Inuvo, Inc.
Q4 2014 Earnings Call Transcript

Published: 7 Feb 2015

[Operator:]

Good day and welcome to the Inuvo, Inc. 2014 Full Year and Fourth Quarter Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Alan Sheinwald of Capital Markets Group, LLC. Please go ahead, sir.

[Alan Sheinwald:]

Thank you, operator, and good afternoon. I’d like to thank everyone for joining us today for the Inuvo fourth quarter and full year 2014 shareholders update conference call. Today Mr. Richard Howe, Chief Executive Officer; and Mr. Wally Ruiz, Chief Financial Officer of Inuvo will be your presenters on the call today. Before we begin, I’m going to review the company’s Safe Harbor Statement. The statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events and as such all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially. When used in this call the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as it relates to Inuvo, Inc. are such forward looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause actual results to differ from those anticipated by Inuvo at this time. In addition, other risks are more fully described in the Inuvo’s public filings with the U.S. Securities and Exchange Commission, which can be reviewed at www.sec.gov. With that out of the way, now I’d like to congratulate management on an outstanding year and fourth quarter and turn the call over to Mr. Richard Howe, CEO of Inuvo. Rich the floor is all yours.

[Richard Howe:]

Thank you, Alan, and thanks everyone for joining us today. We are very pleased to be announcing strong quarterly and full-year results. Revenue in the fourth quarter was $15.5 million, up 36% from $11.4 million in the fourth quarter of 2013, and up 19% sequentially from $13 million in the third quarter of 2014. Gross margins in the fourth quarter experienced a healthy growth reaching 60% as compared to 46% last year and net income on a GAAP basis in the quarter was $645,000 or $0.03 a share versus a loss of $253,000 a year ago. For the full year, revenue was $49.6 million having steadily grown at a 15% compounded quarterly growth rate throughout the year starting with $10.1 million in the first quarter and ending with $15.5 million in the fourth quarter. Gross margin for the year was 59% and net income on a GAAP basis for the year was $2.9 million, or $0.09 per share, the best we’ve ever delivered. Wally Ruiz, our CFO, will be sharing additional details about our financial performance shortly. But the bottom line is we’ve had a terrific year on every front both financially and operationally. Let me share some of our successes with you for each segment of the business starting with the owned and operated segment. This segment is now almost exclusively our digital publishing business as two of our revenues are no longer material to our results. The websites and apps contribution to this segments growth has been nothing short of remarkable. Our business that effectively did not exist less than 24 months ago delivered almost $22 million in profitable revenue in 2014, $7.7 million of which was in the fourth quarter. During that fourth quarter, we continue to build off the numerous site enhancements. We had been making throughout the year, including the new mobile inspired ALOT websites. With an audience that now numbers over 3 million unique per month. Our retention has been concentrated on increasing the amount of time those users engage with us and define new ways to encourage repeat visits to the site. One of the ways we track our improvement in this regard is through the measurement of the amount of time users spend on our site. In the fourth quarter that metric was up 43% for the living site, 20% for the health site, and 15% for the travel site. Generally, across all the sites, visitors are viewing more pages, staying longer and returning more often. Additionally, we’ve also had a goal to increase organic visits through our sites and we have seen an increase in visitation direct in major search engine listings. During the fourth quarter, organic traffic to the career site was up 800%, the living site was up 100% and the health site was up 50%. Now complementing these organic traffic improvements our social media presence has expanded as well. Our ALOT Facebook page experienced a 25% improvement in the likes in the quarter and the number of article shares from site visitors improved by more than a 100%. Content or more specifically the quality of content remains a top priority for this business. We produced, edited and posted over 4,000 new articles in 2014. As we have mentioned on past calls, we launched three new verticals. We have an extremely capable team within this segment that numbers 20 writers and editors both full and part time. Now content can come in many forms. So in addition to the more traditional written articles, we are also developing new types of content. These have included informative graphics, slide shows and short answer formats designed in a Q&A like style. We believe this will be a key growth driver in 2015, and we will continue to expand these content choices for our users building in polls and quizzes, commenting and video. Our partner segment had an equally successful year having, as you will recall, exited 2013 with a revised strategy that focused on quality and innovation. This segment of our business is best described as an add technology service we offer to digital publishers and mobile app owners. Our owned and operated segment, for example, is one of many such publishing and app clients for this segment. Now, while revenue year-over-year in the fourth quarter was about flat in the partner segment, the quality of our deliverable to advertisers has continued to be the very best, we’ve ever measured. We protect our network with various proprietary and patented technologies that have been key to this improvement in quality and we expect to continue to evolve these technologies as the market place changes. We experienced a 14% increase in a number of click ads we get paid for between the first and second half of 2014 and about a 25% increase in the revenue generated per click over that same period, but latter, a good indication of the benefits of improving quality. Sequentially, the network saw strong growth within the year, going from $5.5 million in Q1 to $7.6 million in Q4. The number of partners we have continues to grow and we have had success in 2014 with a strategy focused on growing existing relationships where the quality was already strong. We continue to make investments in this segment of our business and we’ll continue to do so through 2015. Our objective here remains to develop, ad units within the ecosystems of our owned and operated web and mobile properties and once optimized for performance to commercialize those ad units for distribution out to new and existing partners. We already have numerous partners who have signed up based on this model. And as we continue to develop more ad unit choices for publishing partners, we expect those numbers to blossom. An important growth driver for Inuvo in 2015 is a new innovative product line made up of these ad units that we will brand as search links. These new ad units will allows us to target a much larger universal publishers and while we are implementing new partners all the time, we expect a broader release for this product line in early Q2. The development required here is very technical with software needed for signup or reporting and for continuous optimization of these ad units. In addition to the financial benefits of this new product line, the implementation demands are closer tie between Inuvo and the publisher for delivery, which should make it harder for competitors to displace us. Now, I’d like to just touch on a few other successes. You will recall that we entered 2014 with about 15% of overall revenue generated from mobile sources. That 15% claimed to about 19% at the end of Q1 to 34% at the end of Q2 and grew close to 50% of revenue throughout the second half of the year. This represents a significant and positive shift for Inuvo and the go-forward message is that mobile will continue to be an important component of our future growth plan. Further, we just announced this week that we had renewed our Google agreement. And as was stated in the press release, the new contact does support our long-term strategic plan. Our Yahoo agreement doesn’t renew until 2016. However, we routinely include various amendments throughout the turn. With that, I would like to turn the call over to Wally.

