Inuvo, Inc.
Q3 2014 Earnings Call Transcript

Published: 2 Nov 2014

[Operator:]

Good day and welcome to the Inuvo, Inc. 2014 second-quarter Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Thomas Walsh of Capital Markets Group, LLC. Please go ahead.

[Thomas Walsh:]

Thank you, operator and good afternoon. I’d like to thank everyone for joining us today for the Inuvo third-quarter 2014 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. The statements in this conference 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 Security of Litigation reformat 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 forward looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause results different from those anticipated by Inuvo at this time. In addition, other risks are more fully described in Inuvo’s public filings with the US 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 another very successful quarter and introduce Richard Howe CEO of Inuvo. Rich the floor is all yours.

[Richard Howe:]

Thank you Thomas and thanks everyone for joining us today. We delivered another strong quarterly result. Revenue was $13 million up 19% sequentially from $10.9 million in the second quarter and net income in the quarter was $403,000 or $0.02 a share. Now, while revenue on a yearly basis in the quarter was down, this is the result of our previously discussed strategy to transition from a low-margin non-strategic business into a higher margin and scalable content-based business. I will provide some additional insight on how that transition has performed here in a few minutes. Revenue for the first nine months of 2014 is also strong at $34.1 million and net income was $1.5 million for those first 3 quarters. Now that’s already 3 times the net income we delivered in all of 2013. On a cumulative basis, we’ve now been GAAP net income positive over the last 8-quarter period and we do expect this trend to continue throughout the remainder of this year. We are pleased with the yearly top line performance that we’ve delivered having gone from $10.1 million in the first quarter to $10.9 million in the second quarter and now $13 million in the third quarter. Now, as we’ve discussed on many of our prior calls we’ve had a number of strategic initiatives and objectives in 2014 that included transitioning away from our appbar product expanding into mobile, growing our owned-and-operated network and of course improving our balance sheet. So far, we have exceeded our expectations for each of these objectives and I’d like to explain in a little more detail why we think that’s the – that is so. Now, as you will recall appbar had actually delivered revenue of $23.5 million and $10.5 million in 2012 and 2013 respectively. It actually delivered $350,000 in the most recent third quarter. But much more importantly to that story, revenue from the websites and apps business within the owned and operated segment has gone from $8.5 million in 2013 when it was launched to $14 million in only the first 3 quarters of this year. This part of the business entered the year on a $2.5 million quarterly run rate and of course, as you’ve seen in the results, that is already more than double delivering $5.6 million in this most recent third quarter. Mobile revenue which was 15% coming in to this year actually increased to 49% of total revenue for the business in the third quarter. Now, it’s really been a combination of changes that we first implemented at the end of 2013 that yielded this result. And that included the design of our own site support mobile web working with partners who themselves focused on mobile and designing marketing programs specifically targeting mobile audiences. And lastly, as a result of our continued solid financial performance we were able, successfully to refinance what has been a declining debt balance in the past quarter. Total debt was $4.5 million at the end of the third quarter and that’s down from $6.1 million in December of 2013 and of course down quite significantly from 2012. Now, along with the lower interest rates that we got as part of this new agreement – the agreement itself actually provides access to about $2 million more in capital than it’s currently being utilized by Inuvo and of course this is a good way for us to tap in to what is effectively cheap money and use that money to grow the business in the future should we choose to do that. I’d like to comment briefly now on each of the segments starting with the partner segment which proved 27% sequentially in Q3 delivering $7.1 million in revenue. We had a really strong quarter in the partner business and that was really on the back of 2 decisions that were made in the second half of 2013. The first of these decisions was to focus on quality over quantity as it relates to the service we deliver to our principal ad suppliers. Now since quality is a measure that improved overtime the decision to focus here meant we would likely sacrifice some topline in this business for some period of time that’s quality increased. Currently, quality has never been better and as we have believed, when we executed this strategy, as quality improved so does the amount of revenue generated for each transaction delivered to our