Intellicheck Is Ready For A Comeback (NASDAQ:IDN)

Intellicheck (NASDAQ:IDN) is an id verification firm that may reliably confirm identification paperwork inside milliseconds. With its applied sciences, databases, and platform, it is a useful useful resource for firms trying to remove fraudulent transactions.

Identity fraud is large enterprise, and it’s solely rising. It advantages all firms to place safeguards like IDN’s merchandise in place. Bryan Lewis, the CEO of IDN, relayed that losses from id fraud have elevated to $52 Billion yearly from $16.8 Billion simply 4 years in the past in response to Javelin Strategy and Research. An improve of 200% in incidents of id fraud is waking up monetary service firms and different industries, and I imagine IDN can change into a key business participant in reversing this pattern.

I favored IDN again in 2020 after the preliminary shockwave of the pandemic noticed the share value fall from about $10 to only over $2.00 per share. After my article when IDN was at round $5 in April of 2020, the value proceeded to triple to over $15 per share earlier than just lately returning once more to $2. At the time of my preliminary article, I believed that the pandemic had solely exacerbated on-line monetary fraud, and that IDN’s regular buyer wins and market penetration justified a powerful purchase opinion.

Why did it fall a lot, and was it truthful? Fairness actually doesn’t come into play within the ordinary sense of the phrase. This is the Market, in any case, and shares usually overshoot on the best way up and on the best way down. I prefer to overview a stock after a giant plunge and see if the Market has thrown out the infant with the bathwater.

I believe the corporate is value much more, and we received’t have very lengthy to attend earlier than it turns into obvious. Against a fancy macroeconomic backdrop, I believe IDN finds itself in a positive place for no matter could come.

IDN’s Business

IDN has developed a patented, frictionless, recurring-income mannequin of fraud prevention that counts five of the top twelve monetary establishments within the U.S. as clients. The enterprise has a really low churn charge. in response to the CEO within the This autumn convention name:

I’m completely satisfied to say as a part of a normal enterprise overview, we analyzed churn charge. And since 2018, the corporate has not misplaced in single main consumer to something apart from chapter and all of the monetary companies purchasers have grown their use instances.”

This is a superb testomony to IDN’s utility. I’m not conscious of many different firms which have such a buyer retention charge.

IDN’s companies have expanded drastically from their beginnings in retail brick-and-mortar functions to digital transactions. Digital use has elevated by 550% from 2019 to 2021.

IDN’s clients are discovering new use-cases on a regular basis. Customers have just lately begun including “returns without receipt” id affirmation for instance, a hotspot of monetary fraud. In addition, a private-equity owned international media firm and electronic mail supplier additionally simply onboarded to make use of IDN’s companies. If anyone calls this electronic mail supplier to get a password reset, the corporate makes use of IDN’s companies to confirm that individual’s id, thus stopping the scourge of electronic mail account takeovers.

Why did IDN fall?

I’ve reviewed all of IDN’s convention name transcripts from Q2 2021 onward and matched them towards the stock efficiency. The greatest latest one-day drop got here on November 11, 2021, following the Q3 2021 earnings launch and convention name after the market closed on yesterday.

The Q3 2021 numbers got here in at -.02 per share in web earnings, lacking analyst expectations by .01, and income of $4.83 Million, beating analyst expectations by $505,050 per share. In the three days that adopted, the stock value dropped about 30% from $8.71 to $6.03 together with two days of 30 instances the common quantity.

Clearly, anyone determined that they didn’t just like the numbers or what was mentioned within the convention name.

So what might have made some sellers stampede for the exits?

I’ve highlighted just a few issues from this name that I imagine contributed to the deterioration of the share value.

Stimulus Savings

In his opening remarks, CEO Bryan Lewis said,

We acknowledged that as a consequence of financial savings charges and stimulus acquired in the course of the pandemic, proper now, buyers will not be essentially shopping for on credit score or extra importantly, opening new bank card accounts. While we imagine it will proceed to affect us within the brief time period, we imagine that as issues begin to return to pre-pandemic ranges and other people start to spend in a normalized method, it will drive bank card functions and extra card not current transactions.”

This clarification is smart to me. During the heightened interval of the pandemic, individuals have been saving at greater charges, decreasing using credit score, and receiving stimulus funds that had a direct impact on each of these actions. IDN makes money each time a buyer makes use of IDN’s choices to verify an individual’s identification. Such use instances embrace when somebody: 1) applies for a bank card, 2) needs to make a purchase order however doesn’t have their bank card helpful (a “card not present” transaction), or 3) needs to make a return with no receipt.

