Good day, ladies and gentlemen, and welcome to Red Violet's Third Quarter 2020 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 2020 financial results. With me today is Derek Dubner, our Chairman and Chief Executive Officer; and 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 invite 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 risk 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 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 Chairman and Chief Executive Officer, Derek Dubner.

Thanks, Camilo, and good afternoon to those joining us today to discuss our third quarter 2020 results. We sincerely hope that you and your loved ones are safe and healthy during this time. We are pleased to report today another strong quarter during an incredibly challenging time. These strong results demonstrate the applicability of our technology and solutions, across diverse markets, and industries as well as the need of organizations to integrate our solutions to enable their workflow and better data-driven decisioning. The momentum we experienced exiting the second quarter continued throughout the third quarter. Generating a 31% sequential increase in revenue to $9.3 million, and a 130% sequential increase in adjusted EBITDA to a record $2.1 million. Further, the third quarter proved to be one of our best quarters to date, with record platform revenue of $9 million, driving record adjusted gross margin of 71%. Given the current state of the pandemic, I would like to take a moment to reflect on the path we have traveled since the start of the crisis. In the second quarter, businesses faced unprecedented challenges to their survival as a result of pandemic related events, including a government mandated stay-at-home order, which created significant uncertainty. These impacts caused many customers to retract. Causing certain parts of our business such as our collections vertical to experience reduced transactional volume. As a reminder, we cited in our last earnings call that in the face of these challenges, we maintained our long-term view and implemented a multipronged strategy including among other things, assisting our customers, focusing on the health and well-being of our team members, gaining market share and the continued advancement of our technology and solutions. At the onset of the crisis, we committed to what we termed our partnership approach to assisting our customers…

Thank you Derek, and good afternoon. During what has been a very unique and challenging time, I could not be more pleased with the productivity, professionalism and focus of the entire Red Violet team. Combine that with the strength and resilience our business model continues to show and the result was a great third quarter. As customers adapted and became more efficient transacting in the COVID environment, our transaction volume returned to pre-COVID levels by the end of the third quarter. With the exception of collection customer volume, we saw significant improvement across the markets we serve. These improvements were evident in our growth revenue from existing customers that grew at a record pace in both percentage and dollars both sequentially and year-over-year. We continue to see that as customers adopt our solutions their business relies and thrive on our platform. As a result, the third quarter proved to be one of our best quarter’s to-date with record platform revenue that was leveraged down the P&L leading to record adjusted gross margin of 71% and record adjusted EBITDA of $2.1 million. We remain confident in our ability to navigate these challenging times and remain focused on leveraging opportunities. With that I'm excited to discuss our third quarter results. For clarity, all the comparisons I will discuss today will be against the third quarter of 2019 unless noted otherwise. Total revenue was $9.3 million a 12% increase over prior year. Platform revenue grew 27% to $9 million representing 97% of our total revenue. With the exception of our collection vertical and specifically within our services revenue, we saw a nice recovery in transaction volume across the board. Including some pent-up demand as businesses adapted and became more efficient operating in the COVID environment. With 97% of revenue coming from platform, we…

Thank you. [Operator Instructions] And our first question will come from Pamela Carter from Carter Management [ph].

Hi. Yes. So it looks like you had some really strong growth in revenue from existing customers, as well as decent growth from existing customer base revenue. However, the revenue from new customers was down over prior year. Can you explain why that is? And if there is any concern there?

Yes. Hi, Pamela, thank you for the question. This is Dan. Yes. So as I discussed in my commentary earlier our gross revenue from existing customers was very strong both sequentially and over prior year. This is a healthy sign for the business, as it tells us customers who have been with us longer than six months continue to grow their volumes. It tells us that our customers continue to rely on our solutions both in their everyday workflow and as a means to help drive their business as they get back to business. As for the new customer revenue, we are very pleased with how the numbers are trending. What we're really seeing in this metric for the third quarter is really a result of the second quarter COVID Trough, where we saw fewer billable customers added resulting in less revenue generated from new customers in the third quarter. Looking at the onboarding of over 380 billable customers in the third quarter, which is at a higher onboarding rate than our 2019 average, it really tells the story and provide a very healthy leading indicator of future revenue. So we continue to see customers who adopt our solutions grow and scale and volume over time combining that with our low attrition rates and where we are very confident in the overall makeup of our revenue. And so we're confident today in how and where that revenue is growing and how it is trending.

Thank you.

Thanks.

Thank you. [Operator Instructions] And our next question comes from Scott Billeadeau from Walrus Partners. Your line is open.

Hi, guys. Good quarter. Thanks for taking my question. It's just kind of more of a technical one. In terms of your internalized software and depreciation. And kind of where are you that grew significantly in terms of what you're capitalizing kind of where is the run rate to expect? And maybe give us a little update on what the trend of that will be. Thanks.

Yes sure. So the last few years, we've been running about $6 million a year in capitalization of internally developed software. We've added additional resources and product development. But over time, some of that development goes towards kind of the maintaining if you will the system and so, you don't really capitalize that. So from a trending indicator standpoint, you'll probably see over the next year or two very similar capitalization of about $6 million. But as a result of kind of overall revenue and overall time, it's actually decreasing. But on a dollar-for-dollar basis, it will trend around $6 million yearly over the next probably one or two years.

Yes. So you'll start to get some -- you -- with a 40% increase you're kind of at where the number will be. So incrementally from here, you'll be able to leverage that number?

Correct. That is the unique fixed cost structure if you will of the model that provides us so much leverage.

Got it. Okay. That’s all I had guys. Appreciate it. Thanks. Good quarter.

Great. Thank you.

Thanks, Scott.

Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Derek Dubner for any closing remarks.

Thank you. Hopefully as you can see from our results today and the progress we made this year, notwithstanding this rather unique environment that we're all in that we've built leading-edge technology and products and solutions that are essential to the success of many organizations. With the secular tailwind of the digital transformation in place for many years to come, we expect that organizations are going to increasingly demand efficient solutions and there will be an increase in demand for fraud prevention, identity verification, general risk mitigation and consumer modeling. We have and continue to position ourselves to be the go-to provider for these solutions. I'm very optimistic about our future and I look forward to updating you on our progress on our next quarterly call. I want to thank our team members again, as well as our customers and those on the call today supporting us. It's much appreciated. Thank you and have a good afternoon.

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