Inuvo, Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good day and welcome to the Inuvo's 2018 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sean Mansouri of Liolios. Please go ahead, sir.

[Sean Mansouri:]

Thank you and good afternoon. I'd like to thank everyone for joining us today for the Inuvo's second quarter 2018 shareholder update 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. The 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 found and reviewed at www.sec.gov. With that, I will now turn the call over to CEO, Richard Howe.

[Richard Howe:]

Thank you, Sean and thanks everyone for joining us today. We've had another strong showing in the first half of 2018 with revenue up 11% percent year-over-year to $39.5 million. Second quarter revenues were up 4% year-over-year to $19 million. First and second quarter revenues are typically impacted by the timing of seasonality within the advertising industry. Generally, one month out of the first six is almost always weaker relative to the others and almost always occurs in either March or April, which means one of either the first or second quarter is likely to be lower than the other. This year our weak month was April and as a result, Q2's revenue was slightly lower than Q1. This issue also reflects why we tend to look at our first half performance as a better indicator for the year as compared to using either the first quarter or the second quarter's numbers individually. The average of the two, of course, because of this March, April seasonality variance becomes a much better metric for predicting the annual growth rate of the business. While we're on the topic of seasonality, it's worth mentioning that the second half of the year is typically stronger than the first half as advertising demand steadily increases leading into the Thanksgiving and Christmas holiday seasons. In fact, the seven-day average daily revenue through August 7th is already up 3.5% over the prior week average. We also made solid improvements in adjusted EBITDA during the quarter, which was up over 100% to $336,000 and up over 200% for the first half on a year-over-year comparative basis. We continue to expect strong year-over-year adjusted EBITDA growth in 2018. And would also like to note that like revenue, adjusted EBITDA has historically been stronger in the second half of the year. In May, we raised approximately $2.3 million in gross proceeds from the sale of 3.3 million shares of our common stock. This raise was designed to alleviate a working capital deficit that had been growing year-over-year as our revenues had expanded. The money raised will allow us the flexibility to improve payment terms with certain partners that we believe will support growth and provide sufficient capital to meet current growth projections. We have no plans to raise additional money at this time. So far as the business is concerned, we continue to build strong interest in Inuvo's ability to find unique audiences for our media clients through the AI and information assets of our IntentKey technology, which we are now leveraging across the enterprise on behalf of our direct agency and media partnerships. Inuvo's IntentKey prospecting engine is a patented machine learning technology created to mirror the manner in which the human brain can instantly associate ideas, emotions, places, people, and objects. It was trained by over 4 billion pages of content, where it learned through a trillion examples the relative importance of how the 25 million concepts that are contained in our [Indiscernible] relate to each other and demonstrate consumer intent. Inuvo harnesses this power of the IntentKey to uncover and reach incremental end market audiences that are hidden from typical targeting approaches. We added several new brands who will be using our IntentKey media targeting solution to the client roster this past quarter, including leading companies and industries like fast-food, tourism, online retail, healthcare, and agriculture. In addition to these verticals, we continue to drive strong performance in markets like automotive, communications, and travel. We believe the adoption of our solution across so many different industries further reflects the versatility of the IntentKey technology and its ability to find prospects regardless of product or service. As you may recall, we began building a direct sales team in the fourth quarter of 2017. The message we're getting from that team thus far is that the IntentKey capabilities both resonate with prospects and are completely and uniquely differentiated from anything else in the marketplace. As a result, we are getting strong initial interest for solution testing from prospects, which we expect to capitalize upon in order to develop long-term sustainable business relationships. In fact, we have over 100 such opportunities in our Q3, Q4 pipeline. To support this demand, we also closed an important agreement with AppNexus, a leading marketplace for digital advertising that was recently acquired by AT&T. This new relationship allows us to increase the number of channels into which our IntentKey can operate, a strategy that we believe will lead to more direct client. We are currently in the integration process with AppNexus and expect to begin servicing clients later this quarter. As we mentioned in our Q1 call, the IntentKey solution is at its core a contextual technology. Strategically, this is exceptionally important because of the growing concerns around privacy and the use of cookies for ad targeting. We believe our IntentKey can be adapted to work without cookies and we have been in the process of developing this cookie-less targeting solution in a manner that doesn't affect performance. This would be yet another powerful differentiator for Inuvo in the marketplace and align our solutions directly with our clients' desires to meet their growth goals, while not compromising the all-important consumer privacy. We anticipate that this initiative will be rolled out in the fourth quarter. We continue to experience growth within our large media partnerships as well, which as a group, grew 9% year-over-year in the second quarter. This should signal both the stability of these relationships and a new visibility to deliver consistent results for the advertisers that these media partners entrust to us. We have been successfully doing business with these partners for many years and these relationships are a powerful and unique asset for Inuvo. We can and will continue to build additional products that support these channels into more demand. We are currently in contract renewal negotiations with one of these media partners, which we expect to conclude within the next 45 days. Revenue from desktop and mobile markets during the quarter was roughly 30% and 70% respectively. This was, for the most part, unchanged from the first quarter. We expect a similar split for the remainder of the year. Revenue per thousand pages where we had the opportunity to show an ad with $7.40 in the quarter on 2.6 billion pages. This compares the last year's $3.70 on 5 billion pages and last quarter's $5.70 on 3.6 billion pages. The takeaway from these numbers is that the combination of the two numbers that matters. Ideally, we want the highest pay possible on the greatest number of pages. With that said, there are trillions of pages across this market and their relative monetization and margins can vary quite dramatically. I'd like to close my comments this afternoon with a short assessment of our industry and where I believe we are positioned within it. A recent study of the industry compiled from direct conversations with Chief Marketing Officer has concluded two things; more data and fewer agencies. Now, both of these conclusions align with how we have been building out our business. The first is a trend that has been occurring for a number of years. Marketers simply want access to more and new data because that's the key to finding new audiences for their products and services. The second transformation is a consequence, if you will, of the first. The reason CMOs are reducing the number of agencies they work with is because they are searching for service providers who are technologically advanced, particularly those with access to unique information. They are looking for companies like Inuvo. The main objective in marketing has always been to deliver growth while managing the brand. With this objective, the best strategy in the digital age that will deliver results against these objectives is the ability to find and interpret new information on which to then make better decisions. This conclusion was also verified in the market study. Inuvo's IntentKey is an incredibly rich source of proprietary information. It's based on artificial intelligence and it can be used to build and reach highly relevant and unique audiences, while also protecting brand integrity and we do it and are doing it for our media clients every single day. We could not be better aligned with the needs and strategies of our customers for both today and the future. And with that, I will now turn the call over to Wally for a more detailed reporting of our financial performance for the quarter.

