InnerWorkings' (INWK) CEO Eric Belcher on Q1 2014 Results - Earnings Call Transcript

May.13.14 | About: InnerWorkings, Inc. (INWK)

InnerWorkings, Inc. (NASDAQ:INWK)

Q1 2014 Earnings Conference Call

May 13, 2014 11:00 am ET

Executives

Eric Belcher - CEO

Joe Busky - CFO

Analysts

Nathan Brochmann - William Blair

Randy Hugen - Feltl & Company

Matthew Kempler - Sidoti

Kevin Steinke - Barrington Research

George Sutton - Craig-Hallum

Operator

Good day, ladies and gentlemen, and welcome to the InnerWorkings, Inc. First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

I would now like to introduce your host for today's program, Mr. Joe Busky, Chief Financial Officer. Please go ahead.

Joe Busky

Thanks, Jonathan. Good morning, everyone, and thank you for joining our first quarter 2014 earnings call. This is Joe Busky, and I am the Chief Financial Officer at InnerWorkings, and joining me on the call today is our Chief Executive Officer, Eric Belcher.

Before we begin, I'd like to note that this call will include forward-looking statements related to future results that are made pursuant to the Safe Harbor Provisions of the federal securities laws. These statements are subject to a variety of risks, uncertainties, and assumptions that may cause actual results to differ materially from those stated or implied by the forward-looking statements.

Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Listeners to the call are advised to review our SEC filings, including the risk factors contained in our most recent Form 10-K.

This call will discuss, among other financial performance measures, non-GAAP adjusted EBITDA, non-GAAP adjusted operating cash flow, and non-GAAP diluted earnings per share, which are non-GAAP financial performance measures. Please refer to the company's earnings release issued earlier today for a reconciliation of these non-GAAP measures to the nearest comparable GAAP measures. And this call is intended for investors and analysts and may not be reproduced in the media, in whole or in part, without our prior consent.

After Eric provides some remarks, I will cover the financial results and then of course we'll open the call to your questions. Eric?

Eric Belcher

Thanks, Joe, and good morning, everyone. We're off to a good start to the year. We grew revenues 18% with 12% of our growth being generated organically from our core enterprise business. We attribute the growth to a combination of outstanding client retention, further penetration into our existing account base and contributions made by new clients such as Energizer, Callaway and Mondelez.

In addition, we signed a number of new contracts in recent months, none of which have contributed to our revenue or profits yet this year but all are expected to begin doing so within the next few months once we complete the implementation phase.

These new contracts are with a diverse group of impressive companies including Novartis, DEFENDER Direct, Pizza Hut, Hertz, Bristol-Myers Squibb and Danone Group. I'll briefly take you through what our scope of services are for each of these companies.

First, we're really excited about our recent contract with Novartis. By leveraging our new VALO ecommerce platform to facilitate the procurement, ordering and reporting of their global branded merchandizing program we'll support this account worldwide creating global collaboration and efficiency across the many brands that they own. We'll be launching ecommerce sites around the world in the months ahead starting with China.

Novartis chose our platform because it's the only one of its kind of our industry that can handle multiple languages and multiple currencies across dozens of product categories.

We've also signed a new enterprise contract with Pizza Hut, the world's largest pizza chain, to manage their point of purchase materials as well as their printed marketing pieces. Our relationship with Pizza Hut will begin with their corporate-owned restaurants in the United States, but as with Intercontinental Hotels Group, we hope to eventually include their franchise location as well as moving into their international business. This contract represents our first large scale enterprise agreement in the quick service restaurant vertical, a vertical that we believe will benefit quite a bit from our solution.

We signed a new contract with the DEFENDER Direct, the leading U.S. dealer for home security brand ADT. As part of this partnership, we'll lead the development and deployment of their direct marketing program as well as their relationship with U.S. Postal Service.

InnerWorkings was chosen because of the depth of our direct marketing experience and track record of delivering highly segmented customer campaigns for our clients.

Next, we've expanded our relationship with Hertz Corporation. We've been supporting Hertz's branded merchandize program in the U.S. for many years through an online ecommerce ordering platform. And this new contract expands the same services into Europe where Hertz will now realize the savings levels and brand control that they have in America. As an aside, it was great to see the collaboration between our teams in the two markets as we work with Hertz to develop the European solution.

We also recently welcomed two new clients in Latin America. We signed an agreement with Bristol-Myers Squibb to manage the design procurement, production and the logistics of their printed marketing materials in Mexico. And we also signed an agreement with Danone Group, one of the world's largest food and beverage companies, to manage their commercial printing needs in Brazil. The initial scope of these two agreements is modest by our standards, but they each represent significant potential for expansion into additional product categories and geographies.

