Inuvo, Inc.
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Good day and welcome to the Inuvo 2015 Second Quarter Earnings Conference Call. Today's conference is being recorded. 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 second quarter earnings conference call and shareholder update. 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 it 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 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 performance in the second quarter 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 pleased to be announcing our third consecutive quarter of strong growth year-over-year. Revenue in the second quarter was $16.7 million, up 53% from 10.9 million Q2 last year and up 25% sequentially. Net income was also strong at $445,000 or $0.02 per diluted share, up 16% over last year. This marks the sixth straight quarter of positive net income on a GAAP basis and the 14th straight quarter of positive net income when we adjusted for non-cash items. Gross margin in the second quarter was a solid 58% and gross profit was up a 54% year-over-year. Both segments of the business were up in Q2 with the partner segment revenue up 67% and the owned and operated up 39% year-over-year. Wally Ruiz, our CFO will be sharing additional details about our financials shortly, but the bottom line is we had a great first half of 2015. Let me share with you what we’ve been up to within each segment of the business, starting first with the owned and operated segment. We experienced improvement within the O&O segment throughout the quarter. The result of a continued focus on additional site features designed to improve engagement with our audience. These feature enhancements began in the early part of the year and have started to translate into an increase in the number of pages, the average user engage with on the A LOT brand publications along with an increase in the total time spend on ALOT. Collectively these two measures are what we mean when we refer to engagement. In this regard in the quarter, the average page views per user on the health site was up 50%. The living site was up 100% and the travel site had an outstanding improvement of 200% sequentially. Increasing the engagement with our sites will be an ongoing focus for us this year, as it provides additional opportunities to put our advertisers' messages in front of an involved in-market information seeking group of consumers. In turn, this improved user engagement, allows us to command a premium from advertisers for ad placements on our sites. During Q2, we also completed the final transition of legacy ALOT properties, moving them to the new ALOT page template. The highest level domain alot.com have now joined the family and completes this brand overall. You can now go to alot.com as a launching point for all the websites and you will note that we now provide a consistent user experience for all visitors including the legacy consumers who still use the ALOT toolbar. Now I’ll work with the career site over the last year led to the development and launch of an education site, which we announced in the quarter. This vertical has a highly engaged audience searching for information that can help them further their own, or that turns out their children's education aspirations. While the site has only been live for a relatively short time, we are seeing promising results for page views and visits. Additionally, we’ve also been actively expanding the technology that supports our marketing initiatives which we do in a network to attracting audience to our sites. As a result, we have been able to broaden the number of channels we use to market it through and have seen some encouraging results from that effort. Pinterest, Facebook, Instagram and a number of the content recommendation technology providers are among the marketing channels we expect to grow throughout the second half of the year. In addition to building more engage with features and increasing our social presence. We also excited about expanding use of our in-house photographic and video production capabilities. During Q2, we began creating our first in-house and proprietary photo shots which we deployed in-test to measure whether these more highly targeted photo will impact translate into engagement with consumers through image galleries deployed on the sites. Early result suggest that they did and because of that we have plan to scale this effort throughout Q3 and Q4 using both in-house staff and freelance photographers who will work side-by-side with our design, editorial and advertising team. In addition, we will also be deploying our first in-house produced videos in Q3. Our Partner segment had a very successful second quarter. With that said, we can on occasion within the segment experience an acceleration of growth when partners benefit from a demand from advertisers that exceeds the supply of leads in that market. A number of our partner had this occur in Q2 and as a result we expect them to normalize within the second half of the year. Internally and as a result of the SearchLinks launch, we have also organized within the Partner segment around two product offerings, which we will refer to going forward as Partner ads and SearchLinks. The Partner ads business has performed well for us over the last two years. Within Partner ads, our focus will be to continue sign up new customers, while directing some resources towards selling, delivering and supporting SearchLinks. Our Partner ads business has, and continues to successfully serve ads into thousands of websites daily. In last few quarters, we have been messaging the upcoming launch of SearchLinks reinforcing the strategic advantage of our digital publishing business as a catalyst for the design and optimization of that product line. The opportunity size, the quality of publishing partners and the more comprehensive nature of the SearchLinks solution points to an opportunity to capitalize on the growing market for native advertising. The Partner ads business has also been an asset in this launch having supply to data clients for the first quarters in market tests. The SearchLinks launch which we announced officially on Tuesday as actually been ongoing for about a month. The early feedback, the quality of publishing partners, the sign ups and the pipeline are all progressing nicely. In this short time we have signed up about 40 new publishing partners for SearchLinks and about half of them are now going live. We designed SearchLinks to address some very real issues facing publishers who are currently using competing products. Among those issues were, poor ad targeting, poor ad content, poor ad quality and insufficient add coverage per page topic. We wanted to design a product that didn’t bate consumers into a click rather we designed that product that is so aligned with the content that it also aligns with the interest of the consumer. Q2 was a very busy quarter for SearchLinks. Scaling the solution like this require a coordination among development, delivery, account management and sales team and in many of those functions it has also meant hiring and training new people. We expect to continue to hire and support of this product for the foreseeable future as we onboard more publishers we will continue to optimize through technology enhancement, the delivery and support of those clients in an effort to become more efficient. An example of this is self service. For now we have chosen to work closely with publisher to ensure as much as possible that these new clients experience early success with our product. Soon however, we expect to be in a position where we feel comfortable allowing client to go through the qualification, sign up, implementation and payment processes in an automated fashion. SearchLinks is by far the most technically sophisticated product line we have ever built and we wouldn’t have directed our resources towards this solution if we did not believe the opportunity warranted it. SearchLinks is currently delivering about $10,000 per day in revenue. The product line is currently comprised of three different ad unit types. We expect the suite of ad units to expand overtime. We are excited about the launch and we plan to push hard through the second half to sign up and successfully implement as many new clients as practical. By gaining new product launch, we expect as we scale that we will encounter various challenges. But with that said, we feel good about our abilities to deliver on the promise of the solution, both for ourselves and our partners. I would now like to turn the call over to Wally.