Implementation Interruptions

In an trade with an analyst on the Q3 name, the CEO defined that 2 main purchasers had some inside technical growth delays, which slowed the implementation of their IDN-related methods.

Code-Freeze Crunch

The This autumn Conference Call on March 9 introduced additional share value weak spot, amidst the broad market carnage (that ought to be acquainted to most all people.)

While the This autumn name illuminated many positives, corresponding to many contracts renewing at greater costs, and buyer wins from opponents with inferior tech, further consumer growth hitches pushed anticipated revenues out a bit additional. CEO Lewis said,

With all these thrilling developments, tempering this as monetary companies firm quantity two, which just lately started a mission that can allow them to increase credit score to tens of hundreds of further retailers. This required monetary companies firm quantity two, to place code freeze on all different growth, which meant a number of retailers which were anticipated to go stay within the first half of the yr is not going to. The above described mission ought to be an interim delay to our short-term progress that they anticipate to renew integrations within the September timeframe. We imagine this short-term ache now represents a possible long run achieve as these new further functions will want validations.”

This delay in revenues seemingly led to additional share value weak spot.

Bottom Line Blues

Increased gross sales and advertising and marketing headcount, R&D investments and stock-based compensation impacted the underside line. In This autumn of 2021, IDN continued to extend investing in themselves. Sales and Marketing prices ramped up, and it’s a welcome growth. These investments have been paying off in response to the corporate, with inbound leads growing quickly and new buyer wins.

Pernicious Postponement

May 11, 2022 Press launch led to the ultimate drop earlier than the present beginnings to a restoration.

IDN was scheduled to launch their Q1 2022 outcomes on May 12 and host a convention name. Instead, they postponed the outcomes and convention name so as to “to allow for additional time for the Company and the Company’s external auditors to complete the accounting analysis pertaining to the Company’s equity compensation program.” Sounds innocent sufficient, but asserting such a postponement the day of the decision, throughout a vicious multi-month stock market downturn that devastated nearly all of the small and microcap stock universe, was unhealthy timing or unhealthy luck which didn’t sit nicely with some traders and the stock closed that day at $1.43. I ought to point out that three days prior, IDN changed its CFO. The succession of occasions needed to have some traders questioning how large this accounting situation was, and as a substitute of simply questioning and ready for clarification, they obtained out.

As usually occurs when worry and uncertainty reign, May 12 ended up being the low of the yr, and the stock has been recovering since.

The accounting situation ended up being an especially trivial matter. Per the corporate on the rescheduled convention name,

During the primary quarter of 2021 Intellicheck workers did a cashless train of incentive stock choices. Due to an remoted administrative oversight leading to half from the change in payroll suppliers, the corporate inadvertently didn’t remit funds to taxing authorities associated to the shares surrendered for tax functions.”

Though the stock market was, on the date of the rescheduled Q1 earnings launch and convention name, in the course of a horrible multi-day downdraft, IDN stabilized and has been marching upward steadily since then.

Financials

IDN has a year-over-year income progress of 61.46%.

Their annual income in 2021 was $16.39 Million.

While analysts anticipate IDN’s revenues to be stage in 2022 with 2021, they anticipate a resumption of income progress in 2023.

Earnings have persistently stunned to the upside, whether or not from analysts being conservative or from administration setting expectations adequately. Given this historical past, and the data that we are able to get from the latest earnings stories and calls (detailed in the remainder of this text) I believe we might proceed to see IDN outperforming the analyst estimates.

As of the top of Q1 2022, IDN had simply over $11 Million in money on the stability sheet.

They had a low 18.67 Million shares excellent on the finish of Q1 2022, which was secure with the 18.48 Million shares out on the finish of Q1 in 2021.

Why IDN’s Stock Should Rise Again

Every one of many above components is now not a problem. In addition, new enterprise, stabilization of working bills, service value will increase, ought to all contribute to constructive future developments and a corresponding stock value rise.

I’ll spotlight a few of these constructive tailwinds beneath. But first, some phrases in regards to the financial system and credit score.

