Inuvo, Inc.
Q3 2016 Earnings Call Transcript

Published: 27 Oct 2016

[Operator:]

Good day and welcome to the Inuvo Inc., 2016 Third Quarter Financial Results Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Alan Sheinwald, Capital Markets Group. Please go ahead, sir.

[Alan Sheinwald:]

Thank you, operator and good afternoon. I’d like to thank everyone for joining us today for the Inuvo third quarter 2016 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, Inc., 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 out of the way now, I’d like to turn the call over to Mr. Richard Howe, Chairman and CEO of Inuvo. Rich, congratulations for returning to sequential growth in Q3 and the floor is now yours.

[Richard Howe:]

Thank you, Alan, and thanks everyone for joining us today. We recovered well from a softer than expected second quarter with revenue up strongly to $17.5 million or a 12% growth on a sequential basis. For the nine month period year-over-year growth was 5% and while our second quarter performance clearly impacted the short-term we remain on track from a growth perspective to reach our $25 million quarterly run rate target by the end of 2017. We expect to continue sequential growth throughout the fourth quarter of 2016. In Q3, we delivered $420,000 or $0.02 a share of non-GAAP adjusted EBITDA, up nearly 50% over the second quarter. Wally, will review the reconciliation between GAAP and non-GAAP income in his comments. At the end of Q3 we had cash on hand of $3.6 million and we remained free of bank debt. We also renewed under similar terms our $10 million bank revolving credit agreement for an additional two years. From a segment perspective the Owned and Operated business represented 65% of overall revenue and the partner business 35% of overall revenue in the third quarter. We continue to experience mobile expansion with 58% of overall revenue from mobile sources in the quarter and that’s up quite significantly from 38% in the same period of 2015. The partner network returned to sequential growth in the quarter with revenue up $6.2 million that’s up strongly at 30% from the prior quarter. And in line with the baseline Q4 2015 quarter that we had previously messaged as the best starting point comparison for that business following revenue reporting changes between segments that occurred in 2015. We’ve seen a stabilization of the demand issues we reported about in Q2 and we see renewed focus on growth within one of our major adverting suppliers post the announcement from their planned acquisition. New opportunities particularly in mobile may accelerate and we are actively working on a number of deals which should continue to support sequential growth. We continue to see encouraging signs within SearchLinks. The number of ad clicks generated within this product line was up 20% over the previous quarter and revenue collected from SearchLinks publishers was up 15%. We’ve experienced growth in share within many of our existing SearchLinks to publishing partners and we continue to expand the technology foundation of the product and meet the needs of publishers and the competitive treads of the marketplace. Specifically, we are currently testing within our O&O properties, the use of behavioral targeting as a complement to the contextual targeting currently deployed universally within SearchLinks today. With this feature we will have the ability to determine in real-time whether or not we should show an ad based on the content of the page currently being engaged with or shown ad based on a visitors previous search or content engaging with experience. We will of course have the ability to optimize between these ad serving options based on the earnings potential to Inuvo. These enhancements should allow for market share expansion and ultimately is the product scales margin enhancements. Performance to date on this new feature with the O&O business has been encouraging. The Owned and Operated Network also experienced sequential growth up 4% to $11.3 million in the quarter. The segment was down year-over-year in part because of the same demand issues that impacted overall performance through Q2 and into early Q3. Now, we have been an early adopter in our Owned and Operated business of header bidding and some times also referred to as pre-bidding. And this is a relatively new programmatic technique and we can actually offer up our O&O ad placement opportunities to multiple ad suppliers. This technique offers us the absolute best chance to get the highest payment for non-SearchLinks ad inventory on our O&O pages. We have seen a 15% to 20% increase over the amount we collect from advertisers by using this evolving technique. Now, what’s equally promising for us and specifically the results of synergies between business segment is the future opportunity for the SearchLinks products within header bidding. As we learn how to optimize these ad placement on our own sites of the publishers, we would be in a position to leverage the opposite or the supply side of this header bidding marketplace by developing SearchLinks ad products specifically designed to header bidding marketplace, which we could expand our reach for the products, the SearchLinks products specifically to thousands of new potential publishing partners. Generally, as it relates to header bidding for both segments of the Inuvo business, we’re takeaway should be that the technology changes over the last year have really resulted in a more level playing fields that we are now beginning to capitalize on. We produced over 75 original videos in the quarter and the majority of them where in the health, travel, living and on the Earn Spend Live sites. We expect to be developing more videos over the months including some developed and branded with direct advertising partners. We are also doing direct advertising deals with other pieces of ALOT content including within the automotive vertical which we launched some months back at auto.alot.com. We also launched the complement to the Earn Spend Live site with the essential BF site. This property is targeted at 25-year to 35-year old men. Within Earn Spend Live, we also created a weekly series called really talk with a number of interviews with prominent CEO’s. We’ve also completed our first content syndication deal with the financialdiet.com. In this model, we effectively lease our content to others and benefit from the consumer traffic to generate and [support] ALOT. A great example of how we can repurpose proprietary content, the cost of which is already been spend. With that, I would like to turn the call over to Wally.