[Wally Ruiz:]

Thank you, Rich. Good afternoon everyone. Today we reported another consecutive quarter of strong revenue growth and profitability. Inuvo reported revenue of $16.7 million in the second quarter of 2015 compared to $10.9 million in the same quarter of last year, a 53% increase. $9.3 million came from the partner network and $7.4 million from the owned and operated network. The partner network which delivers advertisements to our partners' websites and applications reported $9.3 million in the second quarter of this year compared to $5.6 million in the same quarter last year, a 67% 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 and a focus on marketing campaigns and verticals have returned better than average ROIs in the quarter. Though we're pleased with the high growth rate in the partner segment, we believe that these verticals will settle back to a normal growth level as competitors begin to exploit them. 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 45% of the company's total revenue in the current year quarter. The owned and operated network reported $7.4 million of revenue in the second quarter of 2015, a 39% increase over the same quarter last year. The growth in this business segment is largely due to the investment made in proprietary content and affected marketing campaigns resulting in more revenue. In the second quarter of this year, we announced the launch of a new website education.alot.com which contributed to the revenue growth in the quarter. Further, we acquired two websites getting their first full quarter were also important contributors to the quarter's revenue. During the second quarter, we increased our sales allowance by approximately $326,000 to a balance at June 30th of $866,000. The allowance is used to address advertiser adjustments that occur from time to time. Adjustments that company has incurred in 2015 have not been material. Gross profit in the second quarter of 2015 was $9.6 million compared to $6.3 million last year, a 54% improvement. Gross profit as a percentage of revenue or gross margin was 58% in the second quarter of 2015 compared to 57% in the same quarter last year. Partner network gross profit in the second quarter of 2015 was approximately $2.2 million compared to $1 million last year. The improved gross profit in this year's quarter was primarily due to higher revenue associated with 45% more clicks on ads than during the same quarter last year and due to higher RPCs, or revenue per click this year compared to same period last year. Gross profit in the owned and operated segment in the second quarter of 2015 was $7.4 million compared to $5.3 million last year. The higher gross profit in this year’s quarter compared to last year is primarily due to higher revenue. Operating expense which is comprised of marketing cost compensation expense and selling general and administrative expense was $9.1 million in the second quarter of 2015, compared to $5.8 million for the same quarter last year. Marketing cost of the primary cost 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 cost were $6.6 million in second quarter of 2015, a $3 million increase from the same quarter in the prior year. Compensation expense increased by $200,000 to $1.3 million in the second quarter of 2015; compared to the same quarter of the prior year. The higher expense in the current year quarter is primarily due to higher payroll associated with hiring additional personnel into higher company incentive plan expense. At June 30, 2015 we had 56 full and part time employees, a year earlier we had 40 full and part time employees. SG&A or Selling general and administration expense was $1.2 million in the second quarter of 2015 compared to 1.1 in the same quarter last year. The increase in the current year SG&A expenses due primarily to higher professional fees and facility cost. For the remainder of the year, we intend to maintain our focus on accelerating growth with investments design to continue the expansion of our web properties and support cost associated with the expansion of our native advertising product SearchLinks. We therefore expect marketing cost to increase in coming quarters commensurate with the growing revenue in the owned and operating network. We expect compensation expense to increase as we step-up hiring particularly to support the role of our SearchLinks. And we expect SG&A expense to remain relatively flat for the remainder of the year. Net interest expense was $37,000 in the second quarter of 2015, $66,000 less than last year. This year's lower expensive due to lower loan balances and the renegotiation of our line of credit and term debt last year. We accrued a tax expense of $36,000 in the second quarter of this year for state income tax that we believe we will redo. The net loss from discontinued operations was $15,000 in the second quarter of this year compared to $18,000 net income in the same quarter last year. The loss this year was due to foreign exchange translation adjustment and a auditory expense. The company reported net income in the second quarter of 2015 of $445,000 or $0.02 per diluted share that compares to $382,000 or $0.02 per diluted share in the prior year quarter. EBITDA adjusted for stock-based compensation expense was approximately $1.1 million in the quarter that ended June 30 of this year compared to an adjusted EBITDA of $1.2 million in the same quarter of the prior year. Turning to the balance sheet, as of June 30th of this year. Cash and cash equivalents was $3.8 million at the end of June, about $64,000 higher than the cash balance at December 31st of last year. And bank debt was $1.5 million in June of this year compared to $3.6 million at December of last year. With that I would like to turn the call back to Rich for closing remarks.

[Richard Howe:]

Thanks Wally. In summary we have had an exceptional first half of 2015 and we have exciting plans in place for both segments of the business in the second half. Producing our own video and image libraries is exciting next step in the evolution as a digital publisher and SearchLinks opens a new rollup to a market for advertising technology that we have never before had the opportunity to fulfill. While we haven’t provided guidance, we have suggested in the past that we felt, based on the performance of the business over these last 18 month that Nuvo could be a $100 million annual revenue run rate company organically by the end of 2017. While aggressive we still think this is an achievable longer term goal for our company even though our quarterly performance may continue to fluctuate as we execute on our growth programs. With that I would like to turn the call over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions]. We’ll take our first question from Eric Martinuzzi with Lake Street Capital Markets.

[Eric Martinuzzi:]

Thanks for taking my questions and congratulations on the real strong Q2, its good to see both sides of the business performing so well.

[Wally Ruiz:]

Thank you.

[Eric Martinuzzi:]

Partner network 9.3, I think I was modeling well below that I mean it was a pretty substantial data versus what I was expecting, which is good to see, I mean that 20% more than when I was looking for, what is driving that obviously you’ve got two different parts of the kind of the SearchLinks of the partner as relationship, new customers and then SearchLinks, those the new product but is it fresh customers, is it older customers being more productive with the products that you have with them what’s really driving that?

[Wally Ruiz:]

Yes, so a couple of things come in mind, one is that we do have revenue from SearchLinks which is the product we never had before, so we are seeing the benefit of that, but we messaged just a few minutes ago in the script that it does happen sometime in our industry, they take it vertical or more than one vertical is the case maybe in some instances, has really good advertiser demand and as a result, the price you get paid for those advertising goes up, so we did have such a situation in the second quarter that allowed in part the revenue to be higher than we thought it would be.

[Eric Martinuzzi:]

Okay and then as far as the -- well I guess I was going to get down but let me backup first your monetization partners, certainly Google had a real strong quarter, think the Yahoo! has started the relationship there, your typical revenue concentrations there, I was looking out to I think it's a September or October timeframe, but just like Yahoo! is the option to switch between search monetization, search engine in other words, they could go from Bing to Google is there any potential rumple across to your business, if Yahoo! were to switch monetization partners on the search side?

[Wally Ruiz:]

First of all I don't I can’t really speak to what Yahoo! is going to do in terms of their business. They’ve had relationship that has been ongoing now for I don't at least four years, I guess with Microsoft, so I’m not aware of any changes that are eminent there, I think the answer is I don't think so, but I don't know, right, we would expect Yahoo! to continue to be a provider of search services into the future.

[Eric Martinuzzi:]

Okay. And then shifting up over to the O&O side, another strong quarter there. So one thing that caught my eye though was the marketing costs, obviously you are rolling out new verticals, you want to make sure those verticals get traction, you spend to drive traffic to both the applications as well as the website, it's been rising overtime if I look back over the last four quarters that kind of marketing costs as a percent of O&O network, it's been marching higher, do you see that leveling out or maybe trending back down at some point?

[Richard Howe:]

It was little bit higher in the second quarter than in the first quarter. And you are right, it was trending up a little bit compared to last year too. But from where we are seeing it looks like it should level off at close to these current levels that they were at now.

[Eric Martinuzzi:]

Okay. Now it mean that maybe the new verticals are getting a little bit more organic traffic built up in audience perhaps.

[Richard Howe:]

Yes. I think the marketing is paying off and we are seeing some more unique and some organic traffic in the coming to our side, so yes.

[Eric Martinuzzi:]

Okay. And then now that SearchLinks is, you talked about how the self service capability, you guys have always been very hawkish on inappropriate clicks, in some cases fraud, quick to turn off traffic. If you are allowing a self service capability, do you run a risk higher exposure to inappropriate traffic to your monetization partners?

[Wally Ruiz:]

I think the answer is clearly yes to that. So what you have to do is put in a message to filter out those bad individuals as it turns out and/or companies at various stages and the process from the qualification side of it. We do go through a qualification process, sign up the payment side. Sometimes you catch them in the payment side to their banking stuff MedGov and then if you mix them through all that Eric, we do have technology also that sits in the back paying attention and trying to figure out that it's a real quick or not. So all I can say is we are as good at doing this as anybody in our market because it has been remained to the way we run our business and so we will continue to make sure that we don’t let that happen.

[Eric Martinuzzi:]

And then lastly for me the profitability here where is good revenue outperformance, you guys have been pretty upfront that revenue outperformance is going to be roll back into the business. Is that still the case you are kind of targeting, roughly a million bucks a quarter give or take on the adjusted EBITDA with everything else flown back into early grabbing share?

[Richard Howe:]

So you’re right, we have been messaging this, I will say, two quarters at least that we will be investing in faster growth and larger market share. So the focus has been more on the top-line and the bottom-line. And one thing we have said is that we will remain profitable and profitability and cash flow is important to us. So, every dollar of cash flow that we generate, first goes to our number one priority and that’s growth and then secondarily to bringing down our debt obligations.

[Eric Martinuzzi:]

And I did noticed that the, a nice swing you got positive net cash balance there for the first time in a while two those there.

[Operator:]

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

[Lisa Thompson:]

Can we click about a little bit to the partner network revenue so that it was kind of something extraordinary happening with demand for some vertical markets and your margins were pretty good too? Is that then drop off in September to something more normal or do you expect to have sequential growth it was out there?

[Richard Howe:]

Hey Lisa, it can vary, I don’t think we know. So what we’re saying is we’re forecasting that it will drop off simply because our experience suggest that sometime when these opportunities arise, sometimes are long life and sometimes our short live and we would rather plan on it being short live than longer life. But even with that, we continue to believe that the growth of the company is on a path probably evidenced more by the fourth quarter of 2014 in the first quarter of 2015 and it is let’s say the second quarter of 2015.

[Wally Ruiz:]

Maybe it’s characterizing that is that the growth rate has been strong in the fourth quarter and the fourth quarter and the first quarter, we see nothing to the contrary as we look forward, but we should not probably expect extraordinary growth.

[Lisa Thompson:]

Okay. And this also reflects in the gross margin for the partner network, does that kind of go back down where it was?

[Wally Ruiz:]

Yes. I think that we have been saying that it should be in the low 20s% and it will fluctuate in the low 20s%, when you take everything into account. So there will be some fluctuation in the percentage either higher or lower.

[Lisa Thompson:]

Okay. And am I looking at model that you had about $0.5 million in FR last year in this quarter, is that now zero?

[Richard Howe:]

It's not zero Lisa, but it's pretty darn close, I think it's under $1,000 today right now. Is not it Wally?

[Wally Ruiz:]

Yes, it is.

[Richard Howe:]

So it's effectively nothing.

[Lisa Thompson:]

Okay. So then that actually shows that you grew little faster and you confuse through that into owned and operated?

[Richard Howe:]

Yes, I suppose that's true.

[Lisa Thompson:]

Okay. And the other interesting question I am interested about is, you said you are going to be hiring people and freelancers to do images and video. What does that do to your cost structure, like why would you do that?