[Wally Ruiz:]

Thank you, Rich. Good afternoon everyone. I will recap the financial results of our second quarter. As Rich mentioned, Inuvo reported revenue of $19 million for the quarter ended June 30th, 2018 and $39.5 million for the first half ended June 30th, 2018. That's a 4% increase from the $18.3 million reported in the second quarter of last year, and 11% increase from the $35.5 million reported in the first half of the previous year. Revenue from the large media partners increased 9% in the second quarter over the same quarter last year, with increased revenue from ads placed both on third-party and owned sites. These increases were partially offset by lower revenue from supply partners. As we discussed in our last conference call, we decided to reduce focus on the supply side of the business, in lieu of the demand or advertiser side where our IntentKey solution gains -- continues to gain traction. This change in focus resulted in a reduction in operating expenses of approximately $100,000 per month. The full rate -- run rate of that reduction started to kick-in in July. In spite of the shift in focus, we grew 11% year-over-year in the first half and the revenue lost after executing this strategy has now stabilized. Gross margins also improved in the second quarter to 63.2% compared to 58.3% in the same quarter last year, due in large part to the revenue mix as we focus on advertiser business. As we have now -- as we have mentioned in the past, revenue we generate from ads serve to owned sites has a small cost of revenue associated with it as its expenses predominantly marketing or traffic acquisition costs also known as TAC. If we adjust gross margins to include TAC, the adjusted margins also improved. They improved by 1.5 percentage points. Overall, operating expenses are comprised of marketing cost, compensation expense, and selling and general and administrative expense. Operating expenses were $12.8 million dollars in the second quarter of 2018 compared to $12 million in the same quarter last year. Marketing cost or TAC was higher in the second quarter as opportunities to fulfill demand on owned sites increased. However, we do not expect marketing cost as a percent of revenue to increase materially over the next two quarters. Adjusted EBITDA more than doubled year-over-year to $336,000 in the second quarter. Again, driven by our shift in focus to our higher margin business. For calendar year 2018, we expect -- we continue to expect adjusted EBITDA to increase by double over 2017. On a GAAP basis, Inuvo reported a net loss of $833,000 or $0.03 per share in the quarter that ended June 30, 2018. That compares to $1.4 million net loss or $0.05 per share in the second quarter of last year. Non-cash expenses totaled $1.1 million or $0.04 per share in the current year quarter. We've suggested in the past that GAAP profitability begins to occur in our business at around $25 million of quarterly revenue. However, with over a $1 million in non-cash expenses each quarter, the company is capable of generating positive cash flow at a much lower quarterly revenue. The full-time headcount at the end of the second quarter was 63 compared to 82 at the end of the same quarter last year and the reduction related to the strategy change we referred to earlier adopting supply side technology that has reduced significantly the need for account management. We expect only modest increases in headcount for the remainder of the year or current growth expectations. Our balance sheet at June 30, 2018 had cash and cash equivalents of $4.1 million and $4 million outstanding balance on our bank revolving credit line. The revolver has a total commitment of $10 million with availability dependent upon our accounts receivable. At June 30th, 2018, we had additional credit availability under the line of $2.3 million. As Rich mentioned in May, we sold 3.289 million shares and raised $2.3 million before expenses. We believe with the capital raise in May along with the cash flows from our operations and the line of credit with our bank, provides us with adequate resources to operate as we plan for the quarters to come. With that, I'd like to turn the call back over to Rich.