Moving on from new client contracts, I'd like to give you a quick update on the progress we're making with the Fortune 500 Company we partnered with last year that serves a large installed base of small and medium size businesses throughout their numerous retail locations in the United States. The rollout is going very well and our technology has now been deployed in over 300 of their locations. We expect to be in all 1,800 locations by July.

Our partners using our real time automated quoting and ordering platform to develop incremental commercial printing business from their large foot traffic of small business owners. The early results from our first installations are encouraging with their same-store sales up in a very meaningful way.

As many of you know, we've gone from being a primarily domestic provider to a global force in our industry in a very short period of time. We did so as the global solution is increasingly a requirement of our clients as they looked out towards more and more of their marketing supply chain around the world. And so, we realized a new milestone last month as we held our first ever global conference with top talent from around the world meeting together for several days to develop new opportunities for InnerWorkings. We emphasized expanding into new services and geographies within our existing client base where we believe we have tremendous amount of untapped potential.

We expect our renewed focus on core global enterprise business will not only drive our top line but will accelerate the operating leverage and profit of our overall business. In addition, our bottom line is benefiting from the progress we're making to restore the former productions graphics business in France. I continue to be very impressed with our new leadership and the current state of our operations throughout the European region where we realized over 50% organic revenue growth in the first quarter and saw a meaningful improvement in profitability.

Finally, we recently welcomed a new member to our board, Dan Friedberg from Sagard Capital. We've known Dan and his team at Sagard for several years now as they've been long term holders of our stock. They believe in our strategy, our team, our competitive edge, the size of our opportunity. Sagard brings a great track record to our business and we're thrilled to have Dan on our board.

So with that, I will turn it back over to you Joe.

Joe Busky

Thanks, Eric. We generated revenue of $241.5 million in the first quarter of 2014 which is an increase of 18% compared with the first quarter of 2013. Organic enterprise growth accounted for $24 million or 12%. Growth from acquisitions made in 2013 represent $23 million or 11% growth. And as expected, the decline in revenue from the loss sustained from a large retail customer announced in 2013 was $9 million. The loss from this production spending is now fully annualized.

The $24 million of organic enterprise growth includes new account enterprise business as well as incremental spend with existing customers in new categories and/or new geographies, offset by 1% decline in existing customer same contract spend.

Looking at our sales channel mix for the quarter, our enterprise channel accounted for 78% of revenue and middle market accounted for 22% consistent with first quarter of last year.

Gross profit for the quarter increased year-over-year by $8.3 million to $54.6 million in this quarter and our gross margin percentage for the first quarter of 2014 is 22.6%, flat with the gross margin percentage for first quarter of last year.

Looking at expenses, SG&A expense for the first quarter was $49.6 million or 20.5% of revenue versus $47.1 million or 23% of revenue in the year earlier period.

Q1 2014 SG&A includes $2.1 million of statement related professional fees as a result of Production Graphics issues discussed in Q4. And of note, Q1 2013 SG&A include $6.3 million of Production Graphics net restatement related expense.

Now adjusting out these two items for both Quarter One period, SG&A expense for the current year quarter was 19.7% of revenue and down a little over 20 basis points from the prior quarter.

Adjusted EBITDA defined in our earnings press release was $8.5 million for the first quarter up 26%, from $6.8 million of the year earlier period.

GAAP diluted earnings per share for the quarter were $0.01, compared to a $0.06 net loss in the prior year period. Non-GAAP diluted earnings per share for the quarter were $0.02, compared to $0.04 in the year earlier. The decline is due primarily to a $0.02 impact from higher depreciation and amortization this year versus last year.

In Q1, we saw a significant revenue growth across all of our geographic segments. In our less mature international markets, our net operating margins are lower as we continue to enhance gross margin to create operating leverage. Our U.S. market continues to provide higher net margin.

Looking at our guidance for 2014 we are reaffirming our revenue forecast in the range of $965 million to $1 billion, which represents 8% to 12% growth for the year and we are also reaffirming our non-GAAP diluted earnings per share in the range of $0.23 to $0.27 which compares to $0.09 in 2013.

And with that, operator, let's open up the call for questions now please.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Nathan Brochmann from William Blair. Your question please?

Nathan Brochmann - William Blair

Good morning, gentleman, and way to show some good strength there in terms of rebounding off of a difficult 2013.

Joe Busky

Good morning, Nathan.

Nathan Brochmann - William Blair

A couple of things. One, just the housekeeping thing, Joe. What is the run rate of all the new different business wins that Eric cited to begin with?

