Inuvo, Inc.
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Good day and welcome to the Inuvo, Inc. 2015 First Quarter Earnings Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Mr. Alan Sheinwald of Capital Markets Group, LLC. 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 first quarter 2015 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 relates to Inuvo, Inc. are 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 the 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 congratulate management on their outstanding growth in the first quarter and terrific returns and turn the call over to Mr. Richard Howe, CEO of Inuvo. Rich, the floor is all yours.

[Richard Howe:]

Thank you, Alan, and thanks everyone for joining us today. We are very pleased to be announcing yet another strong quarter of revenue growth. Revenue in the fourth quarter was $13.4 million, up 33% from $10.1 million in the Q1 of last year. This now marks the second straight quarter of greater than 30% year-over-year growth and the fifth quarter of net income with $626,000 or $0.03 a share. Gross margins in the first quarter was solid 55% with gross profit up 14% year-over-year. Gross margins were slightly down year-over-year as a result of strong growth within the partner segment, which was up 39%. Owned and Operated grew 25% year-over-year. Wally Ruiz, our CFO, will be sharing additional details about our financial performance shortly. But the bottom line is we’re starting 2015 off strongly with both growth and earnings at the high end of our peer group. Let me share with you where we're headed for each segment of the business starting with the owned and operated segment. Within the O&O segment, we continued to focus on improving user engagement. We launched a new search experience for alot users in the quarter and we've been working on a vertical site expansion into education as a complement to our alot career site. Search is not new of Inuvo. We have a unique set of resources, technologies and intellectual property in search related products as a result of our previous experience with the tool bar and the solutions we've distributed for years within the partner segment of our business. Delivering a unique search experience for alot site users was something we wanted to include as part of the evolution of the alot properties and brand. This new search resource when fully implemented will provide our users with a much better overall search experience. For example, a search for diabetes versus diabetes supplies within health will yield very different results because the first represent the search for information while the second represent the search for products. We will be issuing more announcements in the next few quarters about the education vertical and the search experience at the alot site. Further, we've been exploring the possibility of small website acquisitions within the O&O segment. We believe in many cases we have the technology, experience and relationships to realize greater revenue and profit from these websites than do their owners. When this is the case we believe this represents a great opportunity for expanding our digital publishing footprint. We’re currently engaged in conversations with several targets and expect to provide more information about this strategy in the coming quarters. During the quarter, we produced, edited and posted over 1,000 new or updated articles, slide shows and infographics while also introducing several new types of content including for the first time quizzes. All of these user engagement enhancements are having a positive impact. As our sites continue to grow so does our exposure with the major search engines. Organic traffic was up significantly again this quarter for health, living and careers. We remain focused on both marketing as a means to drive growth and organic traffic as a means to fuel profits. We have continued to find new and profitable channels where we can successfully market alot with the objective to get more consumers to our sites and then, of course, returning to our sites based on their unique interest. Now, while there are many ways to measure the improvements across our sites, for example, some track page views, others may track unique visitors, the metric we are most focused on internally is what I call the action metric. The question we ask is, are we experiencing more revenue generating clicks than in the past? And in this regard we've seen a 72% increase in clicks and an 18% increase in the revenue per click when compared March, 2014 to March, 2015 within this O&O segment of our business. Our Partner segment had an equally successful