency, and operating income rose to a positive $1.2 million.

The company's financial position is strong, with ample liquidity, no debt and positive free cash flow.

RDVT’s Rule of 40 performance has been only moderate but growing slightly sequentially.

Looking ahead, management did not provide forward revenue guidance.

However, trailing twelve-month topline revenue growth appears to be slowing to currently around 19%, whereas 2022 grew by approximately 20.9% over 2021.

In the past twelve months, the firm's EV/Sales valuation multiple has risen by approximately 14%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include improved customer and prospect uptake for the company's AI initiatives or significant higher-tier customer wins.

However, continued high interest rates and geopolitical uncertainty could weigh on employer hiring plans despite recent strength in non-farm payrolls in the U.S.

I remain Neutral [Hold] on RDVT for the near term.

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