[Wallace Ruiz:]

Thank you, Rich. Hello and thank you for joining us today. Inuvo reported revenue of $17.5 million for the quarter that ended September 30, 2016, a 12% increase from the immediate prior quarter and a 9% decrease from the $19.3 million reported in the same quarter last year. For the nine months ended September 30, 2016, Inuvo reported revenue of $51.9 million or 5% increase over the same nine-month period last year. EBITDA adjusted for stock-based compensation expense and non-GAAP financial measure was $420,000 in the quarter that ended September 30, 2016 or $0.02 per share compared to $282,000 or $0.01 per share in the immediate prior quarter and compared to $1.3 million or $0.05 per diluted share in the same quarter in the prior year. For the first nine months of 2016, adjusted EBITDA delivered $2 million or $0.08 per share compared to $3.1 million or $0.13 per diluted share for the same period last year. On a GAAP basis, Inuvo reported a net loss of $263,000 or $0.02 net loss per share in the quarter ended September 30, 2016. In the same quarter last year, we reported a net income of $651,000 or $0.03 per diluted share. We exited the second quarter of 2016 with the plan to remedy, the demand weakness, we identified on our last call and the strong third quarter over the second quarter growth reflects our recovery from those issues. The Partner Network delivers advertisements to our partners’ websites and application. The Partner Network reported $6.2 million in the third quarter of this year compared to $4.7 million in the immediate prior quarter and $7.2 million in the same quarter last year. As we have reported in prior teleconferences, 2015 had a number of inter segment revenue transfer that made year-over-year comparison at the segment levels not entirely apples-to-apples. As a result, we said on prior call, this is the best starting quarter comparative for the Partner segment with Q4 and fourth quarter of 2015, where we delivered $6.2 million in revenue. With that said, the third quarter revenue of $6.2 million was right in line with the fourth quarter 2015 revenue and seasonally high quarter, the fourth quarter, but more importantly it’s 30% higher than the immediate prior quarter this year. The current trend indicates that the Partner Network revenue in the fourth quarter of this year will continue to exceed the third quarter revenue. Owned and Operated Network has made up a collection of websites and apps we own and where income is derived from advertisement. The Owned and Operated Network represented 55% of the Company’s total revenue in the third quarter of this year. The Owned and Operated Network reported $11.3 million of revenue in the third quarter of 2016, compared to $10.9 million in the immediate prior quarter and $12 million in the same quarter last year. The Owned and Operated revenue in the third quarter exceeded the immediate prior quarter by 4%. Inuvo gross profit in the third quarter 2016 was $12.3 million compared to $11.7 million in the immediate prior quarter and $13.3 million in the same quarter last year. Gross profit as a percent of revenue or gross margin was 71% in the third quarter of this year, compared to 69% in the same quarter last year. The increase in the percentage is largely due to the mix between Partner and Owned and Operated revenue shifting more towards the higher margin Owned and Operated Network. Partner Network gross profit in the third quarter of 2016 was approximately $1.1 million, compared to $797,000 in the immediate prior quarter and a $1.4 million in the same quarter last year. The lower gross profit in this year’s quarter compared to the same period last year is due to both lower revenue and to lower average RPCs, revenue per clip, this year compared to the same period last year. Gross profit in the Owned and Operated segment in the third quarter of 2016 was $11.3 million compared to $12 million last year. The lower gross profit in this year’s quarter compared to last year is due entirely to lower revenue recorded this year. Operating expense is comprised of marketing costs, compensation, and selling and general administration expense. Operating expense in the third quarter was $12.8 million, that’s compared to $12.7 in the same quarter last year. Marketing costs are the primary costs associated with the Owned and Operated Network where dollars are spent to build an audience for the various sites and apps that we own. Marketing costs were $9.9 million in the third quarter of this year, and $233,000 decrease from the same quarter in the prior year, reflecting the lower revenue this year. Compensation expense increased by $110,000 to $1.7 million in the third quarter of 2016 compared to the same quarter last year. The higher expense in the current quarter is primarily due to higher payroll costs associated with additional hiring. At September 30, of this year, we had 70 full and part-time employees, a year earlier we had 61 full and part-time employees. SG&A or selling, general and administration expense was $1.2 million in the third quarter of this year compared to $1 million in the same quarter last year. The high expense this year is due to higher depreciation and amortization expense and a credit adjustment that we made last year that was associated with the unamortized portion of the [Arkansas] brand. We expect marketing cost to increase in coming quarters commensurate with the growth in Owned and Operated Network revenue that we’re expecting. We expect compensation expense to increase modestly to support technology development and our sales incentive and we expect SG&A expense to remain relatively flat in the coming quarters. Net interest expense was $26,000 in the third quarter of 2015 roughly as we’ve seen this last year. The current year quarter included a net income gain and net income positive of a $171,000 were $0.01 per share with the final adjustment in closing of our European subsidiaries which have been classified as discontinued operations for many years. Adjusted EBITDA of $420,000 or $0.02 per share does not include any of the net income growth, discontinued operation. At the September 30 of this year at the end of the third quarter we had cash and cash equivalents of $3.6 million, we had no bank debt and the balance sheet continued to strengthen. The covered ratio improved at the end of the third quarter to $0.97 and the current assets over liability was $0.97 at the end of the third quarter compared to $0.88 at the end of December of 2015. With that I’d like to turn the conference back to Rich.