first quarter. Since we've modified the focus within the segment in 2013, we have continued to communicate a two-fold strategy. The first, to focus on quality and stability within the core partners segment and, second, to innovate and distribute new ad technology. Within our core partner business, we now have a stable collection of publishing customers who use products we successfully distributed for years and with whom we have experienced solid year-over-year growth. We have also added new customers in this core segment over the last 12 months. Click quality remains one of the most important metrics we track in this business and it has remained excellent over the last five quarters following the changes we implemented in the fourth quarter of 2013. While we continue to nurture this core component of the partner business, we have start to migrate sales and support and development resources toward search links which is our entry into what the industry calls Native Advertising. Native advertising is growing segment of online advertising where are ads are better integrated with the content of a page or app. This closer coupling of content and ad experience is purported to yield better click through rates while at the same time aligning more closely with user intent. We have seen this phenomenon with our only native advertising solution SearchLinks which we recently reported with entering its beta program with partners having been launched initially across our alot sites. Native advertising spend is already exceeding $7 billion annually and some are estimating that this spend could approach over $20 billion by 2018. We are very excited to be a part of this new high growth area of online advertising and we believe we have both the means and desire to make this initiative very successful. I would encourage you to visit the searchlinks.com website to get more information about these products including a promotional video we developed to market the product to content publishers, our target audience. We have been running these new ad units across our a lot sites for some time and we now have a about a half dozen partners in our beta program today. We’ve seen encouraging results in both deployments and, as a result, we are getting close to full launch likely in early Q3 with growth expectation in Q4. This is by far our most technically sophisticated product launch to-date. SearchLinks ad units have the ability to understand the content of the pages where our ads are placed. They have the ability to take that page knowledge and match it to advertising that is perfectly aligned with the context of that page. They have the ability to adapt themselves over time based on the consumers interaction with the ad unit and they do all of this without any human intervention ensuring both for Inuvo and our publishing partners the highest possible page monetization. The technology barrier to entry for potential competitors in this market is considerable and this fact gives us confidence that we can both enter and compete in this market for years to come. SearchLinks opens Inuvo, to a much broader universe of publishers particularly content-wise and mobile apps where consumers are spending increasing amounts of their online time. Overall, in our partner segment, we believe we are delivering significant value to our advertising clients and our publishing customers and for the March ending month in 2015 quick accounts are up year-over-year and revenue per click looks good. Let me now touch on a few additional points before turning the call over to Wally. We’ve continued to see year-over-year growth in mobile. In the first quarter of 2014, mobile contributed 21% of overall revenue; it was 35% in the first quarter of 2015 or a 67% improvement year-over-year. Now as you all know from previous calls, it has been as high as 50% of overall revenue in any given quarter and varies quarter to quarter based on the mix between desktop tablet and mobile. Further, we announced in Q1 that we have renewed our yahoo agreement and that what stated in that press release the new contact renews under the same terms and conditions as its predecessor. And this provides Inuvo with right sufficient support our long term strategic plan. Additionally, we also recently announced times to move our main office from Conway, Arkansas to Little Rock, Arkansas. Although those two locations are only about 30 minutes apart from one another, the new location meets both our gross and price expectation and places us in close proximity to Little Rock Tech Park. They expect to be in the new location by October. With that I’d like to turn the call over to Wally.

