Inuvo, Inc.
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good day. Welcome to the Inuvo Inc 2017 First Quarter Earnings Conference. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Mr. Valter Pinto of KSCA Strategic Communications. 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 first quarter 2017 shareholders update conference call. Today, Mr. Richard Howe, Chief Executive Officer; and Mr. Wally Ruiz, Chief Financial Officer of Inuvo 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 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 www.sec.gov. With that out of the way now, I’d like to now congratulate management on the swift integration of the NetSeer business and turn the call over to Mr. Richard Howe, CEO of Inuvo. Rich, the floor is yours.

[Richard Howe:]

Thank you, Valter and thanks everyone for joining us today. We had a very busy first quarter following acquisition of NetSeer in February, we’ve been working very hard to get to this point in our business and we are bullish about our prospects for the future. Later on this call, I'm going to spend more time than I have historically connecting the dots of our go forward strategy post the recent acquisition. We have an adjusted EBITDA loss of $663,000 in the first quarter, this was very close to what we have expected based on our financial modeling of the NetSeer business prior to its integration. We’ve made tremendous progress in cooperating the business into Inuvo and have numerous additional cost savings still available. Realizing these cost savings depends upon expiring contractual obligations, establishing new contracts and the physical moving of the equipment in offices. And an excellent example of such an expense reduction involve the consolidation of datacenters where we expect to realized up to $50,000 per month in potential savings. In this case, our plan trims three datacenters down to two, one in Little Rock and another backup center in California. We expect to be able to begin benefiting from this consolidation in June, with most of the benefit kicking in between August and December. Our success depends on our ability to find patterns within data and these datacenters are key to our ability to do that efficiently. The amount of data we deal with is staggering and we currently store more than six petabytes of information. We currently process over 200,000 transactions per second in those datacenters which means over 16 billion times a day we interrogate opportunity where we could show our ads. This is data we use to make smarter decisions about which, when, where and how we show our ad. We delivered 17.2 million in revenue in the first quarter. As we have discussed in the past, we typically experienced demand side weakness in Q1, due to declines in advertiser budgets following the holiday. As a reminder, we did have uncharacteristic fluctuations in demand last year that shifted what has traditionally been a January to April decline in demand through March to May decline. This resulted in higher Q1 and a lower Q2 in 2016 and explains in part why Q1, 2016 was comparatively high last year at $18.7 million. We also lowered marketing expenses in the first quarter resulting in lower advertising revenue supplied through the websites we own. That revenue declined with partially offset by two months of revenue from the acquisition. Given the regulatory in 2016, a better way to look at year-over-year might be the average Q1 and Q2 in 2016, is that number was 17.2 million which implies that we are coming into 2017, at a run-rate equal to the average of the first two quarters of last year. When we acquired the NetSeer assets, we planned for around 15 million of annual revenue or roughly 1.25 million per month. The business has a similar seasonality trend as Inuvo. We experienced roughly $1 million in revenue in both February and March from this business. Given the seasonality of the business, we believe our expectations that these assets fully integrated into our marketplace, will delivered roughly 14 million in revenue contribution appear to be on track. I’d like to now talk more strategically about Inuvo. Our mission at Inuvo has always centered around the technology that powers what we do and how we do it. Some call it marketing technology, others call it advertising technology and still others call it programmatic technology. Inuvo is all of these and more. Our business revolves and is organized around this technology centric vision. Where Inuvo connects advertisers with the consumers through interactions with Inuvo ad unit on websites and apps across devices. NetSeer was acquired to expand our ability to continue delivering on this vision. At the heart of our strategy is what we will now be referring to as the Inuvo Marketplace. A symphony of technology that provides the means to interact with tens of thousands of advertisers or demand and tens of thousands of publishers or supply. Our