Inuvo, Inc.
Q2 2013 Earnings Call Transcript

Published: 10 Aug 2013

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Inuvo, Inc., Second Quarter 2013. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, August, 8, 2013. I would now like to turn the conference over to Mr. Alan Sheinwald of Alliance Advisors. 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 2013 shareholder update conference call. Mr. Richard Howe, Chief Executive Officer and Mr. Wally Ruiz, Chief Financial Officer of Inuvo will be your presenters on the call today. Before we begin I'm going to review the company's Safe Harbor statement. 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., or such are 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, I'd now like to congratulate management on their profitable quarter and introduce Mr. Richard Howe, CEO of Inuvo. Rich, the floor is yours.

[Richard K. Howe:]

Thank you, Alan, and thanks, everyone for joining us today. For the second quarter of 2013 we are pleased to report a net income of $381,000 or $0.02 of share on $13.1 million of revenue and $848,000 of adjusted EBITDA. These quarterly results reflect positively the significant operating improvement we have made within the business and the improving margins associated with our growth. Revenues for the first half of the year have totaled $29 million, up 34% over the previous year and adjusted EBITDA with $2.2 million, up over 400% from the previous year. Net income through the first half of the year was $91,000, up from a loss of $4.8 million through the first half of 2012. On today’s call I would like to provide some updates on information communicated on the first quarter call, offer some additional insight about the second quarter and highlight some initiatives underway within the segment. Following my opening statement, I’ll turn the call over to Wally for a more detailed accounting of our financial results after which I’ll have some closing remarks. As a reminder to those you who are new to the company, we organize and report our business along two segments. Our Network segment is an ad delivery service provided to websites and applications owners on both desktop and mobile device. And we also account for our ad-based revenue from our growing suite of owned and operated websites in this segment. And the Application segment, where Inuvo delivers ad into company-owned applications, which are marketed directly to consumers through various online marketing methods. Growth in the second quarter and through the first half of the year has come from within the Network segment, which accounted for about 77% of second quarter revenue and about 72% of first half revenue. The decline in contribution from the Application segment reflects the focus on the Network segment with the delivery of ad accessed through mobile devices and the development of owned and operated websites are a priority. While the Application segment of the business has scaled back in recent quarters, we continue to see this segment as a store of potential future growth, particularly within the mobile application marketplace. The direct-to-consumer marketing competency and the Google relationship we acquired with the acquisition in the first quarter of 2012 continue to be important assets in our overall strategy. And the existing users within the segment remain a good source of high quality advertising clicks. Further, it’s important to understand that the Alot brand, which drives much of the Application's segment revenue is the foundation for the owned and operated site expansion. Now we had also discussed on the first quarter call certain changes that have been made within the marketplace that support the Network segment and had provided some indication of its Q2 revenue impact at that time. We remedied these issues starting in April and saw a positive trend throughout the second quarter and into the third quarter. As a result we are pleased to report in advance of Q3 results that unaudited revenues for the month of July exceeded $5 million, up from $4.6 million in July of 2012. Within the first half of the 2013 calendar year revenue, gross profit, adjusted EBITDA, operating expenses, bank debts and net income were all improved relative to the last year and as of August 8th this trend has continued. The company has been cash flow positive since August of 2012. Following the announcement of our move in January we had suggested a potential benefit of approximately $120,000 in monthly expense reduction associated with the move. As disclosed in the press release today, compensation and SG&A expenses on a monthly basis are now down nearly $500,000 per month in 2013, going from roughly $1.5 million in January to the current $1 million per month run rate. These expenses should stay relatively stable throughout the remaining month of this year. With the recent exit of the New York data center, the relocation to Arkansas is now completed. Additionally, based on current commitment we have already achieved our March 2014 obligation to have 26 full time employees within the state and we’ll soon have received the last of the $1.75 million in grant fund. Let me now talk briefly about the two segments of the business and how we are doing against our plan, starting first with the Application segment. We have this segment of the business focused on maintaining current revenue and profitability level. As you will recall, changes to the ways in which software can be marketed to the consumer earlier in the year, gave us cause to rethink our objectives for this segment. And we made a conscious decision to manage towards a stable and profitable run rate. This does not mean we are not taking steps to position this segment for growth in the future. Our marketing teams continue to optimize our campaign and we could start to see modest revenue growth again starting in the fourth quarter. Additionally in the second quarter we started to explore a more current strategy for the A lot business that is aligned around mobile applications. That could include both home grown applications and the acquisition of existing mobile app, which are surprisingly cheap and in great supply. Our ability to market and monetize these apps is a significant competitive advantage here. This strategy is also synergistic with our owned and operated website, which we have said in the past, should each have companion mobile application. We did launched a weather application in the second quarter that was quickly developed in-house as a way to better understand the marketing, support and the monetization of these mobile applications before we make any significant investment. Turning now to the Network segment, which has been driving growth within the business. In the first quarter of 2013, owned and operated websites accounted for roughly 12% of overall revenue and that ratio has held steady in the second quarter. We expect to be making more announcements to the latest site launches in the third quarter. The next site we plan to launch will be a lot help, a content rich web property, optimized for both desktop and mobile devices. The site will feature information on ailments, fitness, dieting and pregnancy; in addition to our resource for contacting local physician. As it relates to mobile expansion, in the first quarter we had mentioned that approximately 15% of all traffic within the network originated through the mobile device. In the second quarter that number held constant. We now have over 200 mobile applications prospects in various stages of implementation and/or testing. In support of our mobile strategy we are also introducing a number of enhancements to the platform that serves the network. This improved functionality ranges from features designed to improve web surf access, to features designed to provide additional flexibility and ease of implementation, particularly for mobile ad unit. As one example, we recently launched in beta an ad unit that displays results based on website content and automatically sized this up appropriately for the device being used to access the site, whether that be a desktop, tablet or phone. The feedback from prospect of the ad unit has been encouraging, and the pipeline for the unit is robust. Since the beginning of the year in addition to the mobile application partners we are working with we have also added about 300 new websites to the network, each of which are in various stages of going live. With that I would now like to turn the call over to Wally for a more detailed analysis of the financial. Wally?