ad suppliers. The second decision we made here was to focus on developing proprietary ad delivery technology which we have referred to in the past as smart Ad units. Our goal here was to put ourselves in a position where we could distribute this technology out to our partners as a way to help them make more money and as a means to fuel our future growth objectives in this segment. We rolled out a number of these new Ad units in the quarter in addition to some significant modifications that we made to the reporting dashboard which is what our publishers used to engage with us and to manage the effectiveness of these ad units on their own properties. And we believe the market size for these Ad units is substantial. And we have seen some very promising early performance statistics from the implementations that we already have in productions. One of the key synergies between our content business, the O&O network, and our partner business is the ability to test the effectiveness of these Ad units on our own properties and apps prior to commercialization per partners. This strategy has allowed us to optimize performance of the ad units, to fix any in-market bugs that might exist with them and establish a quantifiable value proposition based on real implementations that we can then take into the marketplace and use to attract new partners who might want to use these Ad units. This most recent Ad unit was launched in Q3 with 5 Beta partners who went live on September 30th and while the performance varies by publishers the initial feedback is encouraging. Both from the Beta partners themselves and from the demand we are seeing in the marketplace for the product as is reflected in our sales pipeline. In all cases, lead quality has so far been exceptional. I’d like to now turn to the owned and operated segment of the business which grew 10% sequentially in the third quarter delivering $5.9 million in total revenue. Now, given the rapid growth of the websites and apps which have risen from what is really near zero dollars in early 2013 to $5.6 million in the third quarter of 2014, we wanted to focus in the second half of this year on improving the various technologies that actually support this business like reporting and analytics while also improving the more manual operations associated with the business model. We are currently, aggressively adding new content to the sites. We’re implementing improved insights into our marketing ROI and we’re automating the actual processes associated with the publication of our content. Collectively, these enhancements have the additional benefit of allowing for marketing program expansion and optimization. Additionally, we have continued to increase the level of social engagement associated with our sites in an effort to enhance content monetization. We’ve launched programs that leverage Instagram and Pinterest and Facebook and Twitter and others. We now have over 47,000 likes on Facebook which by the way is an excellent way to keep up with the content our team is publishing should you want to do that. The technology that supports this business was built by and for Inuvo and was designed specifically to allow us to scale the creation and deployment of our content. Our goal for this platform was to get to the point where our team could create, edit and market new content within hours. Technically and operationally, we are very close to making this vision a reality. Now, while the technology can help us distribute our content there really is no substitute for great content other than great writing. And we’ve made significant strides here. We now have a freelance staff of 12 writers at Inuvo, the majority of which have been sourced directly from 3 local colleges that are within proximity of our headquarters here in Conway. The combination of our technical enhancements paired with an abundance of writing talents sourced from these local universities has enabled us to publish about 4 times as many articles in the fourth – in the third quarter as we did in the first quarter of this year. In Q2, we reported that we had also redesigned the underlining technology and templates that support our sites, principally, to enable increased social and mobile engagement and to improve overall site load speeds and performance. As of today, all but one of these sites, has completely converted to the new design template and early indications are positive as it relates to monetization, page views, load times and the level of consumer engagement. Article sharing among users for example is one of the measures of engagement and that improved 300% over the second quarter. In content load times, which is particularly important for mobile was up actually 12%. Now, we have also continued to develop and deploy mobile applications within this side of the business, taking our total number of apps from 7 to 12 in the quarter. We expect to release yet another app in Q4, our recipe in shopping application which would really be able to complement our existing apps and categories like news and video and health and travel, photo editing and others. With that I’d like to turn the call over to Wally for a more detailed accounting of over our third quarter results. Wally?