[Richard Howe:]

Thanks, Wally. We made some solid progress in Q3 coming off, but weak Q2. Now we typically see strong demand from advertisers beginning in November through Christmas and expect as a result of these sequential growth in the final quarter of the year. As we look out towards 2017, the advancements we have made in areas like behavioral targeting within SearchLinks. The expanded content in video and on new sites like auto, along with a growing [indiscernible] of direct advertiser relationships that really support our current goal to get to $25 million by the fourth quarter of 2017, which implies the run rate on the business from that point of a $100 million. Now further to that, our trailing 24 month compounded annual growth rate has been 26%, which is inline with the growth rate required to actually hit our target. Now with that, I’d like to turn the call back over to the operator for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And we will take our first question from Eric Martinuzzi of Lake Street Capital Markets.

[Eric Martinuzzi:]

Thanks and congrats on the return to sequential growth, curious to know the growth that we saw sequentially here as I look, it seems mostly on the partner side 6.2 up from 4.7 and 11.3 versus 10.9 on the O&O. As you look out to December and I know you’ve talked about sequential growth in both lines there comparatively speaking, do we continue to see the greater sequential growth on the partner side versus the O&O?

[Richard Howe:]

Yes.

[Eric Martinuzzi:]

Okay.

[Wallace Ruiz:]

Yes. I think that something we’ve been saying in the past. Eric I think it remains true what we still expect the Partner Network time period to grow the asset.

[Eric Martinuzzi:]

Okay. And you talked about some of the expanded footprints with partners. Is this largely due to SearchLinks or is it due to something else?

[Richard Howe:]

Yes. The expansion we were speaking about was specifically related to SearchLinks and I think I know flat call probably one of the first times we have ever done it. Eric as we did actually to close some of the sites we are running SearchLinks on and those are the ones we are talking about and many of them with expanded relationships.

[Eric Martinuzzi:]

Okay. And it’s good to see the working capital number improve given the 400,000 plus of EBITDA I know we didn’t see an incremental improvement in the cash balance of a similar amount with what we spend in money on in the quarter from a CapEx perspective?

[Wallace Ruiz:]

The CapEx is predominately development of our technology, but other than that it’s relatively small in terms of hardware and [indiscernible].

[Eric Martinuzzi:]

I wanted to dive a little bit deeper on a couple of things that you mentioned in the prepared remarks Rich you talked about behavioral targeting which is the term that I recognize for many, many years ago. I am wondering how you guys are doing it different and then you also talked about pre-bidding could you particularly layer deeper on those two?