[Wally Ruiz:]

Thank you, Rich. Good afternoon everyone. We are reporting today another consecutive quarter of strong revenue growth and profitability. The Inuvo, reported revenue of $13.4 million in the first quarter of 2015 compared to $10.1 million in the first quarter of last year. That’s a 33% increase $7.6 million came from the partner network and $5.8 million from the owned and operated network. The partner network which delivers advertisements to our partners owned and managed websites and application reported $7.6 million in the first quarter of this year compared to $5.5 million in the same quarter of last, a 39% increase. Higher revenue in the partner network this year compared to the same quarter last year is due largely to the expansion of market share within the existing publisher base during the past 12 months. The innovative ad units we developed and tested on our owned web properties have been made available to our publishers and health publishers' sites to become more effective. The owned and operated network, which is made up of a collection of websites and apps we own and where income is derived from advertisements, represented 44% of the company's total revenue in the current quarter. The owned and operated network reported $5.8 million of revenue in the first quarter of 2015, a 25% increase over the same quarter last year. The growth in this business segment is largely due to the investment made in proprietary content and effective marketing campaigns resulting in a great number of transactions or clicks as well as the expansion of web property. Gross profit in the first quarter of 2015 was $7.4 million compared to $6.4 million last year, a 14%improvement. Gross margin was 55% in the first quarter of this year compared to 64% in the same quarter last year. The lower margin this year compared to last year is due to the revenue contribution mix between partner and owned and operated networks as a result of accelerated growth within the partner network. The partner gross profit in the first quarter of 2015 was approximately $1.5 million compared to $1.9 million last year. The lower gross profit in this year’s quarter was primarily due to the changes we implemented last year to improve traffic quality and to assure publisher compliance to our policies. These changes resulted in higher margins in the first quarter of last year 2014. At that time we had said we were not expecting higher revenues to reoccur in subsequent quarters. Gross profit in the owned and operated segment in the first quarter of 2015 was $5.8 million compared to $4.6 million last year. The higher gross profit in this year’s quarter compared to last year is primarily due to the higher revenue. Operating expense, which is comprised of marketing cost, compensation expense, and selling, general and administrative expense, was $7.1 million in the first quarter of 2015 compared to $7.8 million in the same quarter last year. Marketing costs are their primary cost associated with the owned and operated network were dollars that spent to build an audience for the various sites and apps that we own. Marketing costs were $4.9 million in the first quarter of 2015, an increase of $1.3 million from the same quarter in the prior year. The higher marketing costs are related to the higher investment level required to promote and create awareness of the owned web properties. Compensation expense increased by $91,000 to $1.2 million in the first quarter of 2015 from the same quarter in the prior year. The higher expense in the current quarter is primarily due to higher payroll associated with additional hiring. At March 31, 2015, this year, we had 52 full time and part time employees; a year earlier at this time we had 34 full and part time employees. SG&A or selling, general, and administrative expense was $988,000 in the first quarter of 2015 compared to $1 million in the same quarter last year. The decrease in the current quarter of SG&A expense is due primarily to lower depreciation and amortization expense. As mentioned in our prior teleconference call, we are focused on accelerating growth. For the remainder of 2015 we will concentrate investment on expanding web properties and launching our native advertising product SearchLinks. We expect marketing cost to increase in coming quarters to 40 campaigns to expand owned web properties. We expect compensation expense to increase as we step up hiring particularly technical personnel though hiring will be commensurate with our revenue growth. We expect SG&A expense to remain relatively flat for the rest of the year. Net interest expense was $51,000 in the first quarter of 2015, $47,000 less than last year’s expense. This year’s lower expense is due to lower loan balances and the renegotiation of our line of credit and term debt last year. In February, we settled a long ongoing dispute with the State of New Jersey over an income tax claim relating to a subsidiary of a company that we acquired in 2012. The settlement was substantially less than liability that we had accrued to handle the claim and we recognized an income tax benefit of $406,000 in the first quarter of 2015. The net income from discontinued operations was $20,000 in the first quarter of 2015 compared to $26,000 in the same quarter last year due to an adjustment of certain accrued liabilities originating in 2009 and earlier as well as a favorable foreign exchange translation adjustment. The company reported a net income in the first quarter of 2015 of $626,000 or $0.03 per diluted share compared to $675,000 or $0.03 per diluted share in the prior year quarter. EBITDA, adjusted for stock compensation expense and accrued severances, was approximately $674,000 in the quarter that ended March 31, 2015, compared to an adjusted EBITDA of $1.3 million in the same quarter of the prior year. Turning to the balance sheet at March 31, cash and cash equivalents totaled $1.9 million at the end of March, significantly lower than what we anticipated and the accounts receivable balance was $7.4 million significantly higher than we anticipated. The cause of this change was a late payment from a major advertising partner that was received on April 2, two days after the quarter. The partner told us that it was a systems issue and that it would not be reoccurring. Bank debts were $3.5 million in March and that’s compared to $3.6 million at the end of 2014. Regarding other matters, this evening we will be making three performatory filing with the SEC. The first will be the 10-Q that relates to the quarter we’re discussing now March 31, 2015. Secondly, we will be filing an S8 for 450,000 common shares of stock that we have accumulated under an Evergreen Clause in the shareholder approved 2010 equity compensation plan. These shares are not outstanding nor have they been granted or in any way been allocated. And finally, thirdly, we’ll be filing the notice of the Annual Shareholder Meeting and Proxy and the meeting that’s set for June 25 at our headquarters in Conway, Arkansas. With that, I’d like to turn it back over to Rich.