[Wally Ruiz:]

Thank you, Rich. Good afternoon, everyone. As Rich mentioned we had another strong quarter financially and you’ll have access to our 10-Q for the quarter ending September 30th this afternoon. Inuvo reported revenue of $13 million in the third quarter of 2014 compared to $10.1 million in the first quarter of this year and $14.5 million in the third quarter of last year. In the current quarter, $7.1 million came from the partner network and $5.9 million came from the owned and operated network. The partner network delivers advertisements to our partner’s websites and applications. The $7.1 million reported by the partner network in the third quarter of this year was 34% lower than the same quarter last year, those 27% higher than the second quarter of this year. The revenue decrease in the current quarter compared to the same quarter last year’s due largely to a planned program we initiated in the fourth quarter of last year that was designed to improve overall traffic quality through the deployment of technology and the enforcement of policies related to the use of technology on the various pages or apps where it resides. The result of these changes was lower revenue compared to last year but higher quality and higher revenue per lead delivered to clients. The owned-and-operated network which delivers advertisements to the ALOT branded websites and applications that Inuvo designs, builds and markets represented 46% of the company’s total revenue in the current year quarter. The owned-and-operated network reported $5.9 million of revenue in the third quarter of this year, a 60% increase over the same quarter last year and a 10% increase over the second quarter of this year. The increases are in spite of the lower revenue in the segment due to our transition away from the appbar product. The appbar revenue in the third quarter of this year was $347,000. This is down from $1.8 million dollars in the same quarter last year. Revenue from the ALOT sites and applications was $5.6 million, up 187% from the third quarter of last year and 16% over the immediate prior quarter. Gross profit in the third quarter of 2014 was $7.1 million compared to $6.3 million last year, a 13% improvement. Partner network gross profit was approximately $1.2 million compared to $2.8 million last year. The lower gross profit in this year’s quarter was primarily due to lower revenue and the accrual of the sales allowance. Gross profit in the owned-and-operated segment was $5.9 million compared to $3.5 million last year. The higher gross profit is due to higher revenue this year compared to last year. As a percent of revenue the owned and operated segment gross profit was 99% in the third quarter of this year compared to 95% for the same quarter last year. And this was aided in part by the elimination of expenses associated with the appbar product. Operating expenses was $6.7 million in the third quarter compared to $5.3 million in the same quarter last year. Marketing costs are the primary cause associated with the owned and operated segment where we spend dollars in an effort to build an audience for the various sites and apps we own. Marketing costs increased $1.3 million in the third quarter of 2014 from the same quarter of last year. The higher marketing costs are related to increased investments to promote and create awareness of the newly launched 2014 ALOT sites and applications as well as grow the existing sites and applications that were launched in the prior year. Compensation expense decreased, by $221,000 in the third quarter of 2014, from the same quarter last year. The lower expense in the current quarter is primarily due to generally lower salaries and commission expense. Selling general administrative expense decreased $180,000 in the third quarter of this year compared to the same quarter last year. The decrease in SG&A expense is due primarily to lower depreciation expense associated with the closing last year of offices and data centers in New York and Florida, as well as to lower facility expenses due to the move to Arkansas. Going forward, on a quarterly basis, we expect marketing costs to increase as we expand our owned-and-operated websites and applications. We expect compensation expense to increase as we step up hiring commensurate with our growth and SG&A expense to remain relatively flat. Other net expenses essentially interest expense, and it was $85,000 in the third quarter of 2014. Last year’s other net expense was $98,000. This year’s lower expense is due to lower loan balances though a higher interest rate on the term debt. In September, as Rich mentioned, we renewed our financing agreement with Bridge Bank for an additional 2 years with modified terms. Those modified terms includes – included a $2 million term loan for 3 years at a significantly lower interest rate than we’ve been previously paying. Net income from this continued operations was $23,000 in the third quarter of 2014 and was composed of a reversal of liabilities to web publishers and vendors from 2009 and earlier as well as a net foreign exchange game. This compares to $50,000 in the same quarter of last year. The company reported a net income in the third quarter of 2014 of $403,000 to $0.02 per diluted share and that compares to $640,000 or $0.03 per diluted share last year. EBITDA adjusted for stock compensation expense and accrued severances was approximately $1.2 million in the quarter that ended September 30th this year and that compares with an adjusted EBITDA of $1.5 million in the same quarter of last year. Turning to the balance sheet, cash and cash equivalents totaled $3.5 million at the end of September this year compared to $3.1 million at the end of December 2013. Bank debt was approximately $4.5 million and that compares to $6.1 million at the end of 2013 and stockholder’s equity was $7.4 million at the end of September. With that, I’d like to turn the call back to Rich. Richard Howe

[Eric Martinuzzi:]

Thanks for taking my question and congratulations on the nice quarter. It’s good to see both of those revenue segments up double digit sequentially. I have a question about the – I guess, the seasonality of the business now. I don’t know that we’re at a point where it’s – you can judge the seasonality but I know for a lot of my online advertising business, business to things get a little bit squarely around the holidays with a big rush up until Christmas and then crickets thereafter, could you talk to your expectations of seasonality because the – what I don’t want to do is just kind of take the sequential growth that we’ve seen in Q2 and Q3 and do something inappropriate for Q4.