Joe Busky

Nathan, we're not giving out specific account revenue guidance. So we will stick with the guidance we put out earlier in the year which has us contribute about $100 million of new organic enterprise revenue for full year. And so the wins we landed last year they're still ramping as well as the deals we have already announced in the first quarter of this year, we will definitely contribute to that $100 million of revenue growth that we have put last year.

Nathan Brochmann - William Blair

Fair enough. And then, in Europe, I mean it seems like you guys are moving forward pretty quick in terms of fixing what had been a big problem there with the previous owner. This definitely sounds like you have the right leadership in place. Could you talk a little bit more in detail about what specific steps you have taken and what you feel you have left there to continue to show the improvement over in that region?

Joe Busky

We have some very good clients and very talented professionals in Europe. And the issue that we experience toward the end of last year was pretty isolated, Nathan, that really just a small group or even an individual. And so in terms of turning the situation around there is no magic to it, it's continuing to build on an impressive client list, we have got some great prospects. We have done some hiring, and we feel as good about that region going forward as we do about any other region in the world.

Nathan Brochmann - William Blair

Okay. Fair enough. And then with the new deal with Novartis, congratulations on that for being the first kind of big win on the VALO kind of platform. What are your expectations kind of for that going forward in terms of the additional opportunities and where do you think that can go on the future?

Eric Belcher

We think it can go a long way. So just a little bit more detail on the software solution that we have for Novartis, they historically were unable to find any sort of technology that would allow them to operate in their many markets with the different languages and currencies and tax implications and all the complexities required within one software platform to allow their cataloging and ordering of their branded merchandize until our solution which is, as you know, quite new came into play. And so we are now under contract with them; we will be kicking off here very shortly actually in the Chinese marketplace and the expanding beyond that very soon with Novartis begin the first of what we expect to be a large number of global conglomerates that have exactly the same need and really only one place in the world to turn to.

So Joe and I have modeled out exactly what we would expect over the next five years in terms of profitability from that component of our offering but we do have, there is a lot of optimism regarding this new solution for our market.

Nathan Brochmann - William Blair

And is there an opportunity, Eric, to one day turn that into more of a traditional enterprise account in terms of actually doing the work for them or how do you kind of view that relationship going forward?

Eric Belcher

There is no doubt about it that we would hope to expand into our other historical offerings with Novartis. And so, those discussions are underway, and where this all might lead we don’t know, but certainly we have now begun work with this fantastic company and there is a tremendous amount of upside potentially here with Novartis. We are really excited about it.

Nathan Brochmann - William Blair

Okay. Great for the additional color and I will turn it over. Thanks.

Joe Busky

Okay. Thanks, Nathan.

Operator

Thank you. Our next question comes from the line of Randy Hugen from Feltl & Company. Your question please.

Randy Hugen - Feltl & Company

Thanks. A little bit more on the Novartis contract and the VALO software. Is that solution ready to roll out now for some of your more traditional offerings or there's lot more work to do there?

Eric Belcher

It's ready to roll out.

Randy Hugen - Feltl & Company

And how are you going to go about the sale process for something like that? Are you just looking at it as another offering you can present in your traditional sales channel or is there another way that you are going to go about trying to solve the, I guess, more a software related products?

Eric Belcher

The former. So we're a solutions based firm in the marketing supply chain, and now when they -- when a Fortune 500 company identifies that one of their needs happens to be a need that our technology can solve for them we will then we will be offering that solution. And so it's more based on listening to our clients' needs of course built the software based on a need or gap we saw in the marketplace, and it's now here. And Novartis is our launch client, and our team is well aware of the capabilities that VALO can offer our clients and we will expect them to engage in the discussion when it's appropriate based on the client's need.

Randy Hugen - Feltl & Company

Thanks. And then I want to follow up on Europe, you said that you saw 50% organic revenue growth in the region in the quarter. Is that from a specific new large client? Are you starting to see some of the clients that you may be have lost their previously coming back to you? What was driving the growth there?

Joe Busky

Hi Randy, it's Joe. That 50% organic growth is driven by both new accounts as well as expansion with existing customers into that region. We'd talked about that last year when we had expected that we're going to start to see some solid growth in new geographies with existing customers and we are actually now starting to see that in a meaningful way. So it’s a combination both driving that growth in Europe.

Randy Hugen - Feltl & Company

And then you mentioned $2.1 million in the restatement professional fees. Is that inclusive of I guess the legal fees that I would assume that you are incurring for the European operation as well, and also are those fees pretty much done now or they are going to continue as we move through the year?

Joe Busky

Good question. So the $2.1 million of fees are exclusive related to the restatement that we went through in 2013. So they are the auditor fees that were incremental because of the restatement and the legal fees that relate to the review of the situation, investigation of the situation. And this bucket of cost is now closed. We don’t expect any more of these costs to come through because the restatement is complete. So there will be likely some ongoing legal costs related to litigation as outstanding, related to former owner of that business, but at this point what I am adding back in that EBITDA now is only the statement related fees which are now complete.

Randy Hugen - Feltl & Company

All right. Thanks a lot.

Eric Belcher

Thanks Randy.

Operator

Thank you. Our next question comes from the line of Matthew Kempler from Sidoti. Your question please.

Matthew Kempler - Sidoti

Thank you. So I first wanted to touch base on the initiative that you put in place in the beginning of the year where you freed up a lot of the resources for some of your top producers to focus more fully on closing enterprise transactions. Can you talk about maybe some of the points you are seeing that suggest this strategies beginning to yield results in support, if it's down the line, what do you think? And what are some of the early indications for that?

Unidentified Company Speaker

We're really happy with what I call the renewed focus on our core global enterprise offering particularly from this a group of the most experienced professionals on our team in terms of bringing new clients into our solution. There is less distractions, if you will, less administrative responsibilities that are saddling this group and maybe keeping them from meeting with CMOs of Fortunate 500 companies. And so there is greater focus. There is more clarity in terms of accountability and expectation from this team and frankly from, I think that everyone across the company, a little bit of the simplification taking the best of InnerWorkings and then approaching the market in a pretty deliberate way. So I like to where we sit right now today from an organizational standpoint, an organizational focus and motivation and accountability standpoint.

Matthew Kempler - Sidoti

Okay. And then on the printing partner that you are rolling out, it sounds like the installs are going to need to accelerate pretty quickly from here to hit the July 1 timeframe. So can you just talk about are there any constraints on that?

Eric Belcher

No, there are no constraints. The technology has been more than tested at this stage, being in 300 stores and going to 1800 I guess, an absolute number of stores it seems like a big step, but the reality up is this is an extremely scalable platform. And so we don't see anything stopping us from being in full swing in a matter of a month or two from now.

Matthew Kempler - Sidoti

Okay. And then lastly, looking at the reaffirmed guidance for 2014, we are near the neck point of the year. Can you discuss what are the main variables that would lead us towards the high end of the range for revenue and earnings versus towards the lower end?

Joe Busky

For the revenue Matt, the variability is really driven exclusively by the timing of the ramping of the new accounts that we landed last year as well as landed so for this year.

As far as the earnings goal, as we talked about before, I do expect an acceleration of operating leverage as we get into the second half for the year primarily because of two things. One is the ramp up of the channel partner in the S&D market that we just mentioned and turning that to profitable as we moved later in the year, as well as the improved profitability that we will see in the European region from the Production Graphics business unit. And so the variability on earnings will really depend on how fast we can improve that leverage coming from these two areas, moving to the second half of the year.

Matthew Kempler - Sidoti

Okay. Thank you.

Joe Busky

Thanks, Matt.

Operator

Thank you. Our next question comes from the line of Kevin Steinke from Barrington Research. Your question please.

Kevin Steinke - Barrington Research

Good morning.

Eric Belcher

Hi, Kevin.

Kevin Steinke - Barrington Research

Joe, it sounds like from a last comment that you feel at this point in the year that you are on track with your profitability improvement goals for both the mid market initiative as well as the European business. Would you say that's correct?

Joe Busky

Yeah, that's fair. I mean, the channel partner rollout, as Eric mentioned, is going well. So it's really right on track where we thought it would be when we put the budget together. And yes, the Production Graphics, we've seen their profitability improve in Q1 as we expected. And I do expect it to continue to improve as we move through the year.

Kevin Steinke - Barrington Research

Okay. Good. And the Novartis deal, I was just wondering how long it takes to implement a deal like that? Is it a similar implementation period to your more traditional enterprise contract?

Eric Belcher

I think, Kevin, thinking of it as a similar trajectory is a good way to think about it. We'll be implementing region by region throughout the balance of this year.

Kevin Steinke - Barrington Research

Okay. And are you kind of indifferent as to whether you sign this type of deal or a traditional enterprise deal or do you view this more as an entry into a traditional deal where you actually have people on site?

Eric Belcher

Well, both. So we price this solution in a manner that makes our shareholders indifferent to whether or not it's an outsource BPO type solution or a software driven solution. And from the standpoint of it, we view this is an entrée into a global Fortune 500 company that we can then expand into other needs within their businesses. Those become more clear, particularly because we'll be working from within there organization with this new program.

