Inuvo, Inc.
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Good day, everyone, and welcome to the Inuvo Incorporated 2017 Second Quarter Financial Results Conference Call. Today's call is being recorded. And at this time, I'd like to turn the conference over to Valter Pinto of KCSA Strategic Communication. 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 Second 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, 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 www.sec.gov. I'd like to now 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 another busy and productive quarter and I'm pleased to report that other than one remaining data center project, which should be finished by the end of this month, we have now completely integrated the acquisition that we closed in February. The last remaining project should save us an additional $600,000 annually. Year-over-year revenue was up almost 17% to $18.3 million and EBITDA adjusted for stock-based compensation and nonrecurring costs associated with the acquisition was $157,000. Sequential quarterly growth thus far in 2017 has been 6%. Gross margin was up 4 percentage points sequentially to 58% in the second quarter, and we expect to see a few more percentage points of improvement in the second half of the year. While we no longer track individual segments, we have seen steady improvement within the acquired operation with recent monthly revenue trends running about $1.3 million, up from a roughly $800,000 per month run rate we have been experiencing immediately following the acquisition. The current growth trajectory on the new business looks good right now, and the gross margins associated with this revenue have so far been higher than those of our other comparable ad technology services. Therefore, our plan in the back half of the year is to continue to accelerate growth in this higher gross margin business and in fact reduce growth in other lower operating margin areas of the business, notably publishing. As we have communicated previously, our publishing business is strategic. This change does not diminish the strategic importance of this business, which, at its current size, is providing the strategic value we require from it. Consequently, we are modifying our 2017 full year revenue range from $88 million to $93 million to $84 million to $89 million. We maintain our guidance that, for the fiscal 2017 year, adjusted EBITDA will be positive. The low end of this range will represent a year-over-year growth rate of 17.5%. This should put us on a trajectory coming out of 2017 that will lead to annual revenue in 2018 of $100 million or more. Now things look good heading into the second half of the year with an average daily revenue thus far in August of $218,000. If seasonality trends are consistent with prior years, we could also see a steady monthly increase throughout the remainder of 2017. In Q1, we reported for the first time that our revenue per thousand page views was approximately $5.75 on 3 billion pages. In Q2, that RPM was approximately $3.70. However, volume was up significantly to 5 billion pages. Q2 is the first full quarter of contribution from the acquired business. As you can see from the variance in these numbers, the business model is maximized when both RPM and volume rise simultaneously. However, it is not necessarily a negative situation when the company decides to go after lower-paying RPMs in exchange for additional volume. Lower-paying RPMs do not necessarily mean lower profit. In many cases, margins are contracted and thus remain constant regardless of RPM. So it is this combination of RPM and page volume that influence the margin dollars the business throws off. Let me now talk briefly about demand, which means our advertisers and advertising partner’s supply, which means our publishers and publishing partners and technology. Starting first with demand. We continued to add new demand relationships, both directly with individual advertisers and indirectly with network partners. In the quarter, we added several new direct and indirect advertisers. One of our new indirect partners is already on a run rate to deliver about $4 million of revenue annually with the potential for much more. Breadth of advertising relationships is an important component of revenue optimization and an excellent way to mitigate certain business risks. We've experienced a material reduction in concentration within our 2 primary indirect partners. Year-over-year, in the first half of 2017, that risk dropped from 98% of revenue in 2016 to 84% of revenue in 2017. This represents a significant and positive shift in the business. Our largest indirect demand relationship is with Yahoo, and it is showing signs of improvement now that the merger with Verizon is completed and the organizations have been integrated. Our relationship with Google, which is built around our owned and operated websites, remain steady. All our demand relationships typically improved throughout the second half of the year. As we head into Thanksgiving, the competition for ad placements increases, which in turn typically leads to higher RPMs, and as discussed earlier, for margin dollars. Let me now talk about supply. On the supply side, the message begins with mobile. More and more of our publishing relationships are receiving most of their consumer traffic from mobile web sources. Inuvo's revenue from mobile was roughly 