Inuvo CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.10.14 | About: Inuvo, Inc (INUV)

Inuvo, Inc. (NYSEMKT:INUV)

Q4 2013 Earnings Conference Call

March 10, 2014 04:30 PM ET


Alan Sheinwald - Alliance Advisors

Richard Howe - CEO and Chairman of the Board

Wallace Ruiz - CFO


Matthew Paul - Sidoti & Company

John Gilliam - Point Clear Strategic


Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Inuvo Incorporated Year End 2013 Conference Call. 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) I would now like to turn the conference over to Mr. Alan Sheinwald of Alliance Advisors. Please go ahead.

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 2013 Shareholder Update Conference Call. I have with us today Mr. Richard Howe, Chief Executive Officer and Chairman of the Board and Mr. Wally Ruiz, Chief Financial Officer of Inuvo, as your presenters today 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 they relate to Inuvo, Inc., are as such, a forward-looking statement. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by Inuvo at this time. In addition, other risks are more fully described in Inuvo's public filings with the U.S. Securities and Exchange Commission, which can be reviewed at

Well, with that out of the way now, I'd now like to congratulate management on the tremendous progress they’ve made in 2013, and introduce Mr. Richard Howe, Chairman and CEO of Inuvo. Rich, the floor is yours.

Richard Howe

Thank you, Alan, and thanks, everyone, for joining us today. A year ago we were entering 2013 with a number of key issues that needed to be addressed if we were going to continue to be successful at building Inuvo into the kind of company we would all want to own.

Among those issues, with the need to lower operating expenses and produce a profit within the business, the need to transition away from the toolbar product and the desire to expand our partner segment into mobile. We had a plan to address each of these issues. And I am pleased to report that the plan has worked very well. I would like to start discussion today by providing you with more detail about those plans and the results which we've seen associated with them. Later on in the discussion I will give you a sense of what we will be focused on in 2014.

Firstly, we all know it was time to build a scalable foundation for our business, one the was supported by profitability. This was really the only way we thought we could put ourselves in a position to make that kinds of investments required to expand into higher value, higher growth lines of business that we're aligned more closely with the future of the internet. Now as you know quiet while from our previous conference calls, we addressed this issue very early in the year by making a conscious and calculated decision to move the company, and I suppose if we had moved down the street from our original location, the story might have ended there.

But that’s not what we did. Rather, we decided to take advantage of certain relationships we had in the State of Arkansas where we could secure a grant to fund the move and where we are also confident we could mitigate the biggest risk associated with that move, which was the replacement of personnel who would not be able to relocate to the new location. To put this in perspective, this represented almost two thirds of the Company’s employees, so it shouldn’t be a surprise that we're also very concerned about our ability to keep the company growing through a transition as disruptive as this one.

And the results here really speak for themselves. Operating expenses year-over-year declined over $8 million between 2012 and 2013 and because of that, the company delivered a GAAP net income of roughly $0.5 million in the year, up from a loss of over $7 million in 2012. That’s a $7.5 million swing in profitability and a significant accomplishment and milestone for our Company. The team's implementation here was well-planned and well executed, but more importantly it has set the company up for continued profitability into the future and positioned the company well for its continued transformation in the higher value higher growth lines of business delivering a $0.5 million of GAAP profit like we did in 2013, is not common for public companies of our size.

Our second plan for the year involves the toolbar product, the market for which was declining quickly and the future of which was in question for a number of reasons that included technological changes, the shift to mobile, and decreasing consumer demand. Coming into the year we saw increasing marketing restrictions related to downloadable software and we also saw the major browser developers increasingly restricting the manner in which technology additions to the browser could be incorporated. Both of these issues were very likely to have an impact on our desktop based toolbar product. And as a result, we needed a plan to transition away from that product and into other products who's business models where less susceptible to market changes and that would ideally capitalize on our existing relationship and competency, no small task for a company of our size.

It is important to note in this context that the toolbar is $23.4 million in revenue in 2012, that same business is $10.5 million in 2013. And as we accelerate the transition of this business in the first quarter of 2014 it will be almost totally transitioned within the 2014 calendar year.

Additionally and effective in Q1 2014, we are no longer spending any marketing dollars promoting this product, electing alternatively to allocate that spend towards the newer allotted products in the owned and operated segment.