[Wally Ruiz:]

Thank you, Rich. Good afternoon everyone. We are reporting today another consecutive quarter of revenue growth, and as Rich mentioned, we have grown 15% quarter-over-quarter throughout 2014. Throughout my presentation when I refer to the current year, I’m referring to 2014 and when I refer to last year or the prior year, I’m referring to 2013. Inuvo reported revenue of $15.5 million in the fourth quarter of 2014 compared to $11.4 million in the fourth quarter of last year, a 36% increase. $7.6 million came from the partner network and $7.9 million from the owned and operated network. For the full year 2014, Inuvo reported revenue of $49.6 million, compared to $55 million last year. The partner network which delivers advertisements to our partner’s websites and applications reported $7.6 million in the fourth quarter of this year, seven tenths of a percent lower than the same quarter last year. For the full year 2014, the partner network reported revenue of $25.7 million, compared to $35.9 million in 2013. The lower revenue in the partner network in 2014 compared to the same periods of 2013 is due largely to the program we initiated in the fourth quarter of 2013 that was designed to improve overall traffic quality through the deployment of technology and the enforcement of our policies related to the use of technology on publishers’ pages and apps. The result of these changes was a lower click volume compared to the prior year, but higher quality of traffic delivered to our customer and a higher RPC or revenue per click for ourselves. The partner network revenue in the fourth quarter of 2014 would have exceeded the prior year, but for a decision this year to implement the sales allowance policy to address any advertiser adjustments that may occur from time to time. The company has not had any material adjustments in this regard since the new program was initiated. The owned and operated network which is made up a collection of websites and apps that we owned and where income is derived from advertisements represented 51% of the company’s total revenue in the current year quarter. The owned and operated network reported $7.9 million of revenue in the fourth quarter of 2014, a 109% increase over the same quarter last year. For the full year of 2014, the owned and operated network reported $23.9 million of revenue, a 25% increase over the prior year. The increases in this business segment are in spite of our announcement in early 2014 to transition from a product that represented a third of this segment’s revenue in 2013. The appbar revenue in the fourth quarter of this year was less than a quarter of a million dollars compared to $1.2 million in the same quarter last year. Though we had expected the revenue from the appbar to have completely ended in 2014 and though we no longer supported, it appears that revenue will trickle into 2015. Gross profit in the fourth quarter of 2014 was $9.3 million, compared to $5.3 million last year at 77% improvement. For the full year of 2014 gross profit was $29.2 million, compared to $26.2 million last year. The reason for the improved margins in both periods this year is due to better margins of the owned and operated network. And second, as previously mentioned to the changes in the partner network, then improved traffic quality and higher RPCs. Partner network gross profit in the fourth quarter of 2014 was approximately $1.4 million compared to $1.6 million last year. The lower gross profit in this year’s quarter was primarily due to the accrual of the sales allowance. For the full year 2014, partner network gross profit was approximately $5.5 million compared to $8 million last year. The gross profit in this year was - the lower gross profit, this year, was primarily due to lower overall revenue and the accrual of the sales allowance. Gross profit in the owned and operated segment in the fourth quarter of 2014 was $7.9 million compared to $3.7 million last year. And for the full year 2014, gross profit was approximately $23.7 million compared to $18.2 million last year. The higher gross profit in both of this year’s periods compared to last year is due to the higher revenue. Operating expense, which is comprised of marketing cost, compensation expense and selling, general and administrative expense was $8.4 million in the fourth