58% in the second quarter. The changes occurring related to mobile in the industry are quite dramatic. For example, starting on Friday afternoon, we see a material decline in desktop usage in lieu of mobile with little abatement until Monday. This was not the case of little as 1 year ago. We signed several new direct publishers in Q2 that collectively have placements that could generate millions in incremental annual revenue from advertisers for Inuvo. We are bullish about our supply side pipeline while we have deals that could deliver tens of millions in potential annual revenue. One of our new publishers is already on a $500,000 annual run rate. By the websites we own and operate, we continue to expand our content, particularly video and start to develop more specialized web properties in topic areas like auto, health and comparison shopping. Revenue from this directly controlled supply was down year-over-year, which, as described earlier, is a business decision we've made to bring more focus and resources to higher-margin products and services. Given their control over the browser and mobile devices, we've also seen both Apple and Google working towards disabling of certain intrusive ads on publisher site. Our newer ad units are being designed with these new ad standards in mind, and any old ad units that we have that are not compliant are being modified to adhere. We are not expecting a problem in this area for Inuvo. With our network of publishers growing, we have also started to develop and sell private marketplace inventory also known as PMP. This mechanism allow us a tighter alignment between advertisers and publishers and provides tighter controls over creatives. We are generating roughly $10,000 per day in revenue through PMPs today. We see this PMP as a growth area for Inuvo in part because our intent key technology can categorize publisher URL. This provides direct mechanism from which to create the alignment between advertiser and publisher. You will note that we have renamed what was previously called the concept graph to the intent key. This is effectively a proprietary targeting technology. While this may seem like a small change, we believe it is a consumer's intent that matters to advertisers, and we are attempting to create a brand around this technology that establishes the position that Inuvo has unlocked the key to determining the consumer's intent. For example, a consumer might be interested in concepts related to focus. However, is that focus related to the car of the Ford Focus? Is it a focus group? Or is it the focus of a camera lens? Intent really does matter, and we believe the intent key technology unlocks a consumer's intent better than any other technology available. Let me now turn to technology, research and development. We have numerous technology projects underway, some are more mature than others, some are aligned with revenue or income goals, some are aligned with adapting to industry changes and others are about gaining a competitive edge. Let me touch on a few of these projects. Like other owners of websites, we are constantly promoting our content. As we have discussed in the past, Inuvo is not your normal owner of websites. We have tremendous direct-to-customer marketing competencies and technologies. In this regard, we continue to invest firstly in campaign automation. This is the process of having a machine make decisions about where to spend money and how much. The reason this is necessary is because of the sheer volume of campaigns and the plethora of different channels available. Secondly, we are investing in campaign analytics. The way a machine can determine what to do only happens with action in response analytics. These are revenue and income-generating projects related to our owned and operated supply with a focus in this area to our previous discussion on margin enhancement. Now for our ad technology, one significant challenge involved determining whether the mobile device we are serving ads onto has the same user as that previous tablet or desktop computer we may or may not have engaged with in the past. As desktop cookies become obsolete, other equally predictive methods of determining consumer intent across devices will be required. We believe we've figured out this problem with an optimal solution involving our intent key technology and Acxiom's identity resolution technology available through their LiveRamp subsidiary. This project provides both competitive advantage and growth opportunities. We signed a deal with Acxiom in Q2. As it relates to our publisher platform, we continue to add features that allow our publishing clients the ability to optimize against variables in addition to revenue like user engagement or latency or viewability. These efforts are competitive necessity if we work to align ourselves with those publishers' long-term goals. This is ongoing R&D. And perhaps lastly, if you follow our industry, you have no doubt heard the term server-to-server integration or perhaps server-side header bidding. These are important technical changes within the industry that positively affect publisher yield. Inuvo was well ahead of the curve in this area, with both our technologies and demand strategies aligned with this marketplace shift. This is both a competitive and growth-related project. I'd now like to turn the call over to Wally for a more detailed commentary on our financial performance.