[Richard Howe:]

Yes, so behavioral targeting is for the most part what I think you know it to be Eric this is you know look you’ve encountered – it is really a machine because privacy laws don’t allow you to profile consumers, nobody does that, but you do know there is a machine you’ve see before that was reading about [indiscernible] and through the technology of behavioral targeting there is the ability to store persistent ID associated with that engagement of the [indiscernible]. And then when that person lands on some other page where we either have content because I said digital property we all know it’s the SearchLinks, ad unit on some publishing site. And we make a determination at that point, is this page a better page to show this consumer an ad based on the content of that page maybe you’re on a page and reading now about travel to San Diego or this is a page that doesn’t really monetize well with content and we be better off showing you something else about [indiscernible] because you really look like you are interested in it you know at 30,000 or 40,000 feet that was going on there is various technologies quite sophisticated, quite frankly technologies required to make that what sounds simple happen.

[Eric Martinuzzi:]

That’s why you get to the pre-bank question just one follow-up on this behavioral or you blending this with data stream from other sources and if so is that changed the margin profile?

[Richard Howe:]

We haven’t yet incorporated third-party data sources we have a significant amount of data from interaction across our own networks quite vast quantities of it by the way and so we built the let’s call it the first phase of this thing on the back of our own proprietary information, which we think is better than many of the third-parties out there and what they have. But that doesn’t mean we’ve excluded the thought of it in fact you know we’ve sort of identified a number of third-party sources we might try to complement the data that we have ourselves but that’s a Phase II.

[Eric Martinuzzi:]

Okay and then the pre-bidding?

[Richard Howe:]

So I actually debated when I wrote the pre-bidding stuff because it’s such a complicated market price that I knew someone would want to delve into it. So I have to take this one up a level two otherwise we will get into the nuts and bolts of it but the sort of programmatic marketplace has changed quite a bit over the last mostly year, year and half. And essentially as I’ve said in my notes what is done is sort of level the playing field. So I guess in a way if the system prior to about a year and half ago with just some degree rigged in favor of those who were early into the marketplace, but the big players who I won’t name [indiscernible]. And some of the technology changes that are now being referred to is header bidding or pre-bidding which basically allows you to bid before the ad servers called gives publishers a better opportunity to get the best price with their inventory. And so we started looking into this some month back now and we found is to be very useful and in fact the economics whereas I said in my comments I think we saw somewhere between - with it I say 10% or 15%increase in the CPM’s that we get as a result of this on that, but I went on further to say like any marketplace right, Eric I mean there is two sides of it. And again one of the benefits are being Inuvo is we planned on both sides of the market. We are not just a digital publishing business that had ad inventory that we want to fulfill, but also an ad tech company that has the ability to fulfill. So when we look at these kinds of opportunities, we see an opportunity on both sides and on the advertiser side of that equation, we see SearchLinks is being the opportunity we could put into that marketplace.

[Eric Martinuzzi:]

Okay. And then lastly on that profitability for Q4, you talked about sequential growth in the topline, adjusted EBITDA I know historically you guys always been targeting to get into to kind of a million marks plus adjusted EBITDA for quarter. Do we get back to that level in Q4?

[Wallace Ruiz:]

We are not giving a specific guidance for Q4, we think the way we are trending at the moment coming off of Q3 that sequentially we are going to be – Q4 is going to be ahead of the third quarter. The operating – the adjusted EBITDA should reflect that increase in revenue, so I think the EBITDA certainly be ahead and follow the increased revenue we are expecting.

[Eric Martinuzzi:]

Okay. Thanks for taking my questions guys. A - Richard Howe You bet, Eric.

[Operator:]

And we will take our next question from Lisa Thompson of Zacks Investment Research.

[Lisa Thompson:]

Good afternoon.

[Richard Howe:]

Good afternoon, Lisa.

[Lisa Thompson:]

So in the past, you’ve given us some description of how the revenues per day travel through the quarter so to speak, because you just kind of recap what happened with the whole Yahoo interruption followed by the android problem and kind of where you are now in this quarter? How do you started the quarter and how you see it trending?

[Richard Howe:]

As best we can, so in Q2 I believe what we said was in first – at least two months of the second quarter, we didn’t see necessarily a drop call it in the total number of clicks that we experienced on ads, but we saw a drop in the amount of money we actually get paid for each of those clicks. And when that happens, Lisa in our business it’s usually a reflection of the supply and demand economic, so less buyers of clicks, we get paid less. And as a result, that we saw a lower revenue, so that you don’t – systematically, the business didn’t changed at all, is not like we did things wrong or something both the android issue aside for a second. This was really simply a marketplace issue and so we saw some recovery from that starting – we actually made some changes to try to recover format technically and we can do that by making decisions about what ads to show and not show and what orders we can do some manipulating beyond the things that algorithms that we have and we did some of that and that had an impact. But the real impact was when the demand entered back into the marketplace and we saw that starting to happen while I guess in the latter part of the second quarter. And it’s been continuing through the third quarter.

