Inuvo, Inc.
Q3 2019 Earnings Call Transcript

Published: 15 Nov 2019

[Operator:]

Good day, and welcome to the Inuvo 2019 Third Quarter Financial Results Conference Call. Today’s conference is being recorded.At this time, I would like to turn the conference over to Valter Pinto, Managing Director at KCSA. Please go ahead, sir.

[Valter Pinto:]

Thank you, operator, and good afternoon. I’d like to thank everyone for joining us today for the Inuvo third quarter 2019 shareholder update conference call. Today, Inuvo’s Chief Executive Officer, Richard Howe; and Chief Financial Officer, Wally Ruiz, will be your presenters on the call.Before we begin, I’m going to review the company’s safe harbor statement. Statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events, and as such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to Inuvo are, as such, a forward-looking statement. Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause actual results to differ from those anticipated by Inuvo at this time. In addition, other risks are more fully described in Inuvo’s public filings with the U.S. Securities and Exchange Commission which can be reviewed at sec.gov.With that, I’d now like to turn the call over to CEO, Richard Howe.

[Richard Howe:]

Thank you, Valter, and thanks everyone for joining us today. For the three months ended September 30, 2019, we delivered $13.8 million in revenue compared to $14 million and $16.8 million for the three months ended June 30, 2019 and September 30, 2018, respectively. For the nine months ended September 30, 2019, we reported revenue of $43.3 million compared to $56.3 million for the nine months ended September 30, 2018. Overall gross margins net of traffic acquisition costs was approximately 64% for the third quarter. As we have discussed in the past, traffic acquisition costs are reported in our operating expenses.Lower year-over-year revenues in the nine months and third quarter come from declines in the ValidClick revenue streams and from attrition associated with a business line we began deemphasizing in 2018. For additional context, this ladder business line contributed approximately $11.3 million in 2017, $5.8 million in 2018 and is expected to produce $2.4 million in 2019. We will talk more about the ValidClick business later in the script.In the quarter, the ValidClick revenue streams delivered $11.2 million and the IntentKey delivered $2.6 million. The IntentKey was in line with our expectations. As Wally will discuss in more detail later, we did have a positive net income of roughly $800,000 in the quarter or approximately $0.02 per share. We had a negative adjusted EBITDA of approximately $769,000. Net income in the quarter was positively impacted by other income associated with the termination of the merger in June of 2019.Revenue within the quarter was $4 million in July, $4.7 million in August and $5.1 million in September. Unaudited October revenue looks to be coming in around $6 million. As we reiterated on our Q2 conference call, our ValidClick business remains an important component in the overall business strategy. We continue to see opportunities within these revenue streams with an overarching objective to manage towards stable revenue sources that can deliver roughly $50 million annually with improving gross margins.As mentioned earlier, the ValidClick revenue streams generated roughly $11.2 million in the third quarter, which was down from approximately $12 million in the second quarter. The primary reason for the difference between the quarters was the elimination of lower quality revenue streams. You will recall that our partners effectively purchased leads from the ValidClick system in real-time. Those leads are scored for quality by our partners; the better the quality, the better the price and margin.The publishing component of this business, principally the ALOT Web properties delivered approximately $320,000 of revenue in the quarter. This publishing asset has become less strategic as we have shifted resources towards the IntentKey. And as a result, we are exploring the potential sale of this component of our business.Our major supplier relationships within ValidClick remain intact and we do not presently see material risks associated with our contracts, one of which renews in late 2020 and another in early 2021, a third contract is in negotiation presently. The ValidClick business did approximately $3.2 million, $3.7 million and $4.3 million in July, August and September, respectively. Unaudited October revenue came in around $5.2 million.We had a strong quarter, the IntentKey, with $2.6 million of revenue, up 30%, sequentially. Unaudited October revenue is roughly $850,000 which is in line with the roughly $856,000 monthly run rate average we had in the third quarter.As we have discussed previously, our primary mission within this business is the hiring of sales professionals. Our current revenue model for this business calls for the hiring of 10 such sales professionals between now and June, 2020. We hired one in both September and October and expect to hire at least one more before the end of the year. The faster we find qualified candidates, the faster their efforts contribute to 2020 revenue plan.Win rates on IntentKey business opportunities has risen from 44% in the first quarter of 2019 to 67% in the third quarter of 2019. Win rates can vary materially based on timing, quality of the sales, representatives, the sophistication of the buyer and the competitive landscape. With that said, these win rates on the IntentKey sales have been increasing throughout the year. Our typical sales cycle involves the submission of an RFP. As we hire more salespeople, we should increase the number of RFP submission. If win rates remain within current ranges, we should be able to scale as we have predicted.Among the many deals signed this quarter, we added notable clients that include a car manufacturer, our second insurance company, a well known hotel chain, a State Department of Transportation, another State Department of Tourism, and a very well known nonprofit. Our client base in 2019 has been growing at roughly 20% month-over-month and our performance results has averaged in excess of 30% above our client’s expectations.Gross margins in the business have continued to increase. Through October, gross margins have averaged 23%. Between July and October margins have averaged 28%. Within our account base, we have accounts with margins as low as 10% and accounts with margins as high as 60%. Typically, account margins start low and move upwards as the IntentKey artificial intelligence begins to learn and improve.The current margin trajectory is growing. And in addition to the typical margin growth associated with clients’ maturity, we expect the recently announced plan to upgrade the IntentKey infrastructure through the IntentCloud to also improve margins through a reduction in processing costs and faster execution on media opportunities for our clients.I would now like to turn the call over to Wally for a more detailed assessment of our financial performance within the quarter.

