Where Food Comes From Inc
NASDAQ:WFCF
Earnings Call Analysis
Summary
Q3-2023
Where Food Comes From reported a modest 4% decline in third-quarter revenue to $7 million, and a 2% decrease to $18.4 million over nine months, due to shrinking herd sizes impacting tag sales and hardware revenue. Despite this, the company saw a 4% increase in its core verification and certification segment for the quarter, reaching $5.4 million. The drop in total revenue was cushioned by solid profitability and substantial share buybacks, returning approximately $3 million to shareholders this year. Lower hardware revenue was the main drag on the balance sheet, contracting the gross profit in Q3 to $2.9 million. The company also announced the acquisition of the Smart Catch program, deepening its strategic focus and potentially expanding its market scope.
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Greetings, and welcome to the Where Food Comes From Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
At this time, I would like to turn the call over to Jay Pfeiffer of Investor Relations. You may begin.
Good morning, and welcome to the Where Food Comes From 2023 Third Quarter Earnings Call. Joining me on the call today are CEO, John Saunders; President, Leann Saunders; and Chief Financial Officer, Dannette Henning. During this call, we'll make forward-looking statements based on current expectations, estimates and projections that are subject to risk. Statements about current and future financial performance, growth strategy, customers, business opportunities, market acceptance of our products and services and potential acquisitions are forward-looking statements. Listeners should not place undue reliance on these statements as there are many factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our publicly filed documents as well as our news releases and website for more information.
Today, we'll also discuss adjusted EBITDA, a non-GAAP financial measure provided as a complement to GAAP results. Please refer to today's earnings release for important disclosures regarding non-GAAP measures.
I'll now turn the call over to John Saunders.
Good morning, and thanks for joining the call today. As highlighted in our third quarter earnings release this morning, our core verification and certification revenue increased for both the third quarter and 9-month period despite continuing headwinds primarily associated with smaller herd sizes related to the cyclical cattle trends. These increases were offset by lower hardware revenue, which resulted in a decline in total revenue for both periods. You might remember that on our last call in August, I mentioned that headwinds were likely to persist for a while, so slightly lower overall revenue in Q3 was not a surprise. Nevertheless, we continue to generate a lot of cash and deliver solid profitability in the quarter and year-to-date period. We also returned $855,000 in value to stockholders in the form of stock buybacks in the quarter with year-to-date buybacks totaling nearly $3 million. So in the context of challenges we've been facing on multiple fronts in recent quarters, we're pretty pleased with our overall performance and, as evidenced by our continued stock buybacks, confident in our future prospects.
Getting back to our verification and certification business, which is by far our largest revenue segment, we achieved 4% growth in the quarter and 8% growth through the first 9 months of 2023. Within this segment, beef verification is the largest single component of revenue. As herd sizes have shrunk over the past year or so due to a combination of drought impact and normal cattle cycles, our tag sales have declined as well. So as I said, the initial audit and tagging process is the first step in the revenue continuum that follows each animal along its path to the consumer. So again, the current environment of smaller herd sizes, there are fewer animals in the pipeline. And that, along with lower tag sales, is a big factor on why overall revenue was slightly lower year-to-date.
The good news is we are steadily adding more cattle ranchers customers and our audit activity is at an all-time high. We have customer retention rate well over 90% that we believe is unmatched in our industry. In addition, because we now audit to dozens of standards, our revenue from noncattle verification sources is also on the rise. This is something I'd like to highlight from time to time because the size and diversity of our services mix is really what sets us apart. We are unique in the depth and breadth of our service base, and that gives us an enormous competitive advantage that would be extremely hard, if not impossible, to duplicate.
Now for some more detail on our Q3 results. Total revenue in the third quarter declined 4% to $7 million from $7.3 million in the same quarter last year for reasons I've already detailed. As previously noted, our flagship verification and certification revenue was up 4% in the quarter to $5.4 million from $5.2 million. That increase was offset by product revenue that declined by $367,000 to $1.2 million from $1.6 million. Consulting revenue was $76,000 lower at $431,000.
Gross profit in the third quarter decreased to $2.9 million from $3.2 million. SG&A expense was 9% lower year-over-year at $1.9 million versus $2.1 million in the same quarter last year. Net income was $723,000 or $0.13 per diluted share compared to net income of $785,000 or $0.13 per diluted share in Q3 a year ago. Adjusted EBITDA in the third quarter was down slightly at $1.2 million from $1.3 million.
Turning to the 9-month results. Total revenue did decrease 2% to $18.4 million from $18.8 million in the same period last year. In addition to the impact of smaller herd sizes and lower tag sales, this decline included the effect of a $0.9 million one-time consulting contract we booked in the first quarter of 2022 that skewed our year-over-year comparisons.
Revenue mix through 9 months included verification and certification services, up 8% to $13.9 million from $12.9 million; product revenue down 10% to $3.1 million from $3.5 million; consulting revenue of $1.3 million compared to $2.4 million in the prior year period when we booked the aforementioned onetime contract. Gross profit through 9 months was $7.5 million versus $7.7 million in the year ago period. SG&A expense was flat at $5.7 million. Net income through 9 months was $1.4 million or $0.24 per diluted share compared to net income of $1.5 million or $0.25 per diluted share in the same period last year.
So I'll reiterate, we're pleased with our overall profitability in light of some of the headwinds we've been dealing with. Adjusted EBITDA through 9 months was $2.5 million versus $2.8 million a year ago. Our cash and cash equivalents balance at September 30, 2023, declined to $3.8 million from $4.4 million in 2022 year-end due primarily to our investment in share repurchases. Further to that subject, on a year-to-date basis, we bought back more than $2.9 million of stock, and we reduced our diluted share count by 432,000 to under 5.7 million shares.