[Richard Howe:]

Well, the why we would do it is, because we are trying, continuing, we are not trying but we are actually succeeding at this, but we continue to work on techniques that will engage our visitors to the site. So is there some for example the photo of what we discussed on the call. And you can see when you go to one of our sites that have an image gallery in it where someone can pan through a number of picture that are representative of what the topic is that they were interested in the first place. So it's the education site it might be the top 10 schools in the southern United States and there is a picture of each with some caption underneath it. Those kinds of improvements to the website engage consumers for a longer period of time and that's a good thing. Video is the next evolution of that for us. Video is one of the best engagement conduit for consumers, we all watch TV, so when we watch TV we are engaged with the program all time. Video is very effective. So because we want to keep people on our site, because we want to keep people engaged in our content across the verticals, we are slowly introducing new things like this to the website to do that.

[Lisa Thompson:]

So that would be a video that relevant to some content that you’re writing?

[Richard Howe:]

That’s right.

[Lisa Thompson:]

Okay. So we’re not talking video ads, right?

[Richard Howe:]

No, no. Whether the ads on, because we make our money from ads that will be like we called pre-rolled leases. So you put an ad on the front just like someone would at YouTube for example. But you got the nature of what the video will be about, it will be related to content and I don’t want to mislead people, we’re not going to hire 20 people to do this work. I mean we tend to do things a little bit smaller scale than that and move up as it starts to work. So I wouldn’t expect this to start adding lots and lots of people here for this.

[Lisa Thompson:]

Okay. So what just to engage more and see people there?

[Richard Howe:]

Absolutely.

[Lisa Thompson:]

Alright, I think everything else is pretty straight forward, I just to see how SearchLinks. Also sounded like you got a lot of revenues from the current customers, when do you seeing that’s going to start moving to getting new customers?

[Richard Howe:]

Are you talking specifically about SearchLinks Lisa?

[Lisa Thompson:]

Well, I think you said in the partner network, right, you had some extraordinary things we had more market share with your current customers?

[Richard Howe:]

Yes.

[Lisa Thompson:]

So, you just placed somebody somehow?

[Richard Howe:]

When I was referring to that in the call that’s really yes. There is existing partners that we have who are in certain verticals where like I said there was just a lot of demand. So we continue that, new partner on both business units within the partner segment. Partner segment now has two business units, one is what we call partner ads which is the core business. And second one is the new product line SearchLinks. So we’re adding new publishing partners in both of those segments. We just have a greater focus right now on the SearchLinks side because it’s the launch of the new product and we see a lot of opportunity for us.

[Lisa Thompson:]

So is that now it is launched, or it’s going to be rolling out, I assume with the current customers namely and then you’ll start adding a new people or no?

[Richard Howe:]

We will, in fact beta tested that we actually signed up some existing partners to be part of that beta test. So yes, we will continue to market that new product to our existing client base but I will say on the cost today, I mentioned that we had already signed up about 40 publishers, roughly half of which I think are going -- are even live or going live here any day. Those are all new every single one of those 40 is not an existing client, so we’re actually seeing a lot of new opportunities with publishers that we’ve never had an opportunity to sell before.

[Lisa Thompson:]

And how does they end up coming to you because the product so unique or they are just kind of try other things, whatever they have been doing?

[Richard Howe:]

If only I could hope that someone would come to me, if they want to buy something, we’re dealing a small team, we have a team of four right now and we have technology that basically go down and scan internet and find suitable site and then we have just sort of the automated email system that sends out an email with a nice looking creative and then say are you interested in SearchLinks. And then we get some inbound yeses, so first that's our process, our initial sales process or sales team and then follows up with the one that they are interested. Now aside from that we also have a whole target list of suitable publishers and our sales team are smiling and dialing and telling everybody the story of SearchLinks and we’re seeing really great results so far.

[Lisa Thompson:]

Well it sounds great. As far as content, is there any other verticals you are looking at or you are going to be working on education for a while?

[Richard Howe:]

I don't think if we should expected to launch any new verticals, we have only scratch the surface in terms of the sheer quantity of content that we could write across all of the verticals that we are in and in fact really the only reason, we launched the education vertical was because it was so closely complimented with the career vertical that we have, and we were seeing users sort of really come into careers but be more interested in education content and so that's why we complimented those that site with education, but would not expect us to launch any more verticals here for a little while.

[Lisa Thompson:]

Right, okay sounds like everything is working well and looking forward to see what happens. Thank you.

[Richard Howe:]

Yes, we’re pleased thank you for that.

[Operator:]

And there are no other questions at this time. I’d like to turn the conference back to our speakers for any additional or closing remarks.

[Richard Howe:]

Thank you. 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:]

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