Good day, ladies and gentlemen, and welcome to Red Violet's Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Camilo Ramirez, Director of Finance and Investor Relations. Please go ahead.

Good afternoon, and welcome. Thank you for joining us today to discuss our third quarter 2019 financial results. With me today is Derek Dubner, our Chief Executive Officer; Dan MacLachlan, our Chief Financial Officer. Our call today will begin with comments from Derek and Dan, followed by a question-and-answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investors page on our website, www.redviolet.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call are forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. The company undertakes no obligation to update the information provided on this call. For a discussion of risks and uncertainties associated with Red Violet's business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the most recent annual report on Form 10-K and the subsequent 10-Qs. During the call, we may present certain non-GAAP financial information relating to adjusted gross profit, adjusted gross margin and adjusted EBITDA. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measure are provided in the third quarter earnings press release issued earlier today. In addition, certain supplemental metrics that are not necessarily derived from any underlying financial statement amounts may be discussed and these metrics and their definitions can also be found in the earnings press release issued earlier today. With that, I am pleased to introduce Red Violet's, Chief Executive Officer, Derek Dubner.

Thank you, Camilo, and good afternoon to those joining us today to discuss our third quarter financial results. We are excited to be initiating our quarterly conference calls and especially pleased to do so by reporting a very strong third quarter. We saw record revenue of $8.3 million, an 89% increase over third quarter 2018. Record adjusted gross margin of 62%, 13 percentage points higher than prior year and record adjusted EBITDA of $1.1 million, resulting in adjusted EBITDA margin of 14%. We experienced continued strong broad-based customer demand of our products and solutions across the enterprise, driven by our cloud-based technology platform. Within idiCORE, our flagship investigative solution, we are seeing increasing customer adoption and at a higher customer tier, as evidenced by our increasing average revenue per customer. FOREWARN, our real-time identity verification and risk mitigation product tailored for the real estate industry, while it makes up only 5% of our quarterly revenue today, we continue to experience strong month-over-month revenue and user growth as real estate associations across the country are realizing the need for this essential realtor safety tool and adopting the solution for their member base. We see significant opportunity to leverage the FOREWARN app and its growing user base to address not only risk mitigation related to face-to-face interaction of real estate agents with unknown prospects, but to also deliver marketing products and services to capture a portion of the estimated $30-plus billion real estate advertising market. Additionally, we expect to apply this model to other industries in the future to address similar identity and risk challenges encountered by face-to-face engagement. As we are kicking off conference calls starting today, many of you may be new to our story. As such, I'd like to take a brief step back to discuss a bit about…

Thank you, Derek, and good afternoon. We're extremely excited to report a record-setting third quarter. We've had our heads down, intently focused on driving the fundamentals of the business allowing us to put up 7 consecutive quarters of strong revenue growth and margin expansion, and now significantly increasing adjusted EBITDA. Exiting the second quarter of 2019, our balance sheet was well positioned to achieve positive free cash flow with us continuing to run the business methodically. However, as Derek discussed earlier, to meet demand and accelerate growth, we raised $7.5 million in growth capital for the strategic deployment through investment in sales, our technology teams and marketing personnel. Notwithstanding the additional investment, we expect to achieve positive free cash flow in the first quarter of 2020. Moving on to our third quarter results. Revenues were $8.3 million, an 89% increase over third quarter 2018, driven by strong broad-based revenue growth from both new customer adoption and existing customer expansion. Adjusted gross profit increased 141% to $5.1 million. Adjusted gross margin increased to 62% from 49% in prior year, and adjusted EBITDA was $1.1 million compared to a negative $0.8 million in prior year. Because our cost of revenue is relatively fixed, we expect to see strong margin expansion continue in the fourth quarter and throughout 2020, just as we have over the last 7 consecutive quarters. Resulting from the P&L's operating leverage, we expect the continued margin expansion will drive profitability in the form of adjusted EBITDA growth, positive free cash flow and ultimately, positive earnings. Continuing to the details of our P&L. As mentioned, revenues were $8.3 million for the third quarter, we added over 400 new customers to idiCORE and over 4,100 users to FOREWARN in the quarter. We are encouraged about the growth we are seeing not…

[Operator Instructions] Your first question comes from the line of Ted Ketterer from TK Associates. please proceed.

I have a couple of questions. Just -- and I've followed you for some time. Could you tell me the total number of customers you have for both FOREWARN and idiCORE? And in idiCORE, rough guess as how many were in the Fortune 1000? And then I have one other question, two other questions?

Sure. From a billable customer standpoint, idiCORE at the close of the third quarter, we had 4,781 customers, and related to FOREWARN at the quarter close, we had 23,853 users. Today, I can't probably give you a breakdown of how much is included in the Fortune 1000, but what I can say is we have a broad base of customers in a number of industries, many of which are included in the Fortune 500, as well as Fortune 1000 and up. So a very broad base of customers across a number of industries.

That's really what excites us about the businesses, all the key metrics are pointing in the right direction. We're executing. And there's just a lot of green pasture ahead of us in getting those big customers. And so that's what we talk about. We're seeing the type of -- the customer tier increasing in the customer base.

Yes. Can you talk about or give an example of a customer or the API, where you're the engine, but it's their website, so to speak? And what type of applications and how big that market is?

Sure, Ted. An example of that would be where we work with a party in identity verification. So they may have many, many customers. They may have large customers. They may have the Aetnas of the world, the P&C financials or others where they're doing some type of identity authentication, getting into either their app or their websites. Where we would create an integration between us, an API, which is a computer-to-computer connection, for those unaware. And really, the ability to query us or pull data from us, where we can give insights into their products. So that's what I was talking about, where we integrate into their product, make their product better, enable them to grow their businesses. So we're on the back end, so to speak, of -- or powering those solutions.

Okay. And I guess my last question is looking ahead, and at a $50 million run rate, what would your gross margin be?

Look. So the great thing about our business, as we talked about, our cost of revenues are relatively fixed. And at this point, every dollar of revenue we're bringing in is nearly 100% contribution margin. So at maturity, when we've done this in the past with the last 2 iterations, the gross margins are upwards of 80%, 90% gross margin. So at a $50 million run rate, we're going to start getting close to those numbers. As you can see, where we're at today, we clipped 62% from a gross margin perspective and have grown incrementally over the last several quarters. So we're excited about continuing to drive revenue growth because again, based on the model, the profitability flows right through to the bottom line.

Okay. And one last question. Based on your current rate of growth, when would you expect to hit that $50 million run rate?

So at this time, we're not providing any forward-looking guidance. But I think just extrapolating from how we've grown over the last several quarters, I think we're going to be approaching that very quickly.

[Operator Instructions] I am showing no further questions at this time. I would now like to turn the conference back to Mr. Derek Dubner.

Thank you very much. Again, thank you all for joining us today. We were very excited with these numbers out, and we're very happy with the business. Very proud of the execution of the Red Violet team just delivering incredible results all year. And it's our goal to keep doing that and our goal to tell the story and to be more visible out there. So again, thank you, and we look forward to updating you on our progress on our next quarterly call. Good afternoon.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.