quarter of 2014 compared to $5.6 million in the same quarter of last year. In the full year 2014, operating expense was $26.7 million compared to $26.2 million last year. Marketing costs are the primary cost associated with the owned and operated network where dollars are spent in an effort to build an audience for the various sites and apps we own. Marketing costs were $5.9 million in the fourth quarter of 2014, an increase of $2.1 million for the same quarter in the prior year. For the full year 2014, marketing costs were $17.5 million, compared to $14.4 million last year. The higher marketing costs are related to the higher investment levels required to promote and create awareness of the ALOT sites and applications. Compensation expense increased by $104,000 in the fourth quarter of 2014, from the same quarter in the prior year. The higher expense in the current quarter is primarily due to higher stock compensation expense. For the full year 2014, compensation expense was approximately $4.8 million compared to $6 million last year. The lower expense in the current year is primarily due to a 20% lower payroll. SG&A or selling, general and administrative expense was $1.2 million in the fourth quarter of 2014 compared to $500,000 in the same quarter in the prior year. The increase in the current quarter SG&A expense is due primarily to favorable adjustments made last year to accrued franchise taxes and bad debt reserve. SG&A expense for the full year 2014 was $4.4 million, compared to $5.8 million last year. The lower expense this year is due to a 36% lower depreciation and amortization expense associated with the closing last year offices and data centers in New York and Florida and 68% lower facility expense this year due to the move to Arkansas. Our goal for 2015 is to accelerate growth. We have engineered our marketing campaigns to focus on the expansion of our owned and operated websites and applications. Marketing expense will increase to support this expansion and the result of revenue growth. Compensation expense will increase as we step up hiring, particularly technical personnel. The hiring will be commensurate with our revenue growth. And we expect SG&A expense to remain relatively flat in 2015. Net interest expense was $65,000 in the fourth quarter of 2014, $20,000 less than last year’s fourth quarter expense. For the full year 2014, interest expense was $351,000 compared to $357,000 last year. This year’s lower expenses due to lower loan balances and the renegotiation of our line of credit and term debt, which became effective on October 1. In spite of reporting our net income and generating a taxable income in 2014, there is no income tax expense in 2014 due to net operating loss carry forwards that we have. The net loss from discontinued operations was $108,000 in the fourth quarter of 2014 due to an accrual of an uncertain tax position in the UK from prior years. The company reported a net income in the fourth quarter of 2014 of $645,000 or $0.03 per diluted share and that compares to a loss of $253,000, or $0.01 per share loss, in the fourth quarter of last year. For the full year 2014, our net income was $2.1 million or $0.09 per diluted share, compared to $477,000 net income last year or $0.02 per diluted share. EBITDA adjusted for stock compensation expense and accrued severances was approximately $1.8 million in the quarter that ended December 31, 2014 or 11.5% of revenue, compared to adjusted EBITDA of $79,000 in the fourth quarter of last year. For the full year of 2014 adjusted EBITDA was $5.5 million or 11.1% of revenue and that compares to $3.8 million or 6.8% of revenue last year. Turning to the balance sheet, we have strengthened our balance sheet this year with improved performance of the business with renegotiating our credit agreement and a consorted effort to pay down debt. Cash and cash equivalents totaled $3.7 million at the end of December 2014, compared to $3.1 million in December 2013. Bank debt was $3.6 million in December 2014, compared to $6.1 million at the end of December 2013. We are closing the GAAP in our long time networking capital deficit from $3.9 million at the end of last year 2013 to $1.2 million at the end of December 2014. We expect to turn that deficit into a surplus within 2015. With that, I’d like to turn the call back to Rich.