[Wally Ruiz:]

Thank you, Rich. Good afternoon, everyone. Thank you for joining us today to discuss the company's financial results for second quarter of 2013. My comments will refer to this morning’s press release and the 10-Q that we are filed today. As Rich mentioned, Inuvo, today reported net revenue of $13.1 million in the second quarter of 2013, a $256,000 increase over the same quarter of last year. For the first six months of 2013 we reported $29.1 million, which is $7.4 million ahead of the same period last year. The Network segment reported $10.1 million of revenue in the current quarter, an increase of 86% over the same quarter of last year. The network segment represents 77% of the company’s total revenue. The increase in the second quarter of 2013 over the same quarter last year is due to the strong increase in the delivery of advertisements to partner website, our own website and the delivery of advertisement to mobile devices. Revenue from the partner’s website increased 85% compared to the second quarter of last year; the result of expansion across publisher segment and improvement in quality and the growth in mobile. Revenue from our owned and operated websites increased 346% compared to the second quarter of last year, largely due to the expansion of websites, particularly the local search directory at local.alot.com. All other revenue in the segment non-core operations declined $439,000 in the second quarter compared to the same quarter last year primarily due to the closing the low margin data business in the first quarter of this year. The Application segment, representing 23% of the company’s total revenue in the second quarter reported $3 million of revenue. This segment is mostly comprised of operations acquired in March of last year. The Application segment revenue in the second quarter of 2013 decreased to $4.4 million compared to the same quarter last year, and was $2.1 million lower than the immediate prior quarter that is the first quarter of this year 2013. Marketing policy changes in the first quarter required us to modify our strategy for the business, focusing first on managing towards the stable and profitable revenue stream only then to explore additional growth, provided the ROI to speed the other parts of our business. Gross profit was $6.2 million in the second quarter of 2013 or as a percent of revenue 47%. This compares to last year’s gross profit of $6.8 million or as a percent of revenue 53%. Overall gross profit declined in the second quarter compared to last year due to lower revenue in the Application segment. The Network segment gross profit as a percent of revenue in the second quarter was 34% compared to 18% for the same quarter last year. The increase comes from the expansion of the network. The Application segment gross profit as the percent of revenue was 91% compared to 78% for the same quarter last year. The higher gross profit is primarily due to the discontinuance of under forming marketing programs. Operating expense were $6.1 million in the quarter, in the second quarter that just ended. This is a $3.4 million decrease over the same quarter last year and a $2.8 million decrease from immediate prior quarter, the first quarter of 2013. All three categories of operating expense, search cost, compensation and S&G expense decreased in the second quarter of this year compared to the same quarter last year and to the immediate prior quarter this year. Search cost primarily associated with the Alot operations within the Application segment, where we bid on keyword in order to drive traffic to our landing pages, the successful result from which is that a customer downloads our product. To a lesser extent we also spent search on owned and operated websites. Search costs decreased $2.4 million in the second quarter of 2013 over the same quarter in the prior year and decreased approximately $1.7 million from the immediate prior quarter of this year due to the marketing policy changes previously mentioned. Compensation expense decreased to $170,000 from the second quarter of this year over the same quarter last year, and decreased $538,000 from the immediate prior quarter due to a non-recurring accrual of $316,000 for severance for employees who chose not to relocate to Arkansas. Selling general administration expense, SG&A decreased $754,000 in the second quarter of 2013, compared to the same quarter in the prior year and decreased $513,000 from the immediate prior quarter. The decrease in the current quarter SG&A is due primarily to lower facilities expense and lower depreciation and amortization expense associated with the closing of offices in New York and Florida in the first quarter. As mentioned, the relocation to Arkansas has gone well and we are seeing the benefits in the form of lower operating expense. The full impact of the savings will be seen late in the third quarter. At this point the state has reimbursed a total of $1.6 million in relocation expense. Net interest and other expense were $66,000 in the second quarter of 2013 compared to 105,000 in the same quarter last year. The lower interest expense is due primarily to interest income received on security deposits as well as lower average loan balances this year. The company reported a $79,000 income tax benefit and that is due to amortizing its deferred tax ability generated from intangible assets acquired in the March 2012 acquisition. As part of that acquisition we acquired several discontinued subsidiaries located in Europe. These subsidiaries have liabilities to web publishers and vendors that were recorded in 2009 and earlier. In the second quarter of this year we determined that a portion of these liabilities were not valid and relieved the balance sheet of them. The effect on the income statement was $283,000 and was classified as net income from discontinued operation. The company reported a net income of $381,000 or $0.02 per diluted share for the three months ended June 30, 2013. The net income from continuing operations was $99,000. In the second quarter of last year, we reported a net loss of $3 million or $0.13 per share. EBITDA, adjusted for stock compensation expense and accrued severances associated with the relocation, was approximately $848,000 in the quarter that ended June 30, 2013. And that compares to an adjusted EBITDA of $204,000 in the same quarter of last year. Turning to the balance sheet, cash and cash equivalents totaled $3.2 million at June 30, 2013 and that compares to $3.4 million at the end of 2012 and $3.2 million the same amount at the end of March or the end of first quarter this year. Bank debt was approximately $6.9 million and that compares to $7.8 million at the end of 2012. The company has been generating a positive cash flow from operations since last August and has used that cash to reduce bank debt and to remain current with the publishers and vendors. With that I’d like to turn it back to Rich for some closing remarks. Rich?