business is focus and organized around maximizing the interaction of demand and supply within our marketplace. Technological advancements made over the last two years provide the ability to interact with demand and supply constituents directly as is the case on demand side with clients like Toyota and MGM. And indirectly for example with clients like Yahoo. The same to me said on the supply side with direct publisher relationships like Helpline and CBS Interactive and indirect programmatic relationships through ad networks, who serve our ads into their publishers. We now serve ads within content, videos and images, a capability that provide our sales team with the stronger value of proposition to sell publishers, and with that, we’ve added resources to our sales and account management team to take advantage of the opportunities on the supply side of the marketplace. The brains behind our ad targeting to consumer is a proprietary machine learning technology, we call the Concept Graph [ph]. This artificial intelligence allows us to precisely target audience on behalf of advertisers. We currently touch about 90% of all U.S. households. Inuvo intellectual property is now protected by our portfolio of 11 issued and 8 pending patents. We expect our marketplace will continue to be successful as we access increasing amount of advertiser budgets again both directly and indirectly. Advertiser diversification has been an important risk management strategy for Inuvo, and in addition to the relationships we acquired with NetSeer is also signed an agreement with another large supplier of advertising inventory in the first quarter and renewed a longstanding relationship with another. Today, with the relationships we have on the demand side. We have context in place with entities who can self-manage to budgets for more than 50% of all online spam in the United States. This aligns Inuvo strategically with where online budgets are being spent. Now unique to our vision for our 21st Century ad tech company is our own supply portfolio. For Inuvo this means the collection of own websites likealot.com and earnspendlive.com. Where we create content in health, finance, travel, couriers, auto, education and living categories. These sites have always been a component of our technology vision, a place to test ad technology, a place to fulfill advertiser demand for high quality consumers through interactions the proprietary content in the form of images, videos, slideshows and the written word. Inuvo's web properties are an extension of our market place and an important part of the supply into which we deliver and fulfill advertisement. The revenue generated on these websites comes from our demand partner and nearly all is generated by our ad technology platform. Our stockholders should view these properties is just another source of supply that we can leverage to fulfill demand. We will continue to write and produce high quality content, because we believe it’s a strategic advantage however from a revenue perspective these sites are no different than any other website we might show our ads on. For this reason, we will be moving to a single segment for reporting beginning this quarter and we will be providing what we believe is a better reflection to stockholders about how we are doing through disclosure of metrics that revolve around the revenue we generate for thousand pages where we have an opportunity to make money or RPM. We may from time-to-time provide information for example about how much revenue was generated from supply we own versus supply we do not own. The split was 42% from the properties we own in the first quarter and we expect that number to hold steady in 2017. From a practical perspective, what RPM tells us is the average amount of money we generate reach thousand times the consumer interact to a page where we show ads. Our RPM in Q1 was $5.75, the total number of pages where we had an opportunity to make money in Q1 was just shy of $3 billion. Across those page opportunities, the individual RPMs can vary significantly with traditional demand site increases between Q2 and Q4. We expect RPMs will rise throughout the remainder of the year. We’ve also made tremendous progress strategically diversifying our demand side relationship. Where we used to have two relationship we now have many, where revenue concentration from these two relationships was on average 97% in 2016 at the end of March 2017, it would 59%. We expect this number will continue to drop as we add new direct and indirect advertisers. The amount of revenue we generated from mobile sources totaled 57% in the first quarter. It was 52% on average throughout 2016. We had 93 employees both full and part time at the end of March. 21 of which were in Sunnyvale, California soon to be relocated to San Jose, California. With that, I’d now like to turn the call over to Wally for our detail commentary on our financial performance.