[Richard Howe:]

Yes, I sure can Eric. So, I think in fact I know what we’ve said in the past about the seasonality of the business particularly as it relates to the fourth quarter is we’ve seen it go both ways. There have been years where the fourth quarter continues to be strong when the third quarter has been strong and then there have been years when the fourth quarter is light compared to the third quarter so, I don’t know if there’s a definitive answer to the question. What we have noticed though is that the fourth quarter tends to be seasonally a lesser quarter when the Thanksgiving and Christmas holidays fall at the beginning of a week as supposed to the end of a week meaning, you know they fall on a Monday, Tuesday or Wednesday rather a Thursday or Friday in the week. And this year, they’re falling late in the week in both instances and that’s a good thing because I think we’ve said, we’ve mentioned this in the past as well is that we tend to have our best days at the beginning of the week and then trailing off at the end of the week so with all that in mind I did say that October was looking good and at this point looking forward we’re expecting you know the fourth quarter to be a good quarter.

[Eric Martinuzzi:]

Okay. And the partner group – you’re definitely seeing it’s a step up there Q3 or step up sequentially of a larger magnitude than you did in June versus March. What’s the [indiscernible] you’re working with application developers and working with website owners what was the bigger driver here in the sequential growth Q3 versus Q2?

[Richard Howe:]

There’s also a number of things that play in to the answer to that question. So – and I think maybe I could summarize it as prominently 3 things maybe. So, first of all towards the holiday season the supply and demand characteristics in online advertising are favourable meaning there’s lot of advertisers who are putting a lot of demand on trying to get, you know what effectively our lead from everybody so that usually rises, means the price that we get paid for example goes up and that does typically happen in the latter part of the third quarter, nearly part of the fourth quarter. The second thing is as we have suggested now starting back in the late third and fourth quarter of 2013, we really did have a concerted effort in the company to eliminate anything within our overall network that didn’t meet our quality standards. And I think, this is a different discussion – under discussion about fraud, we just had you know, an objective to try to produce the highest quality product that we could to our ad suppliers and we rationalized that, like just about every business that I know of when you deliver the best quality you get paid for the best quality and we did see that start to materialize as well in the third quarter which helped. And then the third thing is, you know we’ve talked, on a couple of quarters now about these ad units that we’ve been developing and starting to distribute and we did see you know, a nice contribution in the quarter from that part of our business and we believe that part of the business is going to be probably one of the fastest components of the growth in that partner segment.

[Eric Martinuzzi:]

Okay but it didn’t really have anything to do then with the makeshift of the mobile versus a non-mobile…

[Richard Howe:]

No, not really. You know, we have, you know obviously mobile’s a big, big part of our overall revenue now and of course you know, the differences between desktops and tablets and mobile as defined via phone mobile, you know there are different you know, variations on the payments and pay-outs associated with that but I wouldn’t say that, that was a big contribution to the – it was a contribution in the sense that you know the whole segment group but it’s not a contribution in the sense that if mobile’s paying out more, if you want to look at it that way if I could sense anything it’s the opposite.

[Eric Martinuzzi:]

Okay and then one last question if I could. Your gross margins look like they’re in the range, you’ve already talked about historically that 52% to 55% range but where I was up in my mouth was the – looks likes the marketing costs were a step higher than the anticipating – I understand you’re driving traffic to sites and apps, is that the explanation? You decided to press down on the accelerator a little bit more than you originally thought?

[Wally Ruiz:]

Yes, hi Eric it’s Wally. Yes, I think that’s exactly the dancer and the historic margins are what we’re – is what you should probably be anticipating going forward, so.

[Eric Martinuzzi:]

Okay. One – that’s the second part of the question was about OpEx as supposed to gross margin but I appreciate the clarification on the gross margin. Thanks.

[Operator:]

[Operator Instructions] With the next to Howard Halpern, with Taglich Brothers.

[Howard Halpern:]

Congratulation guys, great quarter.

[Wally Ruiz:]

You bet. Thank you.

[Howard Halpern:]

I do have a question, I guess regarding the, you know, the development I guess of the Ad unit. You talked about, you know having I guess 5 partnerships right now. What kind of growth could you see within those partnerships and you know, what – I don’t know new partnerships from that – from those Ad units in the pipeline?

[Richard Howe:]

So thanks for the question, Howard. You know, we haven’t typically discussed how the growth rate associated with these Ad units is going you know, this is a – this is really a model that didn’t exist you know, sometime ago but I can tell you – because I was looking at the – this area of the business here recently that I think we’re doing you know, somewhere around $15,000 a day just based on these types of ad units which gives you some sense of how that business is doing relative to the fact that it probably – they didn’t really exist, you know at the beginning of the year. So, now what was the other question, Howard I’m sorry?

[Howard Halpern:]

Oh, well do you see new partnerships for the current, I guess ad unit program in the pipeline?

[Richard Howe:]

Yes. We – in fact the pipeline for this part of the partner segment looks really, really strong right now. You know, we do have a sales team associated with this part of our business and their job is to go out there and recruit publishers and mobile apps who could be using these Ad units to make money and it looks good and the response looks really strong. In fact, I think as it relates to the unit that we just launched that I talked about here to – a couple of minutes ago with the 5 Beta partners I believe we have another 20 partners who have already signed up and said yes they want to run the Ad unit right now so, that’s pretty good for us for this kind of product in its early stages.

[Howard Halpern:]

And, I guess with the script is what is like the cycle so – because you talked about how you, you know develop something you tested in your owned-and-operated segment so, is there going to always be sort of a pipeline of new Ad units coming through overtime?

[Richard Howe:]

Yes and I’m very glad that you asked that question because as I referenced in my call script I really do believe that this is one of the more significant differentiators we have and competitive advantages that we have. This owned-and-operated business is, think of it like a gigantic laboratory, anybody who owns a content-based business, a website or a mobile app is all the time sourcing ads through third parties. Inuvo doesn’t do that. We are our own source of ads. So in that regard we are contained but maybe more importantly having you know, an audience on that side of our business that is really our audience because we own the consumer interaction in that case, allows us this ability to innovate with these Ad units and yes that’s exactly the way we’re going to do from now and into the future. We will come up with new ways to make money through ads and we will make them work on our own properties and then when they’re ready for primetime we will commercialize it and then go out to the market in our partner segment then, and offer it to others. And that’s worked effectively for us and we will continue to innovate in that manner for the foreseeable future.

[Howard Halpern:]

Okay. One last set, you know of questions on the – ALOT, you know your ALOT owned-and operated. How many sites do you currently have that are active and how many do you plan, you know what’s in the planning stages like I guess, over the next you know year or so? Richard Howe

[Howard Halpern:]

And is that what you’re going to like you mentioned before that freelance writers? Will you potentially engage in, you know, universities that have medical schools and such? In the universities where as an example … (Crosstalk)

[Richard Howe:]

Yes. In – yes that is correct and in fact, well, it’s probably not known broadly interestingly enough, Little Rock, Arkansas has quite a broad and deep and successful health care industry here probably disproportionately so for the size of the city and so, yes there’s a number of local schools who have medical programs and medical knowledge and there’s no doubt that we’re going to try to collaborate with them, you know, in the future.

[Howard Halpern:]

Okay, well great job and keep up the great work.

[Richard Howe:]

Thank you.

[Operator:]

And the next to [George Harris], a private investor.

[Unidentified Speaker:]

Hello.

[Richard Howe:]

Yes.

[Unidentified Speaker:]

My question sir, is a very simple one. In 5 years from now what do you think is, your sales will be?

[Richard Howe:]

George, we’ve gone the record of saying you know, internally our objective and our goal probably at the end of this year and looking out 3 years would be to try to get our business to be closer to a $100 million in revenue. So, you know, you give us 5 years to do that, that’s great but we kind of [wall and I’ve gone] a record of saying we have an objective to try to get this business to $100 million and it’s not, you know, we didn’t pick that number out of the year. It’s interesting when you’ve run enough businesses particularly tech businesses over your career there’s something magical that happens with the operating side of the business and the income side of the business when you start to get some scale there’s some real advantages to scale and this side of the business.

[Unidentified Speaker:]

Do you think [indiscernible]?

[Richard Howe:]

I’m sorry I didn’t get that last question.

[Unidentified Speaker:]

Excuse me. If you look younger do you think you stay younger?

[Richard Howe:]

If you look younger do you stay younger? You know, it’s a kind of an odd question but I’ll answer it in the context of our business maybe, so you know, most of the writing staff that we have on the content side of our business actually, they are young people and I would say that, that translates into the writing that they have and when you read our sites it’s very much written with a young sort of look and feel and I think that’s a great thing and makes everybody feel younger. So, yes, I guess.

[Operator:]

And once again, that is star one to ask a question this time. There are no further questions. I apologize. We’ll go to John Gilliam with Point Clear Strategic Capital.

[John Gilliam:]

Good afternoon, gentlemen. Congratulations on a great quarter. Can you just – add a little color on the shopping app that you made in relation to fourth quarter, first question. Second question, I believe I read that the mobile portion of our revenue, the portion of the revenue that’s generated from mobile browsers I think was up to 49%, looking back to last year and where we were this point 12 months ago, that’s really extraordinary growth in that aspect of the business, just wanted to see if you guys – look in the year forward do you think we’ll continue on that path? With the mobile side of the business I mean, we’re practically a mobile first business now, where we were at the end of Q3 so, I mean it looks like we would be substantial portion of the business obviously, is going to be mobile and do you see that continuing to grow?

[Richard Howe:]

Yes, sure John. Let me hit the first one. For the shopping app, this is a pretty cool little app that we’re, you know we’ve been developing and like I said we’ll be launching it here soon and really the team, as is evidenced by the new way that we redesigned our sites is really focused on this whole social engagement part of owning a content businesses now and I think that’s evident if you go visit our properties now you’ll see so much more social engagement and if you’re following us on Pinterest or Facebook or Twitter or whatever you can see it and in fact, as I’ve said to people here earlier that is one of the best ways to keep track of the kind of content that we’re putting on the marketplace, you just sign up for one of those and then go like ALOT then you’ll start seeing it. But this app, this particular app is really a combination of recipe and shopping list app so it’s meant to be the kind of app that you can put, you know, recipe and then share it with your social network and the same is true maybe with your shopping list so, we’ll provide more information about that when the app gets launched with you shortly. On the mobile question, there’s no doubt that there’s been a dramatic shift in the business as it relates to the amount of our revenue that is directly attributable to a mobile device. And I will add that, that’s not just, you know, app. It’s funny when sometimes, when you say mobile people you know, think app, but it’s not just app. The mobile – you know the mobile world is really made up of apps and then mobile web and we’re, you know, we’ve tried to focus a lot of our attention to mobile in general and we’re sort of indifferent a little bit, to whether or not it’s app or mobile web. We do have both. And so, yes the question was whether we would, you know, you’re going to see it grow. Look we’re already so far ahead of where we thought we would be at this point in time. I don’t, you know, it’s not – I’m not going to tell you it’s going to go from 50% to 80% of our business. You know, at this point we’re just tickled that it’s half the business already when we came in at 50% so, we’ll probably see it today there around that 50% level at least in the fourth quarter of this year.

[John Gilliam:]

Okay, very good. Thank you, gentlemen.

[Operator:]

There are no further questions at this time.

[Richard Howe:]

All right, thank you. I’d 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 progress over these coming quarters.

[Operator:]

This just concludes today’s conference. Thank you for your participation.