[Richard Howe:]

Thanks, Wally. In summary, we had a terrific first quarter, the second consecutive quarter of greater than 30% revenue growth and the fifth consecutive quarter of profitability. In Q1, both segments of the business experienced significant growth. We remain excited about 2015, with a mission to continue to expand our digital publishing business leveraging the consumer engagement therein as the means for developing native advertising solutions we can sell to website and as publishers under the SearchLinks brand. We expect to continue to grow profitably while also investing in products, marketing and resource initiatives necessary to assure we capture market share essential for continued success. While we are only just completing the first month of the second quarter, Q2 is looking positive with April’s revenue likely to come in around 30% higher than last year. We are confident that our current strategy can continue to fuel growth throughout 2015 and we see additional segments of the digital advertising marketplace where we can successfully introduce products and services. I look forward to providing shareholders with additional update as we evaluate and execute on these new opportunity. With that, I’d like to now turn the call over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions]. And at this time, we will take a question from Eric Martinuzzi with Lake Street Capital Markets.

[Eric Martinuzzi:]

Thanks for taking my questions and congratulations on the good revenue growth there in Q1; it’s nice to see the second quarter. Just wanted to talk about the EBITDA, given the revenue growth I was kind of surprised to see that there wasn’t better EBITDA flow through with the revenue up 33% but the EBITDA down around $600,000 year-on-year; understanding that the growth margins were impacted by the mix towards the partners' side but also seeing that that partner gross margin declined. I was hoping when you could peal it backwards a little bit on why that partner gross margin declined.

[Wally Ruiz:]

Yes, I think you hit on most of it, Eric. The margins were lower in the quarter and there was additional marketing expense and as we talked about in previous quarters and teleconferences we’re focused on growing as quickly as fast as we possibly can and to gain market share. So any available cash that we have we've been either spending it to grow the both of the networks, the partner network and the owned and operated or to pay down debt. And so, right now, we remain focused on growing the top line and we feel pretty confident that the bottom line will follow in the subsequent quarters.

[Eric Martinuzzi:]

Okay. And you said you got a big cash payment in April. What was that dollar amount? Does that swing the -- or I'm looking at a net debt number of about $1.6 million I think; does that bring effect where we were kind of exit in Q4 we assume that payment was about similar in size?

[Wally Ruiz:]

It was a big number; it was almost $3 million, Eric. And it was unfortunate because we normally get it towards -- closer to the middle of the month actually and they had this system issue and it got delayed so.

[Richard Howe:]

I think and maybe, Eric, I know you probably realize it, but it wasn’t material for the operations of our business. The fact that we got the couple of days late was neither here nor there for us in running the business, right. We just usually typically get it in the last week of the month of the quarter, sometimes actually in the second last week --

[Wally Ruiz:]

Yes.

[Richard Howe:]

And like Wally, said it was a system error and so be it. Right so, cash was lower and receivables was higher, nets out the same.

[Wally Ruiz:]

Yes.

[Eric Martinuzzi:]

Does that go against any of the current portion of the term and credit notes payable or is that just going into cash and used for the working capital?

[Wally Ruiz:]

It wouldn’t -- you mean when we received it?

[Eric Martinuzzi:]

Yes.

[Wally Ruiz:]

Yes, no, it went right into cash.

[Eric Martinuzzi:]

No, but I mean because you’ve got looks like about $3.5 million outstanding, I know some of it is long term, some of it is short term; how nearer that short term payoff?

[Wally Ruiz:]

It just made -- there was really nothing unusual about the payables, is that what you’re asking? We just --

[Wally Ruiz:]

Yes. You got to determine the credit notes payable the total about $3.5 million, a million of its short-term, and $2.5 million of its long-term.

[Richard Howe:]

Oh I see, yes. Okay, yes we probably would have shaped off another $300,000 or $400,000 of our outstanding.

[Eric Martinuzzi:]

Okay. All right and then just I know you don't want to give too much color on guiding but for in 2014, you guys had EBITDA of, I think it was around $5 million -- $5.5 million you just did a Q1 with around $700,000. Is the thinking I understand you're investing in on the business and I did all that. But is it to if you've finished 2015 at a similar EBITDA rates to 2014 is that the goal is it just some positive number not necessarily trying to equalize to your -- what’s the thinking on the EBITDA?

[Richard Howe:]

So you're right, Eric. We haven't given guidance. But that being said, I think may be the way to look it, we expect our EBITDA to go up in subsequent quarters.

[Eric Martinuzzi:]

Okay. All right. And then lastly on the SearchLinks product get around online advertising for a while. What you described sounded kind of like contextual search right just contextual paper click model. How is SearchLinks different from contextual search?

[Richard Howe:]

That make take longer to describe then we have on this phone call. I think the best comps may be if people are interested in this product is to go look at companies like the Bull and Outbrain, albeit where they may drive customers to competing websites for the publishers where they have their technology residing, we don't do that. We drive the consumer to an ad, in which case we think which is one of ways we're focused on the content publishing side of the business because we think that there's a big market there for us because we don't do that.

[Eric Martinuzzi:]

Well I guess a big difference then would be a graphical or a display owner linked to the text then?

[Wally Ruiz:]

For the graphics there is content and then there is keywords that there is three elements to every -- we called panel associated with every ad unit. Three things the graphical image, some content, and then some key words.

[Eric Martinuzzi:]

Okay. All right. And could see the April revenue number looking as strong as it does. Thanks for taking the questions guys.

[Operator:]

[Operator Instructions]. At this time we will take a question from Lisa Thompson with Zacks Investment Research.

[Lisa Thompson:]

Can we talk a little bit about this breadth between partner and owned and operated in the next few quarters. How does that change with seasonality and how you're spending and then once SearchLinks is launched is that going to change the split again?

[Richard Howe:]

Yes, I don't know about change in the split. But I think, yes, there is also I mean is always going to be a mix variation in our business simply because we got two segments and they don't grow at exactly the same rate rightly. So the answer to the question is as it relates to seasonality I wish there shouldn't be any expectation of seasonality variations on the partner side of the business at this point because the biggest seasonality component of that segment of our business is usually the first quarter, and we had a good first quarter, so we would expect to see that business grow continuously for the rest of the year. And we think the same is going to be true for the O&O business this year. Again Q1 is usually typically the down quarter in our business.

[Lisa Thompson:]

What do you mean on grow, do you mean sequentially or year-over-year?

[Richard Howe:]

Both.

[Lisa Thompson:]

Both, okay. So and then when SearchLinks launches does that then start skewing partner bigger?

[Richard Howe:]

It could. Of course it's all a function of how successful we are with that product. But I can tell you that we have large aspirations for that product based on results we've already seen from it to-date with trials based on the size of the market for it and based on the what we think is lack of competitor specifically in the niche we're in. So yes it could that product ends up being a successful as we think it will be, it could well grow much faster than our O&O business.

[Lisa Thompson:]

And how long do you think it takes for you figure out if it's working well or not?

[Richard Howe:]

We're already seeing that it's working well. Now the question becomes can we execute, meaning can we sell it, can we get it on pages in the kinds of numbers we need to scale it. And I don't think I'll have a read on that until the later part of Q3 and Q4 because that's when we plan to really roll it out in a big way.

[Lisa Thompson:]

Okay. And then going back to your comment about looking at website to acquire. What would be characteristics that you're looking for and or the topics? Are you -- I know are they something you would try to integrate with what you've got or something that's totally standalone?

[Richard Howe:]

There's two different schools of thought with this. One goes to by the website and then roll them into to be a lot brand. And then of course the other thought is more of a strategy that is been executed on successfully by companies like Internet brand which is just to acquire a whole bunch of other web properties and let the brands be as they may. I don’t know that we've settled on the right strategy there because both can work. But we are looking at verticals that will complement what we're already doing without telling you which one, Lisa.

[Lisa Thompson:]

But would that mean like a website where you can just take the relationships with their and kinds of advertisers and say this would be a good place to put their ad too, that's the thinking?