[Wally Ruiz:]

Thank you, Rich. Good afternoon everyone. We reported today the results of our first quarter. Inuvo reported revenue of $17.2 million for the quarters that ended March 31, 2017. An 8% decrease from the $18.7 million reported in the same quarter of last year. EBITDA adjusted for stock-based compensation expense, a non-GAAP financial measure was a negative $663,000 in the quarter that ended March 31, 2017, that compares with $1.3 million in the same quarter of the prior year. On a GAAP basis, Inuvo reported a net loss of $1.7 or $0.06 net loss per share in the quarter ended March 31, 2017. In the same quarter last year, we reported a net income of $374,000 or $0.02 per diluted share. As mentioned, a third of the way into this year’s quarter we acquired the NetSeer operation. We acquired their assets which included technology, patents, supply and demand side relationships and 21 very talented developers, sales and support people. And exchange, we issue 3,529,000 shares of our common stock about 12% dilution. We also assumed their networking capital deficit of approximately $4 million. The capital deficit -- the networking capital deficit was funded from our revolving credit line at rate of prime was 0.5% [ph]. For the two months that we owned NetSeer in the first quarter is provided $1.9 million of additional revenue. As anticipated it lowered the overall gross margin as the average gross margins for the NetSeer operation run 30% to 35% range. Also as anticipated we incurred an additional $1.6 million of operating expense in the quarter associated with the acquired property. Of the incurred expense, approximately $350,000 was one-time costs. We expect to complete the integration of the NetSeer operations in particular the data centers and computing assets by the second half of this year, at which time the acquisition is expected to be accretive. The 8% of lower revenue of this year’s quarter compared to the same quarter last year was due to, as Rich mentioned, an uncharacteristically high first quarter last year and reduced marketing spend in this year’s quarter as we focused on early in the future growth. This decrease compared to last year revenue was partially offset by higher revenue from our direct supply of partner publishers and from the NetSeer acquisition. Operating expenses comprised of marketing cost compensation and selling and general administration expense. It was $11 million in the first quarter of 2017, compared to $14 million for the same quarter last year. Marketing costs are the primary costs associated with creating an audience for our owned website. Marketing costs were $6.5 million in the first quarter of 2017, a $4.6 million increase from the same quarter last year. The lower spend was management’s decision to focus available funds on building the Inuvo marketplace and the integration of the NetSeer acquisition. Compensation expense increased by $671,000 to $2.4 million in the first quarter of 2017 compared to the same quarter of last year. The higher expense in the current quarter is primarily due to higher payroll costs associated with the NetSeer acquisition, which added 21 employees. As Rich mentioned, in March 31, 2017, we had 93 full and part-time employees, the year earlier we had 71 full and part time employee. The selling, general and administrative expense was $2.1 million in the first quarter of 2017 compared to $1.3 million in the same quarter in the prior year. The higher expense this year is due to $912,000 higher expense associated with the NetSeer acquisition, of which $350,000 was onetime expense. In coming quarters, we expect SG&A expense to decrease due to the integration of the NetSeer operation. Net interest expense was $43,000 in the first quarter of this year compared to $24,000 in the first quarter of last year, due to higher outstanding balance on our revolver this year and to a higher prime rate this year. Our balance sheet at March 31, 2017, had cash and cash equivalent of $3.9 million and a $3.6 million outstanding balance on our bank revolving credit line. Goodwill increased by $4 million and intangible assets increased by $4.3 million during the first quarter reflecting the fair market value that benefit is expected from the asset acquired from NetSeer as determine by an independent valuation [indiscernible]. As Rich mentioned, effective this quarter we will reporting on a single segment as oppose to two segments as we’ve reported in the past. As the company has evolve it is become apparent that our technology primates every aspect of supply chain both third party publishers and our own site. It was becoming increasingly difficult to assess whether revenue was sourced from the partner network or from the own and operated network since the underlying ad serving technology was being used by both networks. Overtime, the relevance of the two segments has diminished. The acquisition of NetSeer further blurred this distinction between the segment. We now report the company's results as we manage the business. We are a single marketplace powered by technology, our owned website will continue to be our laboratory to build ad-tech and provide supply to our demand partners. With this quarter, we will share with our shareholders the metric we use to manage the business. Rich discussed earlier our first quarter RPM and the number of pages where we had an opportunity to generate revenue. These metrics are the basis for the revenue we generate. In the future, as we integrate the NetSeer operations, we will be able to supply for example and report on the range of RPMs within the quarter, the RPM is by vertical, the vertical concentration of revenue generating pages. The revenue split among content, images or video. These are the metrics that we use to operate with it. Now, with that I’d like to turn the back to Rich.

[Richard Howe:]

Thanks Wally. We’ve never been more excited about our company's prospects. We’ve never had as clear a vision for who we are and what we do. We’ve never been in a better position to be a significant player within our industry. That industry is currently on consolidation paid with capital availability constraints that will make it difficult for non-cash flow producing companies to prosper. I will remind you that Inuvo has a cash flow positive now on an annual basis for over the five years. We believe this industry shake up means, the smart competitors who lack Inuvo-like scale will be unable to make the investment necessary to win. And it means the larger companies that were back by significant capital that maybe close to depleted were no longer be able to subsidize their purchase of market share. Inuvo’s demand and supply relationships underlying technology, optimized cost based, experienced team, these things stand us out in the crowd. We managed to grow our company and produce cash flow to appear were competitor were far better capitalized. We feel confident about our process and continuing to doing so, as our playing field levels and as competitor valuations continue decline, we will be opportunistic, on lookout for businesses by next year, that can add value to our marketplace. We’re expecting 2017 revenue to be in the range $88 million to $93 million with positive cash flow on the year. At the low-end of the range that 23% year-over-year growth rate. With that, I’d like to turn the call over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions]. We’ll take our first question from William Gibson with ROTH Capital Partners. Please go ahead.