Inflationary Pressures and Recession Fears

There is loads of worry on the market a few recession. Typically, recessions do happen when the Fed raises charges at such a fast clip to tame inflation. The Fed has solely so many levers to tug, and none of them contain growing the availability of scarce items (the availability aspect of the equation), in order that they purpose that by pulverizing demand (by elevating rates of interest) they will get inflation down. While this normally works, it’s a blunt instrument and has ripple results within the financial system after all. The query is, if there’s a recession, how gentle will it’s? A recession has traditionally been understood to be two quarters of decline in GDP readings. In 2008, the National Bureau of Economic Research (NBER), official recession choose, determined to outline recessions in another way. The NBER at present defines a recession thusly:

A recession is a big decline in financial exercise unfold throughout the financial system, lasting various months, usually seen in actual GDP, actual revenue, employment, industrial manufacturing, and wholesale-retail gross sales. A recession begins simply after the financial system reaches a peak of exercise and ends because the financial system reaches its trough.”

The gist of it’s that defining a recession is a little more amorphous than usually thought. In any case, it’s potential {that a} recessionary interval will have an effect on many industries and thus the stock costs of firms in these industries.

I believe that IDN has a powerful hand each proper now and in a recessionary interval. Inflationary durations just like the one we’re in now may end up in declining actual revenue and financial savings charges, and higher reliance on bank cards and loans. Recessionary durations likewise can see elevated bank card use as borrowing will increase to fill gaps between family revenue and spending when revenue and employment takes successful.

Here’s a knowledge level to again up the concept inflationary durations like now ought to be good for IDN:

Last week, BofA (BAC) reported that combination credit score and debit card spending climbed 11% from a yr earlier, with bank card spending up 16% and debit card spending rising 6%.

More credit score and debit card use results in extra account functions and ID checks, which equals extra enterprise for IDN.

During recessionary durations, along with customers in search of out extra credit score choices, firms can be trying to save money in all places, and due to this fact IDN’s fraud safety companies ought to proceed to be in excessive demand. When margins are squeezed, firms tighten their belts wherever they will. Fraud is extraordinarily expensive, so IDN ought to profit from purchasers’ margin compression.

Back to the tailwinds shaping up for IDN:

New Business

On the newest quarterly convention name we discovered that IDN is working with yet one more high 12 financial institution (which makes 6 out of the 12 main monetary establishments within the U.S.) This one occurs to be one of many high 5 banks. They are going via the usual safety audit, which IDN says they’re very assured that they are going to cross, identical to they’ve all the others at different financial institution purchasers.

IDN additionally simply introduced a world media firm as a brand new consumer within the account takeover prevention house. So, we see that new enterprise retains coming in and new use-cases for IDN’s know-how and companies proceed to be found.

They are scheduled to start two new pilots with massive banks this quarter (Q3 2022). Per the CEO,

The first is a financial institution holding firm headquartered within the south with virtually 2,800 branches. This financial institution plans to begin with digital new account openings and we’ll then add the financial institution branches. This pilot is predicted to begin in Q3. The second pilot additionally includes a financial institution holding firm and can also be positioned within the south with over 1,400 branches. This financial institution goes to do it within the reverse order. They will begin within the financial institution branches after which transfer to digital account opening. This pilot can also be anticipated to begin in Q3.”

Recently, IDN’s clients have been increasing their use instances for the identification verification service that IDN supplies. One instance talked about within the Q1 2022 name is as follows:

On the retail consumer entrance, I’m happy to report one other necessary growth. Our off value retailer that started off utilizing Intellicheck for parsing to prepopulate functions at their 3000 places and that we simply renewed for a three-year deal, has accomplished the rollout of a further use case at their places. In addition to credit score functions, they’ve now begun utilizing us for no receipt returns. They anticipate that it will double their earlier volumes and early indications present that to be the case.”

I prefer to see the continual circulate of recent enterprise, and the CEO has mentioned that the newest purchasers have been utilizing up their “buckets” of transactions a lot quicker than the purchasers anticipated.

New Partnerships Expanding Reach

IDN has additionally partnered with an organization that enables for authentication of worldwide paperwork, persevering with to broaden their use instances and functions past their North America-centric enterprise.

Here’s some colour from the Q1 2022 name about further use instances and increasing attain:

Financial companies firm quantity seven has prolonged using our companies to Canada for each doc validation and facial recognition. Financial companies firm quantity eight has signed on to validate passports beginning on the finish of June. This is a crucial milestone as monetary companies firm quantity eight turns into our second main consumer to decide to utilizing our know-how options for worldwide paperwork.”