[Richard Howe:]

Thanks, Wally. In summary, we had a terrific fourth quarter and full year in 2014. We entered 2014 at financially and operationally sound as we’ve ever been. But let me explain why Inuvo can compete so effectively in the digital advertising marketplace. We have three integrated assets that together can yield strong growth and margins. We own our own content. We do not have to license it or pay a fee for it and it can be reused as many times as we can’t imagine. We own our own technology and we do our own ad survey. It is programatic and targeted, yielding better click-throughs for ourselves and our partner. We do our own marketing. This complicated data-driven expertise is not outsourced and not easy to replicate its scale. Our campaigns are developed and monitored in-house. In closing, let me summarize our yield. Both segments of the business had double digit growth between Q1 and Q4. With the overall business growing 15% quarterly in 2014 from $10.1 million in Q1 to $15.5 million in Q4. Fourth quarter revenue was 36% higher than the previous year. The company delivered $49.6 million of revenue with the 59% gross margin and earnings per share of $0.09. The Owned & Operated Segment grew 114% in 2014, with the sites and apps revenue growing 200% to almost $22 million in the year. Adjusted EBITDA margin was a very healthy 11% at the year-end, with $3.7 million of cash and a debt down by $2.5 million to $3.6 million. With an unused bank availability of $3.1 million. And finally, revenue from mobile sources in the second half of year was steady at about 50% of total sales up, from 15% at the beginning of the year. We’re excited about 2015. Our three-year plan for renewal was to stabilize the business in 2013, to prove out the model in 2014 and to invest in growth for 2015. We are on track. Expect us to continue building out our Digital Publishing business and to maintain the course on a strategy to leverage these owned assets as a means to develop sophisticated ad units that can be distributed to others. With that, I’d like to now turn the call over the operator for questions. Operator.

[Operator:]

[Operator Instructions] I will hear first from Eric Martinuzzi with Lake Street Capital Markets.

[Eric Martinuzzi:]

Thanks and congratulations on our strong finish to a transformative year. The Partner versus O&O mix, we came out of Q4 right now about 51% on the O&O side, obviously O&O growth has been pretty substantial versus the year-ago where it was in the minority of the revenue stream. As you look at 2015, what is the mix, is that same kind of fifty-fifty that we saw here in Q4 or does that shift more to be O&O side?

[Richard Howe:]

Thanks Eric. We said before and I guess I’ll try and restate it again. We really feel good about both segments of our business, clearly O&O business has grown much more quickly than the partner segment has but it also was zero not 24 months ago. So now that it’s caught up. We see equal opportunity for growth in both of these segments of the business right now.

[Eric Martinuzzi:]

Okay. And then staying with the O&O side here, you talked about some new formats inside the content things like informational, tradeshows, short answer, Q&A format that sort of thing. Where are we now like – is written still 95% plus of what you’re monetizing and the other stuffs in the – just barely starting to be material and then again kind of where does this head over time?

[Wally Ruiz:]

Yes, so I don’t know what the exact percentage is Eric, so I don’t know if it is 90 or 80, but we definitely have been already introducing some of the other formats into the various stages. But yes, the lion’s share to this point has been the written content format. So we’re pretty excited about these new choices. And we have been implementing – no, no we are starting to see some really nice engagement with them. Videos should be big thing for us too this year.