[Wally Ruiz:]

Thank you, Rich. Good afternoon, everyone. I’ll now recap the financial results of the third quarter. As Rich mentioned, Inuvo reported revenue of $13.8 million for the quarter that ended September 30, 2019 and $43.3 million for the nine months ended at September 30 of this year. This compares with $16.8 million reported in the third quarter of last year and $56.3 million reported in the first nine months of last year.The revenue decrease of approximately $3 million in the third quarter and $13 million in the first nine months of this year is primarily due to the ValidClick business, where monetization was lower due to our efforts to reduce the number of low quality ads. Additionally, we made a decision last year to reduce emphasis on the supply side of the business in favor of focusing in 10 key resources on the demand or advertiser side, where the IntentKey data platform solution has a considerable market advantage. This change resulted in reduction of revenue in the current year third quarter of $446,000 compare – when comparing it to the same quarter last year. And it is a reduction of $2.9 million in the first nine months of the current year when compared to the same first nine months of last year.As rich mentioned, the overall revenue from the IntentKey business was approximately $2.6 million or 61.6% higher in the third quarter of 2019 compared to the same period last year, partially offsetting the lower ValidClick revenue. Following the integration with the AppNexus platform in the first quarter of this year, the IntentKey has continued to deliver strong results for clients with a sequential quarterly growth rate in 2019 that is expected to be about 30%.Gross margins increased in the third quarter to 64% compared to 63% in the same quarter last year, due primarily to revenue mix, particularly due to the higher ValidClick display revenue, where we recorded its costs and marketing and operating expenses.Overall, operating expenses are comprised of marketing costs, compensation expense and selling, general and administrative expense. Operating expenses were $742,000 lower in the third quarter of 2019 compared to the prior year. It was $11.2 million of operating expenses in the third quarter of this year versus $12 million in the same quarter last year.The marketing costs are primarily traffic acquisition costs associated with ValidClick. Marketing costs were 16% lower in the third quarter this year compared to the prior year due to lower ValidClick revenue. ValidClick revenue is generated predominantly from ads served to websites and therefore has a small cost of revenue associated with it as the expense is mostly marketing or traffic acquisition costs.Compensation expense was 21% higher in the third quarter this year compared to the prior year despite a lower payroll. And this is due to stock-based compensation expense that accrued from modifications to outstanding restricted stock grants and to a reversal of a recruit incentive pay in last year’s third quarter. The headcount at the end of September, both full and part time was 58 compared to 65 employees at the same time last year at the end of September.Selling, general and administrative expense increased 12% in the third quarter this year compared to the prior year, due primarily to expenses associated with the July equity raise and the settlement of a class action suit arising from the terminated merger agreement.Interest expense was $144,000 in the third quarter of this year compared to $101,000 in the same quarter last year, and that was due primarily to higher borrowing rates. We had other income of $3.3 million in the third quarter of this year. With the termination of the merger in June, the merger agreement stipulated that we were entitled to a termination fee of $2.8 million. The termination fee was settled by canceling $1.1 million note outstanding, including interest that was due by November 2021. Additionally, the assets and customers of a business initially valued at $1.6 million was transferred to Inuvo. And finally we were paid 50% of the $250,000 settlement of a class action suit that arose from the merger or the terminated merger.We subsequently had a independent third-party value the transferred business, which was – and the third-party determined it to be $2.6 million. The value greater than that determined in the merger termination fee was credited to other income. Other income was reduced by $460,000 due to a derivative liability that arose from the convertible feature of notes that we issued in March of this year. We reported a net income of $788,000 or $0.02 per diluted share.Our balance sheet at September 30 had cash and cash equivalents of $714,000 and outstanding bank debt of $2.4 million and notes of $1.5 million. In July, we sold 15.8 million shares of our common stock raising $4.7 million before expenses. In this month, November, two of the convertible note holders agreed to convert $765,000 to our common stock, that’s 53% of all the convertible notes outstanding. Also in November, $250,000 of the notes payable outstanding to directors and officers was paid.As we begin hiring additional sales personnel and they proceed through their ramp up period, we expect to burn an average of $100,000 per month starting in January and until the third quarter of 2020 when the gross margins of new IntentKey revenue begin to outpace the lag between sales costs and productivity. We expect ValidClick revenue to be stable at current levels on an annualized basis. We believe the capital raised along with the available credit lines will provide us with adequate resources to execute our plans in 2020.With that, I’d like to return the call to Rich for closing remarks.