[William Gibson:]

I actually like to start with a comment. The new names digital publishing and ad-tech didn’t last very long. Now that we’re one marketplace, in terms of, what do you think is the range of quarterly or what we could expect, and maybe you gave that but I might have missed on gross profit margins by quarter?

[Richard Howe:]

Well, this quarter was about 54% on our gross margin and we anticipate that we'll be in the mid-50s for the rest of the year.

[William Gibson:]

Good.

[Richard Howe:]

And on revenue, Bill, we don’t give a breakdown by the quarter. But our typical quarterly distribution is lower Q1 and rising Q2, Q3, Q4.

[William Gibson:]

Good and I appreciate that. So it sounds like maybe less swing and with experience historic?

[Richard Howe:]

Yes.

[William Gibson:]

Okay. Thank you.

[Operator:]

We’ll take our next question from Lisa Thompson of Zacks Investment Research. Please go ahead.

[Lisa Thompson:]

I got a few questions about expenses. First off, I wanted to clarify, shouldn’t you have taken out the $350,000 out of adjusted EBITDA?

[Richard Howe:]

Yes. We thought about that and we went back and forth on it, and in the end we decided not to change our ongoing definition, which is EBITDA just less stock-based compensation. But we thought that maybe yourself and other analysts might want to do that.

[Lisa Thompson:]

Okay, then we will. And let’s go back to expenses and try to get handle on what’s going to happen going forward. So spent a lot less on marketing. Is that because, you're emphasizing your own content site, or that you found that the cash is better served other places? Or is that just an aberration for this quarter?

[Richard Howe:]

It might be a little bit of both of those, Lisa. I think like I said in my script, we used our website resources strategically as a meaningful as a means to try to fulfill demand and we are spending more of our time and more of our focus, which means more of our resources right now at putting our marketplace in position to be able to scale at a faster rate of growth. So, the answer is a little bit of both, we could seek -- it doesn’t mean we’re not paying attention to our own website, in fact quite the contrary, we have the very strong group of people who are continuing to write content and develop content for those properties. But, I would expect that as it relates to our web properties being one component of our supply that the ratio there will continue probably to drop overtime.

[Lisa Thompson:]

Okay. Did you say that the revenue from your own properties was 42% this quarter, is that some way to figure out what digital publishers want?

[Richard Howe:]

Yes.

[Lisa Thompson:]

Okay. Caught that then.

[Richard Howe:]

Yes.

[Lisa Thompson:]

Okay. And when to get -- so obviously we take the 350,000 out of expense for next quarter, but add another month of NetSeer on. And then how much will you save on a monthly basis once you consolidate the datacenter and move?

[Richard Howe:]

I think in my call script I said it could be up $50,000 a month, which is what we’ve modeled from going from three datacenters down to two. And we think we’ll start seeing some of that benefit in June, already June with the bulk of it in probably in the last part of the year as we standup the machines that transition from the system they had in place to our own datacenters.

[Lisa Thompson:]

Okay.

[Wally Ruiz:]

And there is other synergy to for example, we’re moving facilities as Rich mentioned we’re going to -- we found a new office San Jose, that we'll be relocating to in June or July. So, there is a number of cost synergies while we build up the NetSeer business and increase revenues.

[Lisa Thompson:]

So, is that savings in addition to $50,000 a month that you're talking about?

[Richard Howe:]

Well, certainly. Yeah.

[Lisa Thompson:]

Okay. And it sounds like you didn’t get anybody to move to Arkansas, did you?

[Richard Howe:]

I guess. I don’t know why they wouldn’t. Living like kings down here.

[Lisa Thompson:]

Yeah right, I could tell that the 19 number that nobody seemed to move. All right so what should we be looking for going forward I mean in those two metrics standards to see how well you're doing there, how [indiscernible] doing there. How the new product is?

[Richard Howe:]

I think that’s why we’re eliminating some of those at old nomenclature because it's not really to the way that we run our business, our search length was essentially a content based ad unit, we now have a family of ad unit, we can -- to revive this content and video and images, so it becomes sort of the purpose is to break them all up and provide people with metrics, because we don’t want the business that way, we make money from the images, the video, the content. So, I don’t think its material. I do think that the RPM and associated metrics that we’re providing actually gives our stockholders a much better view of the business, in fact probably as good a view as they've ever had into our business. Example to that, this might be in the past, which is always been difficult for us, when we deal we get ad [indiscernible] producing more content, how much more content, are you going to put up more verticals. And in a way, those are the wrong questions to ask. How much money you’re making, every time, you have an opportunity to make a pay, that’s an important number. Unlike I said on the call, that was $5.75 and with any last that will continue to rise. And then as Wally said in his comments, we didn’t do at this time, in part because we don’t get fully -- we have all of business intelligence data to run the business on integrated well enough to be confident in the data to supply it to you. But there is a lot of ancillary information that we could be providing around RPM, like what is RPM in a third vertical or how is the concentration on the pages that we showed or ads on distribute. And compensation means how does it look at by vertical health or the travel or entertainment. I think those will be more interesting metrics and frankly more valuable as it relates to understanding how our business runs.

[Lisa Thompson:]

Okay. Is RPM then directly proportional to margin?

[Richard Howe:]

It’s not necessarily a reflection of margin, because it’s a revenue based number.

[Lisa Thompson:]

Okay. All right. Okay. Thanks. That’s all the questions I had. Thank you so much and I’m glad to working out so smoothly.

[Operator:]

[Operator Instructions]. Our next question will come from Andy King [ph]. Please go ahead.

[Unidentified Participant:]

I'm a long-time shareholder and I’m not going to sugar coat it, it looks like a disaster call and possibly disaster 2017. And I’m basing that off of late last -- as recently, I think as maybe even into this year, you were still guiding for $100 million revenue run rate by 2017 and that didn’t include the NetSeer acquisition. And some, I’m trying to break down and look at a little bit of guidance, you did give and you’re guiding now for $88 million, $92 million in revenue for 2017. So it kind of feel like not only did our original business miss big, but NetSeer which had done 20 million last year. I think, you guys were looking for 15 million out of it for 2017, so it looks like they’re missing two in the next area side. So now can you give me some clarity first of all, which was a bigger disaster and how we're fixing it? And I have a few other questions after that, but I’d like to you address that first.

[Richard Howe:]

Yes sir. So we don’t see it the way that you’re suggested. In fact, if anything, we don’t see the first quarter as a disaster at all. We had messaged that we would buying NetSeer, we had also messaged that there would be costs synergy take out that would be required as part of that. And like I said in my opening comments in fact the modeling associated with the acquisition is falling directly in line with what we thought. So, on that front we don’t see it that way. In fact I think the integration has gone as well as I've seen integration go and so far as how we’ve integrated the people and the technology and the plant we’re doing that and how rapidly that that has occurred based on my 25 or 30 years doing M&A transactions. So, I'm pretty pleased with that actually. As it relates to the guidance that we said, we’ve been pretty clear from the first quarter of 2014, when we first came out, when we were doing $10 million in the quarter and told everybody that it would be a $25 million by the fourth quarter of 2017. We did not give any indication we first gave that guidance whether that would be acquired or organic. We didn’t actually think we would be buying businesses at that time. So, there was an implied organic growth there. But we feel like we’re right on track with that, in fact we continue to be on track with that. So, in that regard, as we have done in the past and we’ll continue to do in the future. We haven't misled anybody as to what we think we can do and we’ve pretty much done everything we thought we would do. As it relates to the NetSeer acquisition, we’ve also been pretty vocal about that, because we’ve been asked about it. Yes, the business did $20 million, but when you buy a business that has some operating challenges with it. There is a good chance of 20 million in the prior period isn't really 20 million. And I don’t think this business and its acquisition is any difference than the other dozen I've bought in my carrier, where you get a look at the business and once you understand it, you say, okay I see this business now. Yeah, it 20 million, but it's not 20 million I want. I want some other part of the business. And so, when we looked at the business, we said well we see $15 million on an annualized basis of revenue that we would like to keep. And then it managed and measure that against the acquisition price. So, we look at what we paid for the business and we say hey, is 3.5 million shares at a $1.60 or roughly what is that $8 million is something -- $7 million, worth it to acquire the assets of a business that’s going to generate around $15 million in annual revenue for us, give us advance targeting technology, give us other technology that expand our demand and supply side and when we looked at all of those, we thought that this was a great deal.

[Operator:]

And there are no further questions at this time. [Operator Instructions] And there are no further questions. I’d like to turn the conference back over for any additional and closing remarks.

[Valter Pinto:]

Thank you, operator. With that I’d like to thank everyone who joined us on today's call. We appreciate your continued interest in Inuvo and we very much look forward to reporting our progress here over the next quarter.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.