[Wallace Ruiz:]

Thank you, Rich. Good afternoon, everyone. We reported today the results of our second quarter. Inuvo reported revenue of $18.3 million for the quarter that ended June 30, 2017, a 16.8% increase from the $15.6 million reported in the same quarter last year. For the first 6 months of 2017, Inuvo was 3% ahead of last year reporting revenue at $35.5 million. EBITDA adjusted for stock-based compensation expense and the nonrecurring expenses associated with the NetSeer acquisition, a non-GAAP financial measure, was $167,000 in the quarter that ended June 30, 2017, and that's compared to $282,000 in the same quarter of the prior year. On a GAAP basis, Inuvo reported a net loss of $1.4 million or $0.05 net loss per share in the quarter that ended June 30, 2017, compared to $575,000 net loss or $0.02 net loss per share in the prior year quarter. All Inuvo revenue streams increased year-over-year in the second quarter other than the publishing business. And as rich mentioned, we are now directing more development and marketing resources to our Ad-Tech business. We believe long-term profitability and better shareholder value will accrue from this rebalancing. The publishing business will remain an important component of Inuvo, providing focused supply to advertisers and a fertile environment for Ad-Tech innovation. The implication of this focus is evidenced in the lower gross margin this year over the last year. As mentioned, the integration of the acquisition is nearing completion, and we expect substantial monthly cost savings beginning in September and for the remainder of the year. We incurred approximately $441,000 of cost in the second quarter of 2017 associated with the transition and integration of the acquired operation. We expect these costs to be nonrecurring. Overall, for the first half of 2017, we incurred approximately $1 million of additional operating costs associated with the acquisition and the integration of NetSeer. As mentioned in prior calls, we expect the acquisition to be accretive by the second half of this year. Operating expense is comprised of marketing cost, compensation expense and selling, general and administrative expense. Operating expense was $12 million in the second quarter of 2017 compared to $12.3 million in the same quarter last year. For the first 6 months of 2017, operating expense was $22.9 million, down nearly 13% compared to the prior year, entirely due to lower marketing cost. Marketing costs are the primary costs associated with creating an audience for our owned and operated websites. Marketing costs were $7.5 million in the second quarter of 2017, a $1.9 million decrease from the same quarter of 2016. As I mentioned, the lower spend is management's decision to focus on building out new pieces of the Inuvo marketplace, which came with the acquisition. Compensation expense increased by $724,000 to $2.3 million in the second quarter of 2017 compared to the same quarter of the prior year. The higher expense in the current quarter is primarily due to the higher payroll costs associated with the acquisition. At June 30, 2017, we had 92 full and part-time employees. A year earlier, we had 72 full and part-time employees. We expect compensation expense to increase throughout the remainder of the year because of salary adjustment and hiring in development and sales position. SG&A or selling, general and administrative expense was $2.2 million in the second quarter of 2017 compared to $1.3 million in the same quarter in the prior year. The higher expense this year is primarily due to costs associated with the acquisition. In coming quarters, we expect SG&A expense to decrease. Net interest expense was $73,000 in the second quarter of 2017 compared to $22,000 in the second quarter of last year, and this is due to the higher outstanding balance on our revolving bank credit facility this year and to the higher prime rate this year. We expect interest expense to be higher for the remainder of the year over the prior year. Our balance sheet at June 30, 2017, had cash and cash equivalent of $3.7 million and $5 million as an outstanding balance on our bank revolving credit line. We have amended our bank revolving credit agreement to accommodate the NetSeer acquisition. The revolver is for a total commitment of $10 million with availability dependent upon accounts receivable. With that, I'd like to turn the call back to Rich for closing remarks.

[Richard Howe:]

Thanks, Wally. As we head into the strongest part of our year, we are feeling confident in our ability to continue to deliver strong results in a highly competitive industry. Before we go to question and answers, I'd like to touch on a few strategic items starting with future M&A activity. While there are opportunities for additional acquisitions because of valuation declines in our industry, we do not expect to purchase any businesses for the remainder of the year for 2 reasons. Firstly, we want to achieve sustainable growth and profitability within the business we acquired in February first before we focus on another. And secondly, we don't think it's wise to focus on M&A over organic growth during our peak season where we need our resources focused on delivering within the corporate. Additionally, I'd like to also address an initiative underway related to doing business with China. We have been exploring China as a source of new partnerships, geographic expansion and, longer term, as an additional source of corporate development activity. China has a vibrant and growing advertising technology industry. We have visited China twice over the last 9 months. There is nothing to report yet related to this strategy, but we do feel strongly that relationships in China could be important to our future and we have enough scale now to warrant that exploration. Further, we announced in the quarter the hiring of our first Chief Revenue Officer. I'm particularly thrilled with this new role and the focus on sales and account management that comes with it. I'm equally thrilled that the individual taking on this responsibility for Inuvo, Andrea Haldeman, is for me a known quantity. Among her many executive roles, Andrea was in fact a sales leader at Acxiom within one of the groups I operated for them. This existing relationship has already allowed Andrea to hit the ground running at Inuvo. In closing, we expect a strong second half of the year with the year-over-year growth close to 18% at the low end of the range. And on our final note, we started to redesign our websites following the acquisition if ever. And I'm pleased to report that the beta version is now live at inuvo.com. With that, I'd like to turn the call over to the operator for questions and answers.