[Richard Howe:]

Thanks, Wally. As mentioned earlier, unaudited October ValidClick and IntentKey revenue streams were $5.2 million and $850,000, respectively. If we assume a flat revenue pattern for the remainder of the year, we should be within the vicinity of $18 million in the fourth quarter or roughly 30% growth sequentially off of the third quarter. We remain focused on our plan to grow the business and we have strategies in play to allow us to fund that growth, until roughly Q3 2020 when we begin generating meaningful cash flow once again. The macro level trends within media, marketing and data continue to move in our favor, as third-party data providers come under increasing pressure and as agencies and brand struggle with the complexities associated with direct-to-consumer marketing results online.With that, I’d like to turn the call over to the operator for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question today from Eric Martinuzzi with Lake Street.

[Eric Martinuzzi:]

Thanks. I had a question regarding the guidance. I just want to square what you said on September 25 with what you’re saying here on November 14. Specifically, I guess if I back into your – the color that you gave us there for the month of October, it looks like IntentKey is going to be around $2.6 million, which would get us to around $8.6 million for 2019. That $8.6 million for 2019 is less than the $9.4 million that you talked about IntentKey during – on September 25. So could you please address that?

[Richard Howe:]

Yes, that’s correct. And there’s still upside opportunity for us, but we did feel like we should probably just move that guidance down a little bit, again, keeping in mind that the growth within that business has been outstanding. So it could still do better than what we’re suggesting right now because this time of year is uncertain. And there’s a lot of clients we now have and they could decide here in the next week or two to spend more budgets, and we’re currently seeing them committing to spend. But with that being said, look, we’re still exceptionally excited and pleased with the results of that business. And like I said in my notes…

[Eric Martinuzzi:]

The different trajectory of the growth line assuming – in other words, did you lose an insertion order or lose an advertiser between – over the last seven weeks? Or was it really just seasonality that you have a better feel for now?

[Richard Howe:]

No. The primary reason why we moved it down a little bit, and again, I can’t reemphasize the fact that the revenues could actually be higher on that business than what we’re suggesting on this call, but we wanted to set the right baseline for people. The primary reason is we have a client who has pushed their budget to the first quarter. They had something going awry with their product marketing efforts for the product and they decided to push that budget to Q1.