Now, our topline results show that we have not only replaced nearly $13 million of toolbar revenue in the year but also grown the company overall in 2013. And the main reason for that stems from the success we’ve had with our owned and operated web and mobile strategy. A year ago, this business had almost no revenue associated with it; today, it has an annualized run rate of almost $15 million. As a side note, we also saw solid growth in the partner business in 2013. So overall our growth has to a large degree been constrained by the transition of the toolbar product. If we look at the Company without the toolbar between 2012 and 2013, the business went from 30 million to 44.5 million growing almost 50% year-over-year. This underlined growth rate fuelled by initiatives in both segments is yet another significant accomplishment for the Company in 2013 one where we not only built the technology that now allows us to rapidly deploy numerous content rich desktops and mobile properties, but also puts us in much greater control of our own debt financing.

We effectively launched four new ALOT branded web site in 2013, each of which is accessible across desktop, tablet and mobile phone and we fully expect to launch many more in 2014. The acquisition of Vertro in 2012 is what has provided the means to grow this new complementary business, which leverages the asset from that transaction. Additionally and given the synergy that exists between web properties and mobile applications, we also have expansion goals within our O&O business that includes mobile application development.

And while we haven’t talked much about this in the past, we do have a number of mobile applications in market right now that we are using as test cases for the model and already have roughly a 100,000 active users of those applications. The applications are currently being distributed principally through the Google Play app store where the user base has grown almost entirely organically.

Now owning our own mobile applications offers us another significant competitive advantage. It provides a way for us to test in-market the various ad presentment formats we intend to offer through our business to business partner segments. And this provides a good segway to our third objective for the year, which was to position ourselves in 2014 for mobile expansion of the partner segment.

It’s important to note that while we segment our business into partner and Owned and Operated, internally we really view the collective network or web sites and applications across these segments as a marketplace manage and there are some clear advantages that derive from having our own collection of web sites and applications within that network. This model has allowed us to innovate first on our own properties where we can control the implementations and rapidly make changes. This then allows us through controlled testing to find adverting solutions that could potentially offer attractive returns for partners and when we find such pockets of opportunity, we then commercialize them for distribution more broadly.

This has been the case with our mobile advertising objectives in 2013. With reasonable scale and using a combination of the owned application and a number of partners, we have been able to test ad presentment type and channel in an effort to assure proper functioning of technology and adequate return based on advertising click through rate specifically on mobile devices. As a result of our efforts in 2013, we feel we are now getting closer to being able to deliver mobile advertising solutions at scale and therefore able to focus on growth for this part of the partner expansion goals for the Company in 2014.

We are now estimating that in 2014 as much as $10 million of our overall revenue could be directly related to mobile activity across the business as we accelerate the execution of the Company’s overall mobile mission. The 2013 was a solid year and we exited the year with a better mix of products and a better foundation for growth in the future. As a result of executing on the plan described earlier, we were able to grow the company to 55 million in annual revenue and improved the profitability $7.5 million year-over-year.

Now before I transition to Wally, I’d also like to talk a little about the fluctuations in revenue that occur within our business. At its current time, our business really is best viewed on an annual basis because management build strategies like those discussed throughout this call based on yearly and sometimes multiple year objectives. Many of the marketing program, the technological development and/or the channel expansion plans we initiate within any given year do not lend themselves to monthly or quarterly timeframes success measurement. The 2013 year was a good example of this in fact. We had uncharacteristically high revenue in Q1 based on investments made in Q4, 2012 that were not continued due to their low return on investment and strategic fit. We had a more normal Q2 and Q3, typically our best quarters and that was followed by a lower Q4 at $11.4 million which again is typical for a new low based on seasonality was something we talked about on our Q3 call. And in context of our toolbar business had $5 million less toolbar revenue than it did in the prior year. Our typical monthly revenue curve involved lower revenues from November through March following the holiday season and picking back up from April through October. Our typical daily revenue curve involved highest revenues on Monday through Thursday with a flow down Friday through Sunday.

I'd now like to turn call over to Wally for a more detailed accounting of our year-end results. Wally?

Wallace Ruiz

Thank you, Rich. Good afternoon everyone. Thank you for joining us today to discuss the Company’s financial results for the fourth quarter of 2013 and for the full year. My comments will refer to the press release and the 10-K filed earlier today. Inuvo reported net revenue of $11.4 million in the fourth quarter of 2013, a $4.8 million decrease from the fourth quarter of last year. For the year ended December 31, 2013, the company reported overall net revenue of $55 million, a 3% increase compared to the prior year. The Partner segment which delivers advertisements to our partners' websites and applications and represents 65% of the company’s total revenue in 2013 reported net revenue of $7.6 million in the current quarter, a $1.8 million decrease from the same quarter last year. The decrease within the Partner segment in the fourth quarter 2013 of the last year is due to an uncharacteristically high quarter last year and to our efforts to transition away from publisher that focus heavily on marketing models with non-standard traffic sources, the result of which the company is shutting down a number of such publishers in the quarter and establishing a reserve of approximately $263,000 from revenue.