[Operator:]

Thank you. [Operator Instructions] And we will take our first question today from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

[Eric Martinuzzi:]

Yeah, I have a question regarding your outlook here. I understand from the prepared remarks, up sequentially 6%. And then just doing the math on the $218,000 per day in August, that gets me into the neighbourhood of around $19.4 million for Q3. And I was just wondering, given the outlook for $84 million to $89 million in the full year, the algebra would suggest a $29 million number in Q4. So first off, is that math correct?

[Richard Howe:]

No. Lower Q4, higher Q3.

[Eric Martinuzzi:]

Okay, but still $84 million to $89 million for the year?

[Richard Howe:]

Yes.

[Eric Martinuzzi:]

So you're just sensing that we could see some increase there that this August revenue averaging should in fact pick up in September then?

[Richard Howe:]

Yes. The answer is yes, Eric, and I'm not trying to evade the question. There's some interesting and often material swings in our business both as you well know in the beginning of the year coming off the holiday season and then, of course, during the holiday season. And by material, I mean we have, over the last 6 or 7 years, seen those swings be anywhere from as low as, I don't know, 10% to as much as 40-or-more percent. So you can see quite dramatic swings in the business. So...

[Eric Martinuzzi:]

Okay. And then as you look at -- you talked about some of these -- at least on the supply -- the demand side of the equation, glad to hear that, that revenue dependency is decreasing with your indirect partners. You mentioned that in the first half of the year that it was only 84% of the revenue is coming from those indirect relationships. Where do you think that can go over the next 12, 18 months?

[Richard Howe:]

I think so over the next few years, 60-40 would probably be a good split and one that we sort of point to as a business. So we would like to see it get to there.

[Eric Martinuzzi:]

Okay. And then as far as the integration goes, obviously, done a ton of work their integrating everything from the technology to the people on the NetSeer side. Where do you feel like you are as far us rolling that new incremental ad technology across your publisher base where they're really getting a taste of what this technology can do for your publishing partners?

[Richard Howe:]

Where they're now, Eric. There's really nothing left to do in the integration of the business other than this data center project that I mentioned in my prepared notes. So we're focused 100% now on leveraging existing relationships, growing new relationships. And that's probably self-evident in the fact that we felt that was prudent to bring on someone, a Chief Revenue Officer role, to help us especially on the new relationship side and frankly, even on the existing relationship side to maximize relationships that had more potential than we were yielding.

[Eric Martinuzzi:]

Okay all right. Well, congrats on the quarter and thanks for taking my questions.

[Richard Howe:]

Thank you, Eric.

[Operator:]

[Operator Instructions] And we'll now take a question from Lisa Thompson with Zacks Investment Research. Please go ahead.

[Lisa Thompson:]

Hi, good afternoon. Could you - Wally, could you talk about where is your profitability breakeven revenue lever now? I know you had some onetime, but then you said you still have a little bit more of cost savings going forward. So where does that get you to?

[Wallace Ruiz:]

Yes. So one of the things that we've been saying is that we expect the acquisition to be accretive by the fourth quarter. So we think that by the fourth quarter of this year, we ought to be at that point.

[Lisa Thompson:]

So - but what's the magic number in revenues to get to breakeven?

[Wallace Ruiz:]

In revenues, it's between $20 million and $22 million.