[Eric Martinuzzi:]

Okay. And then stepping down to the gross margins, historically I think Wally you’ve talked about 52% to 55% range obviously this quarter you were slightly over 60%. Again I understand the margin profile when you do have a good strong O&O quarter. But as we look at 2015, it seems like 52% to 55% is probably understating the gross margin profile of the business now. What’s the correct range in your mind?

[Wally Ruiz:]

Yes. I think you’re right. Actually I think we’ll be in the mid 50s to – the high 50s. I think we’ve moved up a couple of steps.

[Eric Martinuzzi:]

Okay. And then lastly on the Google contract renewal, I know there is [indiscernible] can’t share, but I’m hoping you can talk to maybe how that arrangement change? What are the areas of emphasis with your key partner there because I imagine this every two years is kind of a chance for them to revisit. And as they go after their own partner network, they being Google, the kinds of things that they’re looking for from you I think it can be – it can tell us sort of where things are headed with your own business or maybe where the things are headed with your other large partner. What are the things that are emphasizing, what they want more out from you, what they want less out from you?

[Richard Howe:]

Yes, so I’ll take a shot of this. So I'm hard-pressed to speak for Google, but clearly we do meet with them on a regular basis, because we have been long-standing partners. And what I can say is they’ve been pleased with the way we transitioned from the downloadable software toolbar business into really a pretty large digital publisher now. So that we just met with them couple of weeks back. So they are very pleased with what we are doing there and there is a whole host of other services that Google has that we could leverage in the future that we could try and so, we plan to do it much of that as we can. Specifically, for the contract, you are quite right here we don’t comment on the specifics of our contract as we consider that a competitive issue. And what I will say is generally, the contract year-over-year doesn't change on average much. So there are parts of the contract that we might benefit from in a new version and there are other parts where we might have lost something. But generally it tends to average sells out. That’s why I think even in the press release I’d said look at the contractors, the business as usual.

[Eric Martinuzzi:]

Okay. Thanks and congrats again on the strong Q4.

[Richard Howe:]

Thank you, Eric.

[Operator:]

We’ll move next John Gilliam with Point Clear Strategic Capital.

[John Gilliam:]

Hey Rich, what a great job guys, you [indiscernible] this quarter, great job.

[Richard Howe:]

Thanks, John.

[John Gilliam:]

It looks like we are running probably between $1 million and $2 million in the EBITDA per quarter for fairly consistently now. We have been - appears we’ve been reducing the debt magically each quarter. I'm curious will that be the focus going forward at any point where we start to buyback shares instead of reducing the debt? Just want to get your idea of where we will be with that going forward.

[Wally Ruiz:]

Yes, I don’t see as using our capital to purchase back our shares. We think there is a higher return on investment for shareholders through the investment of the business, particularly now that the business is - is sound and performing, as well as it ever has in the past. So I wouldn’t expect us to do that, rather I would expect just to come into 2015 with a platform that we’ve now proven has the ability to scale and make all the investments we need to realize the full potential of this platform.

[John Gilliam:]

Great, thank you. You shared some of the growth figures in the O&O for the organic traffic, but could you give us an idea and let me prophecies with understanding that that several sites have not even been around long enough to be fully indexed in the search engines and sites. So to have that kind of organic growth is fantastic, but I just curious overall for the full year or rather just for the fourth quarter, what percentage of our overall owned and operated traffic was organic?

[Richard Howe:]

We don’t disclose that and I’m not prepared to do it yet, John. And by the way you shouldn’t take to mean because it’s too small to want to. Just its one of those metrics that once we start throwing out there – we’re going to have to track with everybody over and over again. And we just don’t think that’s necessary to do it now, which is why I want to give people an indication that why we’re focused on it.

[John Gilliam:]

Yes.

[Richard Howe:]

We know the impact it has on our business and if shareholders don’t understand the impact it has on our business, I will say it for you John, but because I know you know, look organic traffic improve the margins.

[John Gilliam:]

Sure.