[Richard K. Howe:]

Thanks Wally. In closing I would like to summarize we delivered $381,000 of net income or $0.02 a share in Q2. It was up from a loss of $3 million in the prior year. Revenue, gross profit, cash flow, operating expense and net income and debt were all improved in the second quarter. Through the first half of the year 2013 revenues are up 34% and adjusted EBITDA is up over 400% over the comparable period. Net income for the first half of the year amounted to $91,000, up from a loss of $4.8 million in the prior year. Within the Application segment and in particularly for the Appbar, we’re focused on optimizing for profitability and quality and it’s important to know that our owned and operated websites business which is growing is an extension of this direct-to-consumer business. Our move to Arkansas is now completed. We are ahead of our expense reduction goal of a $120,000 a month and based on commitment we’ve made already we met our March 2014 goal to the state for hires. Our unaudited revenue for the first month of the third quarter July exceeded $5 million and that’s up from 4.6 million in the prior year. And finally we continue to be focused on mobile expansion within network. Mobile web traffic is increasing 55% per year. And the market place itself remains in its infancy. Shareholders should be assured that Inuvo is well positioned to take advantage of this growth opportunity. And with that I would like to now turn the call over to the operator for questions-and-answers. Operator?

[Operator:]

Thank you, sir. (Operator Instructions). Our first question is from the line of George Kelly with Craig-Hallum Capital Group. Please go ahead.

[George Kelly:]

Hi, guys. Two questions both on the Network segment. First, could talk a little bit just about what your expectations are for the next couple of quarters there? And then secondly if you could provide any additional color just on what’s driving the big growth in the segment, especially in this quarter? Thank you.

[Richard K. Howe:]

So the first answer as you know we don’t provide future looking guidance but we did provide July results for this very reason as we wanted to give people an indication of the fact that the third quarter was looking good and in fact looking better that it did at the start of last year. And we don’t see any reason to believe that, that trend won’t continue. And the question is related both to actually three things. We did see just general expansion in the network associated with existing accounts and some accounts that we signed, website publishers at these would be. So that was one, two as we mentioned and continue to mention we are focused and as a result we’re starting to see some traction associated with our mobile activities. And this includes both mobile web and mobile application where we’re serving ads into those. And the third is we continue to push hard to launch new sites. As we suggested the next site we’re going to be launching it’s Alot help. And we think this could be continues to be actually a nice driver of growth for us.