[Eric Martinuzzi:]

Okay. All right. I appreciate that extra level of detail. On the sales hiring side, when we came out of the June quarter, you talked about adding 14 IntentKey reps through the middle of 2020. In your prepared remarks today you talked about adding 10 in that by the same deadline. Did you add four reps here since the last quarter?

[Richard Howe:]

No.

[Eric Martinuzzi:]

Have you reduced the number of reps? So you’ve reduced the targeted number of reps so that the equivalent number of that 14 would be 12, or would be 10 or would it be what?

[Richard Howe:]

I think your 14 numbers is correct, Eric, from my past recollection of what we were disclosing. That number is now going to be 10. Yes. We’ve reassessed the number of people we require to meet our 2020 goals and we believe that number is now 10.

[Eric Martinuzzi:]

Okay. And then as far as the productivity of the reps that you have, I’m not really familiar with kind of like if you’ve got tenured reps in the field now, the business they’re selling today is that one-month commit? Is that six-month commit? What kind of insight to the business that you’re winning today? What’s the – I guess the tenure of those commits on the IntentKey side?

[Richard Howe:]

Yes. They can be anything from month-over-month on insertion orders that recur to three months insertion orders to six months insertion orders. You don’t usually get anywhere past that.

[Eric Martinuzzi:]

Okay. All right. And then you mentioned something about Connected TV and I’m not sure, and forgive me if you’ve mentioned it before, but I took note of it for the first time with today’s press release. You talked about the integration of Connected TV media inventory and the release of the IntentCloud. Is that something that the IntentCloud now allows you to do? Have you already always had that same Connected TV capability?

[Richard Howe:]

No, we have not had it. So we – I think we’ve put a press release out about that, I don’t know, two or three months ago I guess it is now. I can’t remember the exact date on it. But essentially what that project was – the IntentKey, as you well know, Eric, is a data platform and we weren’t yet integrated to be able to use that data for Connected TV devices. So we couldn’t target effectively for our clients.And Connected TV is becoming a big medium into which people want to target. So it was a big deal for us to announce the fact that we can now do that for our clients. So it just gives us one more thing that we can go to our clients with and tell them, hey, not only is our proprietary data asset available to you on all these other channels, it’s now available to you to use to put your message in front of people on Connected TV devices.

[Eric Martinuzzi:]

Okay. And then lastly…

[Richard Howe:]

And the IntentCloud – you want me to answer the IntentCloud because there was sort of incident with that. So the IntentCloud…

[Eric Martinuzzi:]

Go for it. Yes.

[Richard Howe:]

Yes. The intent – think of the IntentCloud as a proprietary cloud-based infrastructure that is designed purposefully and specifically to work only with our IntentKey software. So it’s a combination of hardware and software that we branded the IntentCloud and it’s ours. And it’s going to – the key advantage there, which we – would be launched, it should be ready to go in January. But the key advantage there is the ability to react in a shorter period of time when we determine the intent of a consumer.

[Eric Martinuzzi:]

Okay. And then lastly for me on the ValidClick side. Given the outlook for revenue in the vicinity of $18 million for the fourth quarter as well as kind of backing up the expectation for the, I think it’s $2.7 million or so, implied in the IntentKey. That would say, you’ve got a pretty substantial step up in the ValidClick side. I’m trying to see is that tied to just normal seasonality or there’s something special going on there?

[Richard Howe:]

Seasonality.

[Eric Martinuzzi:]

Got you. Okay. Thanks for taking my questions, guys.

[Richard Howe:]

You bet. Thanks, Eric.

[Operator:]

[Operator Instructions] That will conclude today’s question-and-answer session. I’ll now turn the conference over to Richard Howe for any additional closing remarks.

[Richard Howe:]

Thank you operator, and thanks everyone for joining us today on today’s call. We appreciate your continued interest and we look forward to reporting our Q4 and year-end financial.

[Operator:]

That does conclude today’s conference call. Thank you for your participation. You may now disconnect.