[Richard Howe:]

It’s as simple as that because you’re not pay for return visitor. So I would say in the last part of 2014, we started to make a lot of changes related to the engagement of users, the redesign of the site, purposefully to begin to accelerate the percentage, the overall percentage of traffic that comes from organic. And as you can tell from the numbers I gave, we’re starting to see some nice impact from that. And we will continue to focus on that throughout 2015, now that we have the size of an audience that we do.

[John Gilliam:]

Yes, absolutely and obviously the focus you guys have made on generating the quality, the higher quality content is obviously starting to pay dividends with the most the increased time of the visitors are spending on the site, to see even more pages and all of that - great job, fantastic quarters, keep up the good work, thanks guys.

[Richard Howe:]

Thanks John.

[Operator:]

[Operator Instructions] We’ll move next to Jay Eisen with Gotham Travel [ph].

[Unidentified Analyst:]

Great quarter guys. Have you given any guidelines for next year or just next quarter?

[Wally Ruiz:]

Hi, Jay. It’s Wally. How are you?

[Unidentified Analyst:]

I'm don’t know – Gotham Travel but okay, it’s…

[Wally Ruiz:]

So Jay, we had not given any specific guidance up to now, but what we do is we talk about trends and the trending in the business and where we think its going. So I try to give some indications about the operating expenses.

[Unidentified Analyst:]

I understand [indiscernible]

[Richard Howe:]

I appreciate it. Thank you.

[Unidentified Analyst:]

Okay.

[Operator:]

We will take our next question from George Melas with MKH Management.

[George Melas:]

Hi, Rich. Hi, Wally. Great job this year. Could you give us any indication on the maturity of your different owned and operated types?

[Richard Howe:]

Okay, boy, now you’re going to test our memory. I guess if you think we would know that’s 20, 24 months old, right.

[Wally Ruiz:]

The oldest one…

[Richard Howe:]

So the oldest site we lunched, the very first site we launched was the local site and that was I guess probably 20 months ago or so right, give or take. And the next site we launched probably was the health site.

[Wally Ruiz:]

Health site, that’s right.

[Richard Howe:]

And that would have been – I don’t know maybe 16 months ago, so going back in time…

[Wally Ruiz:]

Yes.

[Richard Howe:]

That was followed by the finance site couple months later, so…

[George Melas:]

14 or 12 months…

[Wally Ruiz:]

Those were all 2013.

[Richard Howe:]

Yes. And then we followed that up with careers I think it was [indiscernible] career is 2014 and then there was…

[Wally Ruiz:]

Travel…

[Richard Howe:]

Travel and then living…

[George Melas:]

Excuse me, could you tell us how well those six sites are maturing? Which one is sort of hitting your model that you have for them and which one not quite there and maybe get there at some point?

[Richard Howe:]

Well, so – not surprisingly the one that were last in the Q were the smallest contributor to growth. I don’t think we have any of our sites that we’re not pleased with the performance of. And not surprisingly the first two sites we launched are the ones that are generating a big part of the overall revenue for the business. So we feel good about them all. So we like all of our babies. If I could say at that way right now and we see the opportunity to expand content and growth in each of the verticals that we’ve selected.

[Wally Ruiz:]

And the other thing George is that the some of sites support other sites. So it’s really a family of sites. So when you get someone that lands on let’s say the health site, they may end up ultimately on the finance or living site. So it’s a – we’re starting to look at it as a portfolio of sites because of that interrelation between them and the support between the site.

[George Melas:]

Okay, okay. And then just on the mix between website and mobile, it seems to have at least temporarily stabilized at 50

[Richard Howe:]

Well, we actually didn’t think we would get to 50% by the end of 2014. So we actually did better than we had expected coming end of the year. But I do think the 50 number is a good split right now. Now, market dynamics themselves are going to impact that that split, right. I mean there is just no doubt that consumers increasingly are accessing the internet through either their tablets or their cellphones and they’re just does not seem to be any indication that that’s going to slowdown. But 50

[George Melas:]

Okay, great. Thank you very much.

[Richard Howe:]

You bet. Thanks, George.

[Operator:]

[Operator Instructions] At this time, there are no additional questions. I’d like to turn the conference back over to Mr. Howe for any additional or closing remarks.

[Richard Howe:]

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

[Operator:]

That does conclude today’s conference. Thank you for your participation.