[George Kelly with Craig-Hallum Capital Group:]

Right. Thank you.

[Operator:]

(Operator Instructions) Our next question is from the line of Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

[Eric Martinuzzi:]

Thanks for taking my questions and congratulations on the good progress guys. Nice to see the top line movement again and the cash from ops since a year ago, that’s also welcome. As far as the marketing policy and changes there it's been and I am just curious to know what was driving that was there any monetization partner that was driving that or is that just regulatory authority.

[Richard K. Howe:]

Marketing partner.

[Eric Martinuzzi:]

Okay, and when is that going to affect and will be it just sort of overnight decide or is it were you given an opportunity to just engage. Obviously you've still got the installed base it’s very profitable for you but what was the timing?

[Richard K. Howe:]

Typically Eric we don’t get much if any for wanting that changes to the marketplace. And in this particular case the changes were really related to what you are allowed or not allowed to do to try to get consumers to download your application. And so we have to make changes associated with that and those changes resulted in a different return on investment. And so that we’re not happened you are forced into an optimization process again. So it’s kind of like the roles have change on what you are allowed to and not to do, that’s step one. And then step two is you got to reduce your spend and start spending more and more slowly while you see the return on investment start to be good enough to put more gap on it I guess.

[Eric Martinuzzi:]

You talked a little bit about the growth on the network side and now you’ve really extended these relationships both for the existing and new publishers. what kind of metrics are you using is there a number of publishers and number of pages a number answers. How are you measuring the progress there besides your revenue up?

[Richard K. Howe:]

Almost all of the above; Click, add search, pay per click, number of publishers we track it at a very granular level and in fact we review it daily.

[Eric Martinuzzi:]

As far as the demand site goes obviously as you guys get growth on the publisher side and establish a certain equality you are going to track certain demand, curious to know if you are still, is it are you working with small list players on the demand side or has that grown as well?

[Richard K. Howe:]

No, Small, same small major contributors on the demand side.

[Eric Martinuzzi:]

And is there a development effort to try and increase there or is kind of a limited deal, just how it's been?

[Richard K. Howe:]

No, you can always go direct to averters in this season’s model so at some point that may make sense for us. We don’t view at this point to make the investment necessary to go out and have those direct relationships. And then we’ve got good relationship in place now where we feel like we’re getting fair revenue share so that’s a business model.

[Eric Martinuzzi:]

No, I totally appreciate the cost structure and I know that you guys have done a nice job of minding the OpEx so I don’t want you to change at all. On the balance sheet, good progress there a little bit of progress as we extend the note payables what’s the expectation seasonally for -- I know you are not giving guidance for the revenue, trying to say based on forward-looking statements but is there anything seasonal expenses that we should anticipate for Q3 or Q4 that we change the good progress that we’ve made on cash per month.

[Wally Ruiz:]

I don’t think so Eric. Most of our operating expenses our SG&A and compensation certainly is, generally of a fixed nature. So there is very little seasonality associated with it. The other thing I would point out is that in the second quarter we didn’t enjoy the entire benefit of the relocation yet. We in fact the compensation we had some doubling up, quite a bit of doubling up on employees because of the transition. It was a knowledge transfer going on still into the second quarter.

[Eric Martinuzzi:]

So then given that total operating expense for Q2 was, if I am looking at $6.1 million I am not sure how much of that is non-cash but what -- do you have your arms around how much more, what the incremental improvement could be for OpEx?

[Wally Ruiz:]

Sure and it’s going to be you’re going to see in the third quarter that it’s below that. This is what we’re trending to.

[Eric Martinuzzi:]

Okay. And then as far as you talked about the staffing and having guidance to the headcount, that gets you, that fulfills your obligation with State of Arkansas, is that, is this being driven by the demand by the growth in the top line, or did you have kind of a target that you are going to ramp up to regardless of the top line?

[Richard K. Howe:]

The latter. We have an obligation under the terms of our grant agreement with the state to bring -- it is 50-50 both on employee by 2016 instead of 2015, right Wally, is that right.

[Wally Ruiz:]

Four years from now through 2017.

[Richard K. Howe:]

2017, yeah, and so yes to your point Eric there were milestones every year that we put together with the state and the first milestone is actually March of 2014 and that was to make sure we had 20 bolt-on employees in the state with an average compensation of $90,000 as salary and benefit.