[Lisa Thompson:]

Okay. And so how – when you entered the third quarter kind of where was revenue dollar per day and then where is it now, is it behaving as it typically does this time of the year?

[Richard Howe:]

Yes. We try not to disclose what’s going on right other than cases like in Q2 where we know that there was a weakness, so we think it’s important to shareholders now we are tracking. What I’ll tell you is, what I said on my comments is, right now we are expecting sequential growth in Q4 or Q3. So I guess my implication that means we are going to get – make more money on a daily basis, right.

[Lisa Thompson:]

Okay. So we’re getting more numbers anymore. Just a quick kind of top level on SearchLinks and you’ve had a number of customers that have been testing it for a while, given at some point where these people will get out of the test phase and kind of roll it out. Where are you with customer?

[Richard Howe:]

Yes. I wouldn’t call what we’re doing with a lot of those customers testing at this point. I mean, we’ve had longstanding, I mean the products only been in the market probably I don’t know less than a year. And so we’ve got relationships that go back, call it nine months. And in many of those cases, those are not tests anymore. I mean with the number of those publishing partners, many of them among the list that I named in the second quarter call, we’ve been expanding on a regular basis with them.

[Lisa Thompson:]

Okay, so it’s not like there is a bunch of big ones that are just going to kick in when they say, okay, tied it for six months and now we are ready to roll it to the whole?

[Richard Howe:]

Yes. That could happen, Lisa, but I think you’ve been asked this question in the past and I’m not sure what my answer was, but it’s probably this is answer I’m going to give, which is – publishers and we are one, of course, so we know how this works, because we do it ourselves. They don’t typically turnover all of their ad inventory to anyone to buyer, at least not immediately. That becomes sort of a risky endeavor for them. So there is a tenancy to have a gradual creep into more ad inventory as performance warrants creeping and so it’s a more steady increase.

[Lisa Thompson:]

Okay. And has anything changed in the dynamic with competition just to build that out…

[Richard Howe:]

No, we don’t see it. We’re having the same success rate in our sales activity as we’ve been having over the last six months and the marketplace is competitive. So it was when we went into this business and it’s going to be for the foreseeable future. So I think that’s why the investments and things like the way we are targeting and predicted analytics and better data sources, these are all the reasons why we’re going to be able to win.

[Lisa Thompson:]

All right, great. Thank you. That’s all my question.

[Richard Howe:]

Thank you, Lisa.

[Operator:]

[Operator Instructions] And we will take a question from Jon Hickman of Ladenburg Thalmann.

[Jon Hickman:]

Hi, thanks for taking my questions. So you mentioned that improvement started in the later part of the second quarter and the demand improvement, is that true? So was that I heard. So with the current noises that Verizon is making, you haven’t seen any change in the demand in the Yahoo platform?

[Richard Howe:]

No, we have not.

[Jon Hickman:]

Okay. And then the comments you made about reaching the $100 million run rate which would be a $25 million quarter. Can you be like – do you expect that in the early part of the year or until a later part of 2017?

[Richard Howe:]

Yes, the current goal has it’s been stated is for Q4 of 2017.

[Jon Hickman:]

Okay, all right.

[Richard Howe:]

And just to give you a historical context for that, I case you won’t aware of it, but the very first time we gave that goal was in the first quarter of 2014 and at the time we were doing $10 million of revenue in the quarter and that’s when we laid out that guidance for the marketplace, a guidance we stayed with and not altered by the way since, and the implication was that we’re going to get from that $10 million in the first quarter of 2015 to $25 million by Q4 of 2017 and that is essentially our guidance. So we don’t change it ever. We haven’t changed it. We don’t tend to change it. That’s where we think, we want to get to and the track we’re on. As I said in my comments, our current, at least trailing 24-month CAGR put us right on track for achieving that goal.

[Jon Hickman:]

Okay, thank you. That’s it for me.

[Richard Howe:]

Thank you. End of Q&A

[Operator:]

[Operator Instructions] And with no further questions in the queue, I would like to close the call. Thank you for participating. And have a great day.