[Richard Howe:]

Thanks Wally. We've had a strong first half of the year with double-digit growth, meaningful improvements to adjusted EBITDA, new partnerships, new direct clients, strong demand for the IntentKey and continued growth within our largest media partnerships. We remain exceptionally excited about our place in this market, our ability to compete in that market, and ultimately, our alignment with the future of digital advertising. We reiterate our double-digit year-over-year revenue growth expectations with strong year-over-year improvement in adjusted EBITDA. And with that, I'd like to turn the call over to the operator for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And we'll go first to Bruce Goldfarb with Lake Street Capital Markets.

[Bruce Goldfarb:]

Hey Rich, Wally, congrats on a very strong first half. Thanks for taking my questions. You guys have guided for double-digit revenue growth for 2018. Do you see potential for that to persist into 2019?

[Richard Howe:]

Are you asking, are we have going to continue to see double-digit growth even through 2019?

[Bruce Goldfarb:]

Yes, without guidance, I guess.

[Richard Howe:]

Yes, I think we haven't guided for 2019, yet, but yes, we'd be disappointed if the business is unable to at lead to double-digit growth for the foreseeable future.

[Bruce Goldfarb:]

Sure. Thank you. And then we've seen cost of clicks impact certain verticals like such as auto. Are you seeing any trends in traffic costs for your partners that are having an impact on your business?

[Richard Howe:]

I'm not aware of any -- and I say that because the clicks are being generated for us across a plethora of verticals. So, if we were experiencing an issue in any vertical that had a material impact on our financials, I would know about it. With that said, we do see, of course, seasonality variance in click revenue and/or display-based revenue, right. So, we definitely have experience that, but we do -- we see that every year, which tends to reverse itself as the seasonality trend.

[Bruce Goldfarb:]

And then my last question is the Yahoo contract, I think it -- does it end in September? You're still confident -- do you believe that will be renewed kind of--?

[Richard Howe:]

Yes, So, as you well know, we don't talk about the large -- the names of the large media partners, but I did reference in my script the fact that we were in contract renewal negotiations and we expect that to be concluded in 45 days. I'm not expecting any issues. And we're well into the process with them. So, we'd know about it by now.

[Bruce Goldfarb:]

Great. Thank you. Congrats again on strong first half and thanks for taking my call.

[Richard Howe:]

You bet. Thanks Bruce.

[Operator:]

[Operator Instructions] We'll go next to Lisa Thompson with Zacks Investment Research.

[Lisa Thompson:]

Hi guys. looks like a really interesting quarter, much improved margins. Seems pretty exciting. I was wondering if you could talk a little bit more about this cookie-less solution you have. Where do you find the most interest in that, is that going to be an issue you think going forward, people blocking cookies and that being an intrusion of privacy? Talk about that--?