[Eric Martinuzzi:]

Understand. Okay. I appreciate you taking my questions.

[Richard K. Howe:]

You bet, thank you, Eric.

[Operator:]

(Operator Instructions). Our next question is from the line of John Gilliam with Point Clear Strategic Capital. Please go ahead.

[John Gilliam:]

Good afternoon, gentlemen.

[Richard K. Howe:]

Hi, John.

[John Gilliam:]

Could you give us an idea of -- you mentioned that the full benefit of the reallocation and all of the cost reductions would not be felt until the end of Q3, I believe you said that earlier in the call. And could you give us an idea on a month-to-month basis where that would put us in the OpEx minus the discretionary ad spend?

[Wally Ruiz:]

Yeah. So there were couple of things in the second quarter that and into the beginning of the third quarter that we won’t see by the end of the third quarter. And part of it is the like I said doubling up some of the compensation due to the knowledge transfer. And the other one is the closing of the New York datacenter which we finally accomplished days ago. So and that has -- to give you an idea that has an impact of approximately $40,000 a month.

[John Gilliam:]

That’s fantastic. Okay. So it comes back into the -- can you give us an idea on the Application side of business how many Alot Appbar users do we currently have?

[Richard K. Howe:]

I think we’re running I’d say I think because when we hit that cost over here recently the datacenters, John we messed up the numbers a little bit on some of the accounts. But we have been talking around 4 million.

[John Gilliam:]

About 4 million. And can you break that down between what we call I guess the region one, the core region, U.S., UK and such and international?

[Wally Ruiz:]

Yeah I don’t have them John but we can follow up with as you will, I think as you recall we do have five tiers in our English speaking nations and then others Brazil's a big for us. We’ve got to call back and give them to you if you'd like.

[John Gilliam:]

Okay. And did do guys -- are you still tracking the Bargain Match, I think a lot of discussion is of Bargain Match, do you track for live users in the same way that you track the right users of Appbar?

[Richard K. Howe:]

It’s similar, the answer is its similar and at last count we had 150,000 to 200,000 users for the Bargain Match application.

[John Gilliam:]

Okay. Is that -- you mentioned I know for that segment overall you were pretty clear that this is, the real focus there is on maintaining and where the opportunity presents itself and ROIs there to we might possibly see some growth. In the past we’ve seen substantial benefit from that segment in that Q4 period where you got the shopping season for the holiday and such, and do you see the possibility that we might ramp that up in anticipation of the similar occurrence this year?

[Richard K. Howe:]

It’s possible. However, as I said when we look at our business right now we see growth opportunities in the Network segment that produced an ROI that’s better than what we’re seeing in the Application segment. And that’s why I was very cautious in my opening note to say that we do think there will be some return to growth in Q4 but we don’t at this point have any plans to spend significant money to drive more downloads and the only reason why we’re not is because the ROI not attractive enough to do that right now.

[John Gilliam:]

Just got it. And would you say I don’t think you got back the ad spend at least in the release this morning. What was the ad spend for the Application segment this quarter?

[Richard K. Howe:]

I don’t know if we break that out that way.

[Wally Ruiz:]

We haven’t, no, we haven’t been right"

[John Gilliam:]

Because it’s probably I am guessing combined with the spend for the owned and operated sites, it would just be a total figure?

[Richard K. Howe:]

That's right. And I think if you look at the three months ended June 30 we've got about 2.9 million of search cost. That’s correct so that follow your point.

[John Gilliam:]

Got you. On the network side the I think you mentioned that you have added around 300 new websites to the publisher network is that correct?

[Richard K. Howe:]

Yeah, we had 300 add, is different from signing someone up, because when we sign up new customers they go through a process they have to be approved and then they have to be implemented. And so we’ve got 300 that are queued up that are in various stages of being launched, some of them by the way have been launched already.

[John Gilliam:]

Okay. And obviously the third party these are not even in the discretion of our owned and operated?

[Richard K. Howe:]

That’s correct.

[John Gilliam:]

That's great. Great job gentlemen. Thank you very much.

[Richard K. Howe:]

Thank you, John.

[Operator:]

Mr. Howe, I show there are no further questions at this time. Please continue with any closing remarks.

[Richard K. Howe:]

All right thank you. I would like to thank everyone who joined us on today’s call. We appreciate your continued interest in Inuvo and we look forward to a steady progress over the coming quarters.

[Operator:]

Ladies and gentlemen, this concludes the Inuvo, Inc. second quarter 2013 conference call. Thank you for your participation. You may now disconnect.