[Richard Howe:]

Well most certainly that's the case. So as I said in my script the reason why this is an effective strategy for Inuvo is only because we have technology resources and abilities that these smaller websites which is the ones that we would target do not posses. One of those being the one you desire which is again as you all know we serve all on our own ads. So we can acquire a small website where the individuals cutting deals for ad with someone else in the Internet ecosystem and getting terrible shares as a result, that’s an easy problem for us to fix because we serve our own ad technology and we can then also take those web properties and market to them which is something smaller size web properties usually don’t have the ability to do. Not certainly not at the level of certification that we do given our size and our expertise.

[Lisa Thompson:]

And then how do -- how do those things what’s the pricing on those websites -- how do they people grow with their work?

[Richard Howe:]

It varies but probably the bottom-line for our shareholders is it's really not material these are inexpensive way to scale that business. Often times we might actually able to do with a little bit stock.

[Lisa Thompson:]

Okay. And how do they -- would they do it by web in multiple revenue or one people with the website how does that work?

[Richard Howe:]

Well we would typically if we're going to do a deal like this we would, like I said, there might be some small amount of cash and some small amount of stock, right, not material is the bottom-line. But we would then hold the original owners of the website accountable to revenue growth trajectories for their payment of those things.

[Lisa Thompson:]

Okay. All right. Certainly sounds interesting will have this effect. I think that's all the questions I have right now.

[Operator:]

[Operator Instructions]. As of time we'll take a question from Brandon Weiser, Private Investor.

[Brandon Weiser:]

Congratulations on another great quarter. I just have a question or two about well first off about apps. I know that you guys have some apps in the Google play store. But I don’t think you guys have any apple app store yet. Do you guys plan in the next quarter or in the coming year to rollout apps in the app store?

[Richard Howe:]

Yes, hey Brandon, interesting article about you by the way so congratulations on that.

[Brandon Weiser:]

Thank you.

[Richard Howe:]

Yes, I think the answer is yes but it's probably important that people who are following or who understand that the internal app strategy for us is not as important for strategy. When we first started developing apps to be candid we did it one because we thought we could offer our website users something that they may want. But more importantly we wanted to get our ad technology working. And I don’t say that because I don’t think it's important mobile apps are obviously important. But if you visit our web properties that we first built the web properties with mobile in mind mobile web as it turns out. That’s really difficult for us to do any better than we’ve already done with the experience on a mobile phone for our website. So the concept of an app is just not that important to us.

[Brandon Weiser:]

Okay.

[Richard Howe:]

But that being said we still continue to build them, we still continue to produce them, and we will be complementing with IOS as opposed to just android in the future.

[Brandon Weiser:]

All right, cool. And also congratulations in getting the new property in Little Rock. So this you new guys are trying to expand along and get employees. And if so where or what segment are the majority of these employees going to go to?

[Richard Howe:]

Yes, that’s a good question too. So I think in 2014 headcount was 35-ish, 36-ish I don’t know Wally something like that, right.

[Wally Ruiz:]

Full time.

[Richard Howe:]

And do you that's -- that's probably at the end of 2013 at the end of 2014 it was we were up what at 54 or 55 now.

[Wally Ruiz:]

We are presently at 52.

[Richard Howe:]

52.

[Wally Ruiz:]

Full and part time.

[Richard Howe:]

Yes and I think I think our plan for the year is to get to 60 something 62, or 63, if I remember something like that. So as a result there may be 10 people or something for the year at least according to our current plan. The majority of those people will be development, account management with sales.

[Brandon Weiser:]

Okay.

[Richard Howe:]

And I'd say the bulk of them likely to be targeted at our SearchLinks product.

[Brandon Weiser:]

Okay that sounds great. Well that's all my questions. Thanks a lot and again congratulations on another great quarter.

[Operator:]

At the time we have no further questions in the queue. I’ll turn things back over to management for any additional or closing remarks.

[Richard Howe:]

Thank you, Operator. I’d like to thank everyone who joined us on today’s call. We appreciate your continued interest in Inuvo and we look forward to reporting progress over the coming quarters.

[Operator:]

And again, it does conclude today’s conference call. Thank you all for your participation.