[Lisa Thompson:]

Okay. And as you integrate – ready to work with NetSeer and you said you had the partnership with Acxiom now. Is this putting you in a different place as far as competition? And who are you out there to beat and what's your selling characteristics as to how you do that?

[Richard Howe:]

There was a few questions there, Lisa, so I'll do my best here. Yes, it absolutely puts us in a different place competitively in the marketplace. That was a principal reason for making the acquisition. We needed technology to put ourselves in that position, and we had the choice of either -- like we always do, we either develop it ourselves or buy it. And we felt buying it was going to be a faster path. So the question -- the answer to it does a different -- produce a different response. So our position in the marketplace is yes. The second question was -- what was the second question, Lisa, sorry?

[Lisa Thompson:]

Who does that put you up against as far as competition that may be different than it had been in the past?

[Richard Howe:]

Well, that is a hard question to answer because our industry has quite a few players in it. And if you look across the landscape, they all sort of fill individual niche roles. So in a way, it puts us in direct competition with everybody. But it's probably more important to consider what our strategy has been and another reason why we bought the NetSeer operation, and that was for the following reason. We don't - we didn't want to be a niche player within our industry and be, if you will, withholding to other players in the industries being an intermediary, if you will. We wanted to make sure that we're going to put ourselves in a position where we had the technological capability to have direct relationships with advertisers and indirect relationships with publishers and then be the focal point for the connection between the two as opposed to trying to do that through other parties. So that's what we're doing, right. So we just head down. We compete with probably any and all of the big names that you would know in the industry in any given situation. It could be Taboola or Outbrain that we're competing for need of advertising at the bottom of page. It could be the programmatic players that we're trying to get inventory through programmatic channels and others.

[Lisa Thompson:]

Okay. So what's the strategy? Are you going after industries or a certain problem that needs solving? Like you can't just throw it out or change everything?

[Richard Howe:]

So it's a big industry, and I know that you should infer from that, that we're going after everything. What we're going after, frankly, from a conceptual perspective is pretty simple. We know what it is advertisers want, and what advertisers want to do is to be able to build an audience for their products or services. And we now have, with the collection of technologies under our roof, the ability to help them do that. And we think we can do that better than anybody else can, and we're going to compete based on that basis.

[Lisa Thompson:]

Okay. You said you might be adding some employees. Would that be pretty much all in sales?

[Richard Howe:]

It's not all in sales, but I think we're at 93 people now, Wally, is that right?

[Wallace Ruiz:]

92.

[Richard Howe:]

Out of 73 or so last year, and the -- any additions that we make between now and in the year will not be material. So we're probably talking 5 or 6 people at most, and they would be sales and/or development.

[Lisa Thompson:]

Okay, great. And is that going to be added in Arkansas? Or it doesn't really matter?

[Richard Howe:]

It doesn't matter to us. I guess, I could say it doesn't matter, but it kind of matters. I guess, we try to do the following. We want to balance the economics associated with hiring with the quality of the candidates that we're getting, right. So I think it depends, right. If we could find, for example, great developers in Arkansas, we're probably more likely to do - to hire them because our headquarters are here. If we can't, good news, we have an office in San Jose and we can hire them there.

[Wallace Ruiz:]

And in some cases, it may be in neither places. I mean, some salespeople can work from remote location. And Lisa, just to make sure that you're clear on what I was saying before, I was talking about a breakeven added adjusted EBITDA, right?

[Lisa Thompson:]

Okay.

[Wallace Ruiz:]

And not GAAP net income.

[Lisa Thompson:]

What's the number for GAAP net income?

[Wallace Ruiz:]

Okay. GAAP net income is going to be when we reach that $100 million run rate, and so it'd be at least at $100 million run rate.

[Lisa Thompson:]

Okay. So $25 million then?

[Wallace Ruiz:]

Yes.

[Lisa Thompson:]

All right. Good, Thank you. Thank you for clarifying that. That’s all my question.

[Operator:]

[Operator Instructions] And I would now like to turn the call back to Rich Howe for any additional or closing remarks.

[Richard Howe:]

Thank you, operator. I want to thank everyone for joining us on today's call. We appreciate your continued interest in Inuvo, and we look forward to reporting our progress over the coming quarters.

[Operator:]

And thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation.