Inuvo, Inc.
Q4 2015 Earnings Call Transcript

Published: 4 Feb 2016

[Operator:]

Good day and welcome to the Inuvo 2015 Year End Financial Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alan Sheinwald, 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 fourth quarter and full year 2015 shareholders update conference call. Today, Mr. Richard Howe, Chief Executive Officer and Chairman; and Mr. Wallace 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 reviewed at www.sec.gov. With that out of the way, now I'd like to congratulate management on an outstanding year of growth across all financial measures and turn the call over to Mr. Richard Howe, CEO of Inuvo. Rich, the floor is yours.

[Richard Howe:]

Thank you, Alan and thanks everyone for joining us. We are proud of what we accomplished in 2015 both financially and operationally and I am pleased to report that we exceeded our 2015 targets. Between the first quarter of 2014 where we delivered $10.1 million in revenue, and the most recent fourth quarter of 2015 where we delivered $21 million in revenue, we've grown the company 108% and that’s in less than two years. At $70.4 million year-over-year revenue in 2015 was up 42% and we delivered this result while increasing net income 11% to $2.3 million for the year. We’ve now been GAAP income positive for eight straight quarters in a row all the while continuing to make the investments necessary to build a bigger and financially stronger business for our shareholders, our employee and our partners. Adjusted EBITDA and free cash flow are important operating measures for us as a result of certain non-cash items in the P&L. We find that these measures provide a clearer view of the operating cash being generated by the core business. So while we delivered $0.01 of GAAP earnings per share in 2015, at $4.6 million in the year there was $0.19 per share on a free cash flow basis. This 48% year-over-year improvement in free cash flow was a driving force behind the retirement of our debt in 2015. We also ended the year with $4.3 million of cash on the balance sheet. Now comparing 2015 to 2014, both business segments were up year-over-year with partner up 18% and own and operated up 68%. As we mentioned in the past certain partner revenue from sites we acquired earlier in 2015 is now being recorded in the owned and operated segment. The impact of this acquisition is now fully represented in the run rate within the partner business and so shareholders should be looking at this the 6.2 million in Q4 revenue in partner as a good baseline for the future relative growth within this segment. While we continue to believe we are currently undervalued relative to the assets we possess, the results we are producing, the products and technologies we are developing, the partnerships we have forged and the opportunities ahead of us, shareholders did benefit from a more than doubling of our stock in 2015. Let me now share with you what we’ve been up to within each segment of the business starting first with the partner segment. The partner segment grew 18% year-over-year and 2015 was an important pivot point in the operating model for the business. Historically our revenue stream from this segment was made up of more custom implementations in the middle and smaller publisher market. With the development of SearchLinks which is a suite of native advertising solution we are moving towards a more standardized implementation with a more middle and upper market publisher target audience. Now despite our increased focus on SearchLinks, we have in fact added several new partners with customized implementations in the fourth quarter of 2015 that we believe will contribute to revenue growth within this segment in 2016. We continue to call this part of the partner segment the partner at business. SearchLinks had a very busy Q4 despite the fact that most publishers do not make any code changes to their site leading into the holiday season. We added dozens of new publishing partners within the quarter and SearchLinks is already appearing on some very well traffic in category leading sites like Kiplinger [ph] in Finance. With all of our SearchLinks implementation we are focused on delivering value first in an effort to establish a base from which to optimize future performance. Building these relationships around stable and steady growth is preferable to going fast and encountering lower than expected performance for our clients. The sales cycles are longer with upper market premium publishers and as a result we want to make absolutely sure we maximize the opportunity given the hard work that went into getting the business in first place. Being too aggressive and delivering poorly optimized ads could jeopardize our relationship with these new clients and does not align with our high-value time matched product positioning. We believe both the partner ad business and the SearchLinks business will grow continuously throughout the year after starting point in January 2016. SearchLinks delivered $2.6 million in total revenue in 2015, a very robust result when you consider the product was only announced officially at the end of July and we effectively had publisher implementation freezes between November and December. Now as I'm sure many of you know Yahoo! in an important partner for this segment of the business. We believe our relationship with Yahoo! has never been better. The business we did with them in 2015 as measured by the revenue generated for Yahoo! across both of our segments was not only the largest ever but also the highest quality ever. We also had an outstanding year within the owned and operated segment of the business which grew 68% year-over-year. In 2015 we wanted to increase the amount of time users spend on our sites and the number of pages they interact with while on our sites. We operationalized this goal by writing better content, building a new website features and adding complementary content choices like galleries. The results have been encouraging. For example, we experienced a 200% year-over-year increase in engagement within travel, 74% in living, and 125% in education. For our proprietary gallery content we are now finding that over 70% of the people who start at gallery finished them. The total number of visitors also increased significantly across all sites with notable increases of 500% for living, a 1000% for travel and 60% in health. Including sites we acquired, we had more than 8 million unique visitors per month across all the 010 properties in the fourth quarter. With great content comes the opportunity for great paying display ads in premium locations on our sites. We experienced a 400% increase in revenues specifically resulting from these premium display location in 20 15 over 2014. We also passed the 7000 total proprietary articles written and published mark in 2015. Now let me turn my attention to our internal video and image production capabilities both of which we started in late 2015, and expect to continue throughout 2016. We’ve experienced encouraging engagement results with these new content types and as a result we will continue to build a library of video and image content for publication across all of our sites. We launched a new test site in the fourth quarter. It can be visited online @earnstandlive.com [ph] and you can get a good feel for the kind of video we are producing in-house by visiting the earn, stand, live YouTube channel which you can get to by searching for earn, stand live at YouTube. With this web property we are testing the concept of building closer relationships with our visitors by publishing highly targeted content delivered to highly targeted user groups. Our core ALOT properties were designed for broader content appeal and therefore this new category of sites represents a fresh opportunity for us. Social media and a conduit for content exposure will be a much larger focus for us in 2016. We see channels like Facebook growing rapidly and the opportunity to build brand recognition within the channel appears less burdened by competing in better-known brand. The social media environment at least qualitatively appears less content brand sensitive. This makes it an excellent place to build interest in our content. We will continue to build our proprietary marketing technologies throughout 2016. In a market like we are in where consumers have plenty of choices for the content they consume, the effectiveness of our marketing campaign programs can provide us with an advantage over our competitors. Throughout 2015 we had been continuously developing and deploying marketing technologies that in effect give our campaign managers statistical insights about the performance of their campaigns that in turn allows them to manually adjust those campaigns. In 2016, we already have plans underway to incorporate automation and just in time decision-makings into the campaign process. For example, a campaign that might not be performing well at a certain time of day could be paused automatically and then restarted at a time of day when it does perform. We believe it is these kinds of applied artificial intelligence that will drive growth into the future while building barriers to entry for our competitors. We maintain that both content and marketing are important keys to building a successful digital publishing business and we’ve built a terrific team capable of delivering both. I’d now like to turn the call over to Wally for a more detailed commentary on our financial performance.