Now I'd like to switch gears and provide an update on our Smart Catch program, which has been an important strategic focus for us this year. Last week, we announced the acquisition of the Smart Catch program with the intention of accelerating the rollout and expanding the scope of the program. To recap, Smart Catch was originally a program of the James Beard Foundation designed to promote transparency and sustainability in seafood at the restaurant level. Specifically, it is designed to link chefs to place-based seafood sustainability initiatives. Since inception, the program has been administered by our Postelsia division and going forward, Postelsia will take the lead in driving our growth plan.
We announced the acquisition a couple of weeks ago in conjunction with our sponsorship of the LA Chef Conference, where we hosted a Sustainability Summit to discuss global sustainability trends. The news was well received by hundreds of chefs in attendance who, like the other players in the food business, are paying a lot of attention to sustainability in response to broad interest by food consumers at both the restaurant and retail levels.
One thing we heard over and over in our discussions with chefs and other culinary influencers was the concept of evolving from consumers to contributors. In other words, there is a growing desire in the chef community to move beyond simply consuming food to actively participating in practices that contribute to higher levels of sustainability. We see Smart Catch as being an important part of that process. It reinforces our mission of advocating for high food standards and facilitating the accessibility of responsible seafood choices for chefs and diners alike.
We also see tremendous potential for expansion into other areas of the seafood supply chain, including food service institutions, retailers, seafood distributors, suppliers and producers around the world. Although the current focus is on seafood, we as well as other chef community are interested in expanding the program to other products.
So overall, the LA Chef Conference was a great kickoff for us in our new role and with dozens of similar conferences around the world every year, we see these types of events as excellent opportunities to market the program and grow our customer base.
So with that, I'll thank you again for joining the call today, and open the call to questions. Operator?
[Operator Instructions] Our first questions come from the line of Raphi Savitz with RYS Advisors.
John, I think a few calls back, you had referenced potential regulations that could drive increased demand for your tags. Just wanted to see where that stood and what your sort of outlook in there.
Thanks, Raphi, for the question. There hasn't been any significant movement other than the closure of a comment period that the USDA put out to the public for comment and those results, I think, are being compiled. We hope to see something early next year in regard to the results of that, but they haven't published anything yet.
Got it. And then maybe big picture. You've been with this business and you've built this business for a number of years at this point. I guess, what are you -- as you look to the future, what are you most excited about?
We -- good question, and it goes back and forth between things that are requiring attention immediately. I will tell you over the last 12 months, what we've seen is an increased focus on sustainability. And I think where we're seeing the most interest is what's called Level 3 supply chain and valuations related to the sustainability. And specifically -- most specifically, the carbon footprint. I think that's taking most of the headlines these days. So we find ourselves right at the middle of that because we are the ones that are in charge of keeping track where the food comes from. So it's a core component and it's foundational to most of the other attributes, but specifically the carbon footprint of an animal has to start when that animal is born.
So full traceability is a requirement of being able to manage whatever offsets or insets are being associated with that supply chain. And we find ourselves in the middle of a number of different pilot projects and programs that are under the USDA's Climate-Smart program, sheerly because we are the ones that are maintaining the traceability of the product.
Got it. And any real change in competitive dynamics within auditing all of your tags?
Not really to speak of. I do think I spoke on our last call about the struggles we're dealing with in finding talent and finding -- just keeping our auditor staff. We find that's the #1 limiting factor for us right now is just being able to identify qualified individuals that are able to handle the audits that we're looking for.
Got it. And just one last one, if I can. Happy to see that you've been buying back stock this year. How do you think about your kind of capital allocation at this point?
Yes. As I mentioned many times, we are constantly looking for any type of M&A opportunity. That does bode well with what we're doing. And the Smart Catch program was one of those opportunities, so investing quite a bit there. In lieu of those opportunities, we're going to continue to look at our stock very, very aggressively and to continue to buy back in lieu of having other opportunities. But we still are looking at those, Raphi, so don't think that we've moved on from that. It's just allocating the resources when we can and getting the best bang for our buck.
Our next questions come from the line of Chris Brown with Oake Financial.
Raphi actually took a couple of my questions, but one follow-up was on the ADT program. I know it's kind of taking a while and you -- from the beginning, you said it was going to take a while for the changes to go through. Do you still see it as a kind of potential tailwind? Has anything changed materially in what they're considering that you know of?
Yes. We continue to work with industry groups, including NCBA and CattleTrace, specifically, the 2 groups that are involved with traceability and related to ADT. In fact, next month, I'll be traveling to an industry meeting in Kansas that's going to be focused on that. And then most of the conferences that we do are early in the year and the focus specifically of the National Cattleman's Association is traceability, and we're going to be sponsoring an event there. So we're looking forward to having probably several hundred producers there in attendance. A lot of them are decision makers, not only for their operations, but also potentially in the states and the regions that they live. So again, we've always been really focused on making sure that there's a value opportunity and a return on investment for producers to engage. So that continues to be the case. So we're pleased to continue to see momentum, but we also want to make sure that as producers are engaging, that there's a way for the sustainability of their operation to continue as a result of that, which, unfortunately, over time, can be fairly unique patients. And that's what we're doing.
We have reached the end of our question-and-answer session. I would now like to turn the floor back over to John Saunders for any closing remarks.
Once again, thank you for the time and great questions. And we look talk -- look forward to talking to you after the first of the year. Take care.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.