In the Q3 2021 name, the CEO spoke about different partnerships with Point-of-Sale terminal suppliers:

First, we signed an settlement with one of many largest suppliers of stock and point-of-sale methods for the hashish business. Integration is full, and we have now begun joint advertising and marketing efforts concentrating on their clients. We have additionally signed agreements with 2 main point-of-sale system suppliers to the hospitality business to include ID validation into their methods. Collectively, these 2 point-of-sale system suppliers signify over 2,400 bars and eating places. Integration with each is now underway.”

IDN Raising Prices to Customers

In the newest quarterly earnings calls, CEO Bryan Lewis said that the most recent clients are paying greater charges than IDN beforehand charged. When present buyer contracts come up for renewal, greater charges are constructed into these new contracts. Some examples thrown out was a contract growing 16% in yr 2 with no low cost for quantity, and one three-year contract that has a yr two improve of 87% and a yr three improve of 33%.

Companies can’t elevate charges until the service is valued. IDN’s clients should be seeing loads of examples of the worth IDN brings, and enormous will increase corresponding to this can be mirrored within the high line.

Insiders Step Up and Buy

In conditions like these involving small/microcap firms and stock value stumbles, my normal rule is to not purchase until insiders are as nicely, or they’ve a big stake within the firm already. I need to see that the corporate isn’t just a daily paycheck to them, however an funding.

IDN insiders have certainly been making the most of the share value low cost.

CEO Bryan Lewis stepped up simply after the Q1 launch and bought 28,180 shares at round $1.70/share on 6/16 and 6/17 and 1250 extra on 6/21, bringing his complete to 263,216.

Newly employed, seasoned CFO Jeffrey Ishmael confirmed his confidence in IDN by shopping for 30,200 shares at about $1.70 on 6/16 and 6/17 as nicely, then shopping for 5,800 extra on 6/21, 20,013 extra on 6/23 at costs as much as 1.83, and topping off with 4,000 extra on 6/24 at costs as much as $1.95 giving him 60,013 shares.

Director Guy Smith added 4,000 shares, bringing his complete as much as 248,492 shares.

Cautions

While I imagine the danger/reward ratio could be very favorable for IDN, it’s nonetheless a microcap stock and small firms’ share costs will be very risky. IDN doesn’t have a excessive quantity of every day buying and selling, so massive sells or buys can contribute to the volatility. Also, regardless of IDN’s apparent utility to firms throughout a variety of industries, it is potential that if a recessionary interval comes and results in “belt-tightening”, that firms might be short-sighted and in the reduction of on IDN’s companies too. I believe this might be made up for via elevated utilization coming from customers making use of for extra credit score throughout such a interval. In addition, IDN’s purchasers embrace some large international monetary establishments, and implementation timelines generally slip. The larger the corporate, the extra slippery the timeline, it appears. So, I attempt to maintain that in thoughts when anticipating an organization turnaround.

Conclusion

Sometimes the Market overreacts and good firms’ stock costs get pummeled. This is my favourite time to purchase a stock as the danger/reward ratio turns into extraordinarily favorable. Did some delays in implementations, international uncertainties, an enormous stock market rout and accounting snafus journey up IDN? Absolutely. Is IDN value greater than round $2.60 per share, equaling a market cap of solely about $50 Million? Absolutely, in my view. Far extra. IDN’s gross margins are a terrific 90.7%, and when all the brand new buyer rollouts, expanded makes use of and repair value will increase talked about above hit the highest line, earnings ought to circulate strongly to the underside line.

After all, IDN has been flirting with web earnings within the final couple years, and I believe their actions are bringing them very near constant profitability. On the This autumn name, the CFO estimated that working bills would stage out at $5 million per quarter. This is after some heavy investments IDN just lately made of their know-how platform, advertising and marketing and gross sales workers. In Q1 working bills have been within the ballpark of estimates at $4.5 million.

I’ll conclude with some stunning information talked about by IDN within the Q1 2022 convention name: In the final yr alone versus the earlier yr, account fraud in checking and financial savings accounts elevated 73% to $7.8 billion. Account takeover losses soared 90% to over $11 billion. Consumer legal responsibility rose 672%, with a median of $1,551 loss per sufferer. It’s abundantly clear that lenders, banks and retailers must get a deal with on these incidents of id fraud as they lose each money and clients. IDN has been widening its advertising and marketing attain to tell potential purchasers about IDN’s less-than-20-millisecond answer to stopping this out-of-control monetary drain. It’s a win-win answer for any enterprise, in any form of financial local weather.