For the year ended December 31, 2013, the Partner segment revenue was up from $25.9 million in 2012 to $35.9 million in 2013, a 39% growth rate. The Owned and Operated segment delivers advertisements to websites and applications that Inuvo designs, builds and markets under the ALOT brand. The Owned and Operated segment reported $3.8 million of revenue in the fourth quarter of 2013, a $3 million decrease from the same quarter last year.

As Rich mentioned, our decision to transition away from the toolbar product was the primary reason for this decline. The toolbar revenue was $1.2 million in the fourth quarter this year, down $5.3 million from the $6.5 million reported in the same quarter last year. For the year ended December 31, 2013, the Owned and Operated segment reported revenue of $19.1 million; $8.3 million lower than last year. Of the lower revenue, the toolbar was nearly $13 million.

Gross profit was $5.3 million in the fourth quarter of 2013 compared to $8.8 million last year. And the gross profit for the year 2013 was $26.2 compared to $27.7 million last year. The lower gross profit this year is due to the Owned and Operated segment revenue being a lower portion of the total revenue this year compared to last year, the reserve charge to the Partner segment revenue in the fourth quarter of 2013, and the increased affiliate cost associated with growth in the Partner segment. The Owned and Operated segment gross profit as a percent of revenue was 97% and 95% for the fourth quarter and full year 2013 respectively, that’s compared to 88% and 85% for the fourth quarter and full year of last year respectively. The higher gross profit as a percent of revenue in 2013 is primarily due to the transition away from the toolbar to the owned and operated website and application.

Operating expense was $5.6 million in the fourth quarter; this is a $4.3 million decrease from the same quarter last year and an $8.1 million decrease from the full year of 2013 compared to the prior year. All three categories of operating expense, marketing cost; compensation and selling, general and administrative cost decreased in the fourth quarter and full year this year compared to the same period last year.

Marketing costs are primarily associated with the Owned and Operated segment where we spend money to drive traffic to our landing pages, where successful result is when a consumer clicks on an advertisement or downloads our product. Marketing cost decreased $1.3 million in the fourth quarter of 2013 compared to the same quarter of the prior year and decreased $3.8 million from the full year 2013 compared to full year 2012. The lower marketing cost is due to again to the transition away from the toolbar product.

Compensation expense decreased $950,000 in the fourth quarter of 2013 from the same quarter last year and decreased $678,000 for the full year 2013 compared to 2012. The decrease in the quarter is primarily due to a severance charge in the fourth quarter of 2012 of $505,000 and due to a lower number of employees this year over last year. There were 34 full time permanent employees at Inuvo at the end of December 2013 compared to 47 employees a year ago.

Selling, general and administrative expense or SG&A decreased $2 million in the fourth quarter of 2013 compared to the same quarter in the prior year and decreased $3.6 million for the full year 2013 compared to 2012. The decrease in the current quarter of SG&A expense is due primarily to lower facilities expense, lower depreciation and amortization expense associated with the closing of offices and data centers in New York and Florida in the first quarter of this year and in addition we were over accrued, we had over accrued in franchise act and bad debt reserve both of which were adjusted in the fourth quarter of 2013.

We expect marketing cost to increase on a quarterly basis as we roll out new, owned and operated websites and applications. On an annual basis we expect both compensation expense and SG&A expense to be lower in 2014 compared to 2013.

Other net expense is primarily expense that -- and that was -- I am sorry other net expenses primarily interest expense and that was $86,000 in the fourth quarter of 2013, last year that amount was $164,000. So this year’s lower expense is due to lower average loan balances.

The company reported a $76,000 income tax benefit in the fourth quarter of 2013 due to amortizing its deferred tax liability generated from intangible assets acquired in the March 2012 acquisition of Vertro. Net income from discontinued operations was $46,000 in the fourth quarter of this year and was composed of a reversal of liabilities to web publishers and vendors that date back to 2009 and earlier and this compares to a loss of $41,000 in the same period last year.

The company reported a net loss in the fourth quarter of 2013 of $253,000 or $0.01 per share loss. This compares to a net loss of $864,000 or $0.04 per share loss in the prior year quarter. As mentioned earlier the company also took a one-time $263,000 reserve in the quarter which adversely impacted net income.

For the year ended December 31, 2013, Inuvo reported a net income of $477,000 or $0.02 per diluted share impaired to a net loss in the prior year of $7 million or $0.34 per share loss. EBITDA adjusted for stock compensation expense and accrued severances and other non-cash expenses was approximately $30,000 in the quarter that ended December 31, 2013, and that compares to an adjusted EBITDA of $1 million in the same quarter the prior year.

Turning to the balance sheet, cash and cash equivalents was $3.1 million at December 31, 2013 compared to $3.4 million at the end of 2012. Bank debt was approximately $6.1 million at the end of December 2013 compared to $7.8 million of debt at the end of 2012 and stockholders’ equity was $5.3 million and that’s compared to a stockholders’ equity of $4.2 million at the end of the prior year 2012.

With that I’ll like to turn the conference back to Rich.

Richard Howe

Thanks Wally. We had a very successful 2013, it was a year in which we moved the company to a new state at no cost to our shareholders. We reduced operating expenses $8 million, we delivered $0.5 million of net income coming off a year where we lost 7 million, we grew a brand new business to its current $15 million run rate and we reduced our debt from $7.8 million to $6.1 million.

As we look ahead towards 2014 we have two primary objectives for the year and they are respectively; to focus on growing our owned and operating network of sites and mobile applications. We recently announced yet another expansion of the Inuvo business with the launch of our travel site, the expansion of our finance site and the redesign of the local site. Please see our press release for more details. And the focus on the expansion of the partner network into the mobile space. We entered this vertical last year with a number of tests and this year we plan to dedicate resources and capital to aggressively build out our mobile presence. This business grew 35% year-over-year in 2013.

In conclusion, we expect 2014 to be more profitable than 2013. We expect our O&O business to continue to grow aggressively. We expect to be transitioned away from the toolbar business entirely within the first quarter, typically our lowest quarter in any year. And we expect to have a greater percentage of our overall revenue be from mobile.

With that, I would like to now turn the call back over the operator for questions and answers. Operator?

Question-and-Answer Session


Thank you, sir. (Operator Instructions). Our first question is from the line of Matthew Paul with Sidoti & Company. Please go ahead.

Matthew Paul - Sidoti & Company

Hi guys. Thanks for having me and taking my question. First question is for Wally, I want to ask what the effect of your effort to increase your mobile development will have on margins for 2014 and moving forward?

Wally Ruiz

Yes. We’re expecting increase in our mobile business in both the Partner segment and the Owned and Operated segment both. And typically we’re seeing higher margins in Owned and Operated right now. So, we would expect it to have a favourable impact going forward and as Rich mentioned that’s a growing area for us in 2014.

Matthew Paul - Sidoti & Company

Sure. For favorable impact on the revenue you planned you know from the mobile portfolio but how about I guess in the cost effect?

Wally Ruiz

We’re delving into it and in the margins in the first few months of this year have been very favourable in the mobile -- on our mobile business right now. We’re very encouraged by it.

Matthew Paul - Sidoti & Company

Thank you. Moving forward, I know applications have sort of grown as of late over the last few quarter but do you have a number in terms of number of web sites and applications you’re looking to roll out in 2014 or by the quarter, has that changed at all?

Richard Howe

It really hasn’t and we’re cautious about trying to put a number out purposely so that we don’t set an expectation we can’t deliver on but you’ve seen the history here over the last, we call it six or nine months right in and we’re running at least one if not more new web properties a quarter and I think that will probably be the case as we look out for the year.

Matthew Paul - Sidoti & Company

Okay. And last question as the O&O portfolio grows, can you just I guess set a little color on your strategy to review clicks, number of clicks, I guess just share absolute numbers of traffic, what I’m trying to ask is, is your strategy to grow clicks per site visit or just to keep funnelling additional traffic in there or somewhat or both?

Richard Howe

Well, there is a bunch of metrics that we track as it relates to O&O. So, it’s not any one. So, do we track clicks yes, we may get paid at least in part based on individuals who click on ads after we give a presentment of them along with the content that we’re delivering that’s one. But we also are keenly watching pages because we have other monetization techniques on the site banner ads and the like. So, that’s an important aspect of the design of the web properties. And, can’t remember what the third thing you asked.

Matthew Paul - Sidoti & Company

So I was just trying I guess to get possibility if the primary strategy was to just gain incremental traffic with each website you’re launching.

Richard Howe

Yes, both inorganic and organic, right. So, I think everybody understands, everybody launches web properties, spends marketing dollars to try to get traffic to come to the websites and the margins in the business improve as people repeat visit, right because you do not have to pay for them when they repeat. So, we also track that quite carefully because the intent is to try to get as many people return again as we can.

Matthew Paul - Sidoti & Company

So I just want to make sure is it safe, am I thinking about this correctly that it's just -- from the strategy side, bigger part of your business is just driving incremental traffic burst trying to increase click per user, per visitor or something like that.

Richard Howe

It's all of that. No, but there is not any one. I mean we’re trying to design high quality, excellent content that appeal to users regardless of the device that they’re entering the property through and of course what we want to do is to get them to stay as long as they feel they need to and the longer they stay the more likely they are to either see a banner ad or display ad that we're showing them or to click on some other ad that we've got located somewhere in the property.


(Operator Instructions). And I’m no further questions at this time; pardon me we did have a person queue up for a question. We have John Gilliam with Point Clear Strategic, please go ahead.

John Gilliam - Point Clear Strategic

Have you guys -- I apologize if you addressed this early in the call, I missed about the first 10 minutes of the call, but on the transition away from the toolbar business, have you had any feedback from Google who's of course been one of our main partners in terms of monetization, have you had any feedback from them on the transition away from the toolbar business and the corresponding increase in the business on the O&O side?

Richard Howe

Nothing specific John, clearly they’re aware of the strategy that we’ve had here and in fact we presented that strategy to them I guess a year ago. So in that regard they’re fully aware of what it is that we’re trying to do and why we’re doing it and how we’re doing it, as our partner and there’s no issue if that’s what you’re trying to get at.

John Gilliam - Point Clear Strategic

Well I was just curious to know in fact, what I understand that’s not a business they’ve been really high on in the past; one of the largest players had actually just about been shut down by Google from what I understood. So, that’s a positive I think and just curious feedback that you had and wondered even if there had been any potential for better rev share as a result of the higher quality traffic I think that there’s been perceived with move away from the toolbox side.

Richard Howe

There’s always the possibility for higher rev shared in our business model and in the context of our contracts with our suppliers. It’s almost always associated with hitting new tiers and we’re getting close there with the sites business now. As it relates to -- again, just to talk about the toolbar business, I don’t think it’s any surprise to anybody that the toolbar business model is a business model has been in decline. And I said earlier John, you weren’t on the call, but that’s the result of people making it harder to market, they try to get people to download the browser developers making it more difficult to integrate into the browsers. So we knew this a year ago and we put a plan in place to make sure that we -- that we could change the mix of products in that part of our business and we did that, very successfully in 2013.

John Gilliam - Point Clear Strategic

Yes, you guys, you definitely moved the bar forward on that, great job and can you give, me what would be the best example of one that Inuvo Owned and Operated mobile sites, because I’m super familiar with all the web properties and I've seen some of the apps, but I’ve not gotten familiar with the mobile sites that we have.

Richard Howe

All of the sites are mobile ready, so anyone them,,, anyone of the sites that we have,, every single one of them is mobile accessible.

John Gilliam - Point Clear Strategic

Okay, okay, I followed you and I think I’d misunderstood that. You mentioned I believe that there was close to a 100 apps that we’ve developed in house that are currently, I may have printed that wrong, I apologize if, do we have around…

Richard Howe

Yes, so let me help you out here John. So we have -- as part of our strategy we’ve always had a desire with our, call it web site strategy, it’s not really a web site strategy, it’s a web site and application strategy, but we’ve always had the desire with this strategy to not only launch web properties but to launch synergistic mobile applications that align with those web properties, and we started working on that, in concert with the web site launches that we had and the 100,000 you’re referring to is really our first foray into that with a couple of applications, one’s a weather application, the other one’s actually a photo application, and that’s why I threw it out there just to let people know that we do expect to be both developing and promoting multiple applications alongside our web site.

John Gilliam - Point Clear Strategic

Yes thank you I’ve seen that, I’m sorry I got the number, right, it’s just that we had a 100,000 active users of our internally developed apps and that’s amazing that we’ve gotten to that level just through organic growth due to Google app store, because if you’re a user of Google app store you know there’s so many different things to attract your attention and that we’ve grown it organically at that level is pretty impressive.


And I’m showing no further questions at this time, I’d now like to turn the call back over to management for closing remarks.

Richard Howe

Thanks, Camille. I’d like to thank everyone who joined us on today’s call, we appreciate your continued interest in Inuvo and we look forward to reporting our progress over the coming quarters.


Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation, you may now disconnect.

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