[Wallace Ruiz:]

Thank you, Rich. Good afternoon everyone. Today we reported another consecutive quarter of strong revenue growth, profitability and cash flow. Inuvo reported revenue of $21 million in the fourth quarter of 2015 compared to $15.5 million in the fourth quarter of last year, a 36% increase. $6.2 million came from the partner network and $14.8 million from the owned and operated network. The partner network delivers advertisements to our partners’ websites and applications. It reported $6.2 million in the fourth quarter of this year compared to $7.6 million in the same quarter last year. As Rich mentioned the sites we acquired from a partner earlier this year now has its revenue recorded in the owned and operated segment, which has the effect of lowering the partner segment revenue and increasing the revenue of the owned and operated segment. The revenue shifted was approximately $1 million per quarter when we acquired this site in March 2015. The sites have grown quickly under Inuvo’s ownership. The owned and operated network is made up of a collection of websites and apps we own and income is derived from advertisement. The owned and operated network represented 71% of the company's total revenue in the current year quarter. The owned and operated network reported $14.8 million of revenue in the fourth quarter of this year, an 87% increase over the same quarter last year. The growth in this business segment is largely due to the investment made in proprietary content, effective marketing campaigns and the acquisition of partner sites. Gross profit in the fourth quarter 2015 was $16.4 million compared to $9.3 million last year, a 75% improvement. Gross profit as a percent of revenue or gross margin was 78% in the fourth quarter of 2015 compared to 60% 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 fourth quarter of 2015 was approximately $1.5 million compared to $1.4 million last year. The improved gross profit in this year's quarter in spite of lower revenue was due to somewhat higher RPCs or revenue per click this year compared to the same period last year as well as an adjustment of the reserve. Gross profit in the owned and operated segment in the fourth quarter of 2015 was $14.8 million compared to $7.9 million last year. The higher gross profit in this year's quarter compared to last year is essentially due to higher revenue. Operating expense, which is comprised of marketing cost, compensation and selling, general and administrative expense was $15.6 million in the fourth quarter of 2015 compared to $8.4 million 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 $12.7 million in the fourth quarter of 2015, a $6.8 million increase from the same quarter in the prior year. The higher marketing spend was an essential driver behind the 87% increase in the fourth quarter owned and operated revenue. Compensation expense increased by $126,000 to $1.5 million in the fourth quarter of 2015 compared to same quarter of the prior year. The higher expense in the current quarter is primarily due to higher payroll associated with additional hiring and the company’s incentive plan expense. At December 31, 2015 we had 63 full and part-time employees. A year earlier we had 53 full and part-time employees. SG&A expense, selling general and administrative expense was $1.4 million in the fourth quarter of 2015 compared to $1.2 million in the same quarter in the prior year. The higher SG&A expense this year was due primarily to a $131,000 higher facility costs and $72,000 higher depreciation and amortization expense. As in the recent past, we will continue to focus on continuing the accelerated growth, expanding our web properties and supporting and marketing our native advertising product SearchLinks. We therefore expect marketing costs to increase in coming quarters to measure it with a growing revenue in the owned and operated network. We expect compensation expense to increase as we step up hiring particularly to support the rollout of SearchLinks and we expect SG&A expense to remain relatively flat. Net interest expense was $30,000 in the fourth quarter of 2015, $35,000 less than last year’s fourth quarter expense. This year lower expense is due to lower revolving loan balances. The net loss from discontinued operations was $3000 in the fourth quarter of this year compared to a net loss of $108,000 in the same quarter last year. The net loss last year was due to accruing an uncertain tax position in the UK. We expect to complete the closing of discontinued operations by the second quarter of this year 2016. The company reported a net income in the fourth quarter of 2015 of $617,000 or $0.03 per diluted share compared with $645,000 or $0.03 per diluted share in the prior year quarter. The EBITDA adjusted for stock-based compensation expense was approximately $1.6 million in the quarter that ended December 31, 2015 compared to an adjusted EBITDA of $1.8 million in the same quarter of prior year. Over the past several years, Inuvo has been able to generate an increasing cash flow. In 2015 we generated $4.6 million of free cash flow which equates to $0.19 per diluted share. This compares to the free cash flow we generated last year of $3.1 million or $0.13 per diluted share. At December 31, 2015 we had cash and cash equivalents of $4.3 million and no bank debt. Both accounts receivable and accounts payable balances increased at December 31 2015 compared to the same time last year due to a 36% higher revenue in the same quarter compared to the same quarter last year. During the fourth quarter of 2015, we relocated our offices from Conway, Arkansas to Little Rock. The new facilities required a net expenditure of $362,000 for leasehold improvement, furniture fixtures and equipment. With that, I’d like to turn the call back to Rich.

[Richard Howe:]

Thanks, Wally. In summary, we had an exceptional 2015, a year in which we exceeded our target growing revenue 42%, free cash flow 48% and net income 11%. We had an owned and operated business model that continues to fuel growth and a fantastic new product SearchLinks that we expect will deliver strong year over year growth in 2016. At December 31, 2015 mobile revenues were above 42% of total, debt was zero and the cash balance was $4.3 million. Our overall strategy has not changed. In 2016, we expect to continue expand content in O&O segment and broadly distribute SearchLinks within the partner segment. We will continue to use our O&O segment as a testing ground for new ad technologies. At over $70 million in profitable annual revenue and an organic growth rate well in excess of our peers, we believe we have demonstrated that we have a model capable of scaling. We exist in a very competitive marketplace where size really does matter. Being bigger gives us ability to negotiate better terms with partners. They become more efficient operationally and it provides certain reputational marketplace advantages. We believe it in the best interest of shareholders that we continue to make investments in our business to drive scale, believing that a larger platform provides opportunity to increasing margin. We’ve had a longer-term goal to reach a $100 million profitable run rate by the end of 2017 and we believe we are on track to deliver against that goal. Q1 is typically the weakest quarter in our industry as the price paid for ad placements by advertisers drop following the holiday season. This drop usually impacts both revenue and margin. With that said, we had strong sales in January where unaudited revenue came in above $6.5 million which is well above last year and a strong star to 2016. With that, I'd now like to turn the call over to the operator for questions.

[Operator:]

[Operator Instructions] And we’ll go first to Eric Martinuzzi of Lake Street Capital.

[Eric Martinuzzi:]

The growth that you got – in the press release you talked about the January and if I just take that $6.5 million unaudited revenue that you just mentioned, and I am not sure what the seasonality is within the quarter. But just that and multiply it times 3, that would be a $19.5 million quarter. A) is there anything wrong with that logic? And then B) that growth rate in comparison to a year ago when posted a $13.4 million quarter would be a pretty strong acceleration in growth rate entering the year versus the quarter you just finished? So I'll start there.

[Richard Howe:]

I think that’s a fair way to look at it.

[Eric Martinuzzi:]

And then obviously you do have a revenue concentration you talked about it in your 10-K every year. In 2014 Yahoo! was 54%, it was 44%, I know you have a budding relationship with Facebook but can you talk about where you finished at 2015 on a revenue concentration and your goals for the coming year?

[Richard Howe:]

Yes. In the past as you know, Eric, the vast majority of the revenue was through Google and Yahoo! and we’ve made a concerted effort to diversify as much as possible and we’ve had some success this year bringing on some new direct relationships and we think that, that’s going to continue into 2016. It’s certainly a strategy that we put together that we expect to grow over time year after year. However we do realize that Yahoo! and Google will continue to be a very very strong or big part of our revenue stream.

[Eric Martinuzzi:]

And then obviously I don’t want you to get too specific on it but I will just kind of use the last year’s numbers is probably a good proxy for 2015. Let me shift over to the profitability. I know goal here is to get to $100 million but as I look at the year just ended, I am sorry, the quarter just ended, we had a terrific growth in Q4 2015 with the revenue up 42%, and yet there was a decline in the adjusted EBITDA, I am talking about $1.6 million that you did this quarter versus $1.8 a year ago. What should we be thinking about as far as how you play with that profitability flow [ph] in the coming year?

[Richard Howe:]

So all of our available cash and profitability that we have, we want to put it into growth.

[Operator:]

And we’ll go next to William Gibson of Roth Capital Partners.

[William Gibson:]

Hi, I want to follow up a little bit on focus on Eric and focus on profitability. But first, just in relation to the gross margin you mentioned, 78% versus 60%. Could you give us a little more detail on what that reserve adjustment was, how much that impacted the quarter? Hello could you hear me?

[Operator:]

It appears that our speaker line has been disconnected. Please stand by while we resolve.

[Richard Howe:]

Hello. Thank you. We are back.

[William Gibson:]

Okay. Good. Did you hear my question before you got cut off?

[Richard Howe:]

We did not, Bill. No, we apologize. We did not. We just had to dial back in, so we apologize to the audience that’s listening. What was the question, Bill?

[William Gibson:]

Well, first, I just wanted a little more color on the reserve adjustment that impacted gross margin in the fourth quarter and what was the effect of that on the improvement and what was the adjustment?

[Richard Howe:]

Yes, so we had an adjustment made earlier in the year that was associated with a traffic source that we had, that we needed to verify. And once we had verified that source was what we thought it was, we were able to release the reserve.

[William Gibson:]

And then just following up on Eric’s question, I understand the investment in driving scale and the O&O. But it seemed to me what you talk about the custom projects and the increase in SearchLinks, that we are to start leveraging profitability do a little bit in the first quarter or am I just being too optimistic – speaking of a partner network contributing more?

[Richard Howe:]

Generally what we’re trying to do is build a business that can operate at scale and sometimes you have to lead that effort – so SearchLinks is a perfect example of that. As that business scales, we have additional account managers to hire additional salespeople and we have to – to some degree lead the revenue on some of those items, and that of course has an expense associated with that. We also have developers that they design. So when we say we are investing in the growth of the business, it’s things like that that really – we are talking about.

[William Gibson:]

So internationally do you have a timeline when you think that, that investment starts to pay off that we see it in profits?

[Richard Howe:]

Yes, I think we’ve always said that once we hit a $100 million we’re going to start seeing a turning point. At that point we have enough leverage in our relationship, in our contracts, and in our financial statements that, at that point we’re going to – we expect to start seeing some better margins.

[Operator:]

And we’ll go next to Jon Hickman of Ladenburg Thalmann.

[Jon Hickman:]

Hi, I just want to follow up on Bill’s question. Can you give the size of that reserve, like how many margin points is it?

[Richard Howe:]

It had an effect on owned and operated about 2 percentage points.

[Jon Hickman:]

All my other questions have already been asked and answered.

[Operator:]

And we’ll go next to Lisa Thompson of Zacks.

[Lisa Thompson:]

Hi, just talk a little bit about more of your investment, obviously you don’t have to pay them debt this year. Are you going to have all that freed up, right, to also pour into marketing?

[Richard Howe:]

That’s right. We’ll have more cash available to go into R&D and into marketing, that’s right.

[Wallace Ruiz:]

That being said, though, that – that was being part of the overall expenses last year, with couple hundred grant and interest expenses maybe we won’t see this year. It’s not immaterial, Lisa and it wasn’t a gigantic number. We spent more money hiring five people than we will on the interest expense associated with that debt.

[Lisa Thompson:]

So it’s not what you have X amount of cash one on the balance sheet, anything over and above that you’re going to spend, or –

[Richard Howe:]

No, we have targets obviously that we set internally for where we want to be with the business this year, profitability targets, cash flow targets, revenue targets. So we don’t want to mislead people. Look, is the business doing well, we grew income last year over the year before and there is a chance we might get this thing this year, what we are saying is we are not tooling the business at this point because we are trying to lead our growth to that. It may happen because we are diligent in how we spend our money. But we are thinking about growth first and foremost around here because we see a model that can scale and we want to make sure we capitalize on that while we have the means to do so.

[Lisa Thompson:]

So can you talk a little bit more about what you’ve learned about the competition, SearchLinks, how you stack up against Outbrain and Taboola and I also saw in web content that apparently discarded the Coldfield [ph] deal with AOL. Talk to what’s going on out there?

[Richard Howe:]

You bet. So those are all companies competing – for spot where we have products available. Yes, the market for ad technology is a competitive marketplace, that I don't think that’s any surprise to anybody. The way you win is you’ve got a product that integrates well with the publishers’ content and it delivers most value. So what I can say – I can’t speak to their business, because that’s their business. But I can speak our business. We are winning deals, we are signing up clients, and in some cases some of the folks that you mentioned are doing business with these publishers. So we feel good about our ability to compete against that landscape given the four, five, six months that we have been at this with SearchLinks.

[Lisa Thompson:]

Or there is a niche or anything that you are being able to excel at or is it broken out like that yet?

[Richard Howe:]

Yes. We have tended to sign more publishing clients in the health verticals than others, not that we haven't signed some up in other verticals but health has been a particularly interesting vertical for us.

[Lisa Thompson:]

Is that your product or the spread that you are in there, other similar companies.

[Richard Howe:]

It’s a lot of reasons, Lisa but probably more than any other reasons, SearchLinks itself was originally designed and commercialized from our own health site and I think that gave us the ability to be able to go out and offer it to other people so that they could also make some money from the product. So it’s probably more to do with that than anything else.

[Lisa Thompson:]

Maybe one thing is give us kind of example of a customer that –

[Richard Howe:]

Yes, as you well know, because we get asked this question a lot, we are careful not to talk too much about the publishers that we do business with. But in the script for the first time I did mention that our ads are showing on Kiplinger, so Kiplinger is a finance site. So there is an example. We have many.

[Lisa Thompson:]

And then how did you come about how to get in touch with them and then how did they like it, how does that go?

[Richard Howe:]

Yes, good old fashioned hard selling, you basically have to sell them a value proposition based on making them more money and while at the same time providing a good experience for their users really to whatever the content that we are showing our ads on. That’s what we do and in a lot of cases we’re being successful doing that.

[Operator:]

And we’ll go next to Juan Melissa [ph] of B. Riley.

[Unidentified Company Speaker:]

Could you address how you plan to allocate resources between partner and O&O in the coming year?

[Richard Howe:]

I am sorry, we’re quiet for a second. I am just – I wasn’t expecting a question about the breakdown of our resources. I don’t have with me, so I’ve got to think about what it is generally. We do have a lot of shared resources in the company, mostly the IT and database resources. When you take those out of the mix, I think we have more resources in O&O but generally because of the content team, which numbers maybe 20 now, Walley, give or take. So if you look at the development analytics side, I think the resources complement on both sides are about equal and you have more content based writers than publishers on the O&O side.

[Unidentified Company Speaker:]

And then do you provide any type of breakout in terms of marketing dollar spend? You mentioned before you spent on website acquisitions, in marketing spend et cetera?

[Richard Howe:]

Our marketing spend is in the financials that we really publish every quarter, it’s been growing.

[Unidentified Company Speaker:]

But a break of that, that’s how you provide?

[Richard Howe:]

That’s it. That’s what we break – yes, we give the total number that we spend.

[Operator:]

And with no further questions in the queue, at this time I will turn the conference back to Richard Howe for any additional or closing remarks. Somebody signalled that if you would like to take them?

[Richard Howe:]

Yes please.

[Operator:]

We’ll go next to [Mike Sherlinger of MicroCap]. Mr. Sherlinger, your line is open.

[Richard Howe:]

Yes, he is not there, operator. End of Q&A

[Operator:]

And that concludes our question and answer session. I will now turn the conference back to Richard Howe for any additional or closing remarks.

[Richard Howe:]

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

[Operator:]

And this does conclude today’s conference. We thank you for your participation. You may now disconnect.