[Richard Howe:]

Yes, you bet Lisa. So. there's two aspects to that. One is the one you just mentioned that on the consumer side, consumers themselves are becoming sensitive to the tracking and utilization of their tracking information, particularly in a retargeting scenario. And so yes, you're seeing an increased preponderance of consumers smart enough to know that they can turn that off if they want to. It's not a big number by the way in terms of the overall population, but it is growing. That's one. And then two, just the brands themselves, I mean, with all of the current publicity around some of the issues with the large social media company, I think brands are starting to rethink how they work with service providers who have technology and whether or not they adequately considered in the past the consumer implications of some of the marketing strategies. And so the combination of those two things -- and I'd add a third of the GDPR changes that occurred in Europe, where Europe started much more constraint on consumer privacy for European citizens. It's sort of leading us in a direction. Now, while I don't think America is ever going to be like Europe, nor do I think we want to be. I think generally a more consumer-friendly approach to ad targeting is going to be rewarded in the marketplace over the next few years. So, since we had -- so that's the backdrop. So, since we already had a technology that, as I said in my script, was contextual, it wasn't that difficult for us to start adapting or thinking about how we could deploy that technology in a manner that it doesn't require us to use cookies and we think that that's going to be a really good thing for us.

[Lisa Thompson:]

Is that some fairly novel in the industry? Anybody else have that solution?

[Richard Howe:]

Nobody has it and is doing it the way that we do. The majority of people who have cookie-less-based targeting approaches are simply doing straight-off contextual targeting. You're on an auto site about Corvettes and they're going to show you auto related ads. We're doing a lot more than that because of the nature of our AI.

[Lisa Thompson:]

All right. That sounds pretty cool. So, people that are waiting for this as a product or is it just going to be kind of surrounding there with the current customer base?

[Richard Howe:]

I think it'll be a differentiator for us when we can go into our current prospects. And as I mentioned, we have a growing prospect list actually these days and present this as an opportunity for them to think about a different approach to their targeting consumers that doesn't involve privacy-centric issues, especially with cookies, I think that will be -- it will allow us to add another point of differentiation to our sales pitch.

[Lisa Thompson:]

Interesting. So, back to the financials, your margins certainly went up meaningfully sequentially. How much further do you think you can go based on your current model?

[Wally Ruiz:]

Yes, that was a pretty, pretty good jump this quarter. I wouldn't anticipate seeing those types of increases in future quarters -- for the next two quarters. But having said that, I think we can maintain that level or close to it.

[Richard Howe:]

And maybe moreover, Lisa, because we do -- we want to make a big deal about the adjusted EBITDA number. And we actually do think it's the best gauge of the cash being generated in business. But we've mentioned that that's going to be materially improved this year. And, in fact, it's on our run rate to go into 2019 on a percentage basis as a higher number. So, this year, we didn't hit sort of the full benefits of some of the improvements that we made in the margin enhancement that we have, but you'll just start to see those. So, I think it's fair to say, Wally, we will continue to see adjusted EBITDA margin improvements in the business as we grow.

[Wally Ruiz:]

Yes, I think we've seen bottom-line improvement, right.

[Richard Howe:]

Yes.

[Lisa Thompson:]

So, regardless of your revenue new levels, right, it won't be just driven by higher sales? You've got lower sales, you'll have higher margins?

[Richard Howe:]

Well, the margins we expected to stay at approximately where they are at now, right, regardless. Was that your question, I'm sorry Lisa?

[Lisa Thompson:]

Well, -- like say you did $20 million in revenues this year, do you think that that same $20 million will be at a higher margin going forward? Or--

[Richard Howe:]

I don't think margins are going to be higher.

[Lisa Thompson:]

Okay.

[Richard Howe:]

No, I think. I don't think--.

[Lisa Thompson:]

All right. And what's your tax situation look like right now, or as carryforwards or you might be paying tax?

[Wally Ruiz:]

Okay. Yes, well, we have a very large net tax loss carryforward, right. And it's in the range of in excess of $60 million, right. So, that doesn’t change.

[Lisa Thompson:]

All right. Great. Great looking quarter. I look forward to the second half.

[Richard Howe:]

Thanks Lisa.

[Lisa Thompson:]

Thanks.

[Operator:]

At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Howe for his closing remarks.

[Richard Howe:]

Thank you, operator, and I'd like to thank everyone who joined us on today's call. Please note that Wally and I will be presenting at Liolios Gateway Conference on September 5th and 6th in San Francisco and I hope to see some of you there, if not, we appreciate your continued interest and look forward to reporting our Q3 results in November.

[Operator:]

That does conclude today's conference. We thank you for your participation.