The answer is absolutely, yes. And I believe that the company that we're talking about right here is as well as other organizations that we're talking to about. This new VALO ecommerce platform also view the -- this first step as just an initial part of our relationship and maybe it's a -- it kind of meets some more burning need within their organization, something they have been searching for for many years. But they're very open to discussions of how we can support them in other product categories around the world too. So it's really a positive development all the way around.

Kevin Steinke - Barrington Research

Okay. Great. And what does a deal like this or additional deal like this do to your margins, both in terms of the gross margin and the SG&A ratio?

Eric Belcher

Well, it's obviously accretive on a gross and at margin basis, as we're not running the cost of the product through our P&L. From a G&A standpoint, I would say it's equivalent in terms of support, but yet again on a net G&A basis it's quite a bit more accretive than our average margin.

Kevin Steinke - Barrington Research

Good. On the rollout with your Fortune 500 partner, are you to the point yet where your sales people are making follow-up calls to customers of the Fortune 500 partner?

Eric Belcher

No, we're not at this stage. So the focus really is on implementing the technology in our 1,800 retail locations today. The next phase of the relationship we'll get into, so the second half of the year we'll get into that specific comment that you made, as well as a few other related initiatives that will assist our client and us going forward. So that's all to come.

Kevin Steinke - Barrington Research

All right. And one of your larger customers Mondelez has been in the news recently with combining it's coffee business with another industry player and kind of giving up its majority ownership in that business. Does that -- do you see that creating any challenge or opportunity for you, going forward?

Eric Belcher

We really don't -- we don't see a major change to our relationship with Mondelez as a result for that change within their business right now.

Kevin Steinke - Barrington Research

Okay. Good. Last one for me. As you see a mix shift towards international revenue, I know traditionally, international right now I think is a little lower margin in terms of gross margins, but you're doing work on it and improving those margins. But given the mix shift you're seeing, do you see that having any kind of near term impact on gross margin?

Joe Busky

No, Kevin. Good question. But I don't see there being any significant impact. The margins -- the gross margins are pretty similar outside the U.S.

Kevin Steinke - Barrington Research

All right. Thanks for taking my questions.

Eric Belcher

Okay. Thank you, Kevin.

Operator

Thank you. We have time for one more question. Our final question comes from the line of George Sutton from Craig-Hallum. Your question please.

George Sutton - Craig-Hallum

Thank you. Eric, a few questions. You had mention that your retail partner was seeing a significant improvement in same-store sales. I wasn't sure if you meant as a result of working with you or just in general, but could you clarify that?

Eric Belcher

Sure. Hi, George. So the comment is related to their implementation of our technology in their store. So one-sixth of their stores now has our solution in it. And they've done an internal analysis that track how those stores are performing over the last month or two depending on how long our technology has been implemented versus the other 1,500 or so their stores within our product categories, the commercial print categories we're supporting them within. They found a meaningful uptick in their sales of products that are flowing through our technology in those stores that have implemented the solution.

So the point there, of course, is that things are working out very well, in some cases may be better than everybody's expectations. And we hope that trend continues when we rollout to the other 1,500 stores. That's the purpose of them selecting InnerWorkings is to grow this segment of their business. And the initial data would suggest that that's working.

George Sutton - Craig-Hallum

Got you. You mentioned your global conference that you had recently. I know that's a major event for you and that there were some new services in geographies that you discussed. Can you just give us a maybe a little bit more of a summary as to what some of the key finding is coming out of that work?

Eric Belcher

Well, if you look at our capabilities today focused on the global Fortune 500, we're able to source in categories like events and promotion below the line solution that Mondelez has so successfully implemented initially here in Brazil. And if you look at the work we're doing in packaging with this new Novartis agreement, there is a lot that's new and exciting. And depending on a given corporation's situation and their needs and where they are in their marketing supply chain there is a lot that we have to offer.

And so, the purpose of the three-day meeting was to ensure that most of our -- that the folks that are having majority of the conversation with the Fortune 500 are very familiar with the solutions that we have in place for companies all around the globe, as well as, frankly, for some of our teams did meet one another for the first time as the global expansions happened fairly quickly. And so there was a lot of a team building that went on during those few days and a lot of energy coming out of the meeting in terms of being able to take these new ideas and new geographies to support our clients even better going forward.

One other things that we spent a lot of time talking about of late is growing within out exiting account base is the opportunity there is so huge. And as you know, our clients are extremely satisfied with the results that they've had in working with us in the various geographies, with the various services that we have offered in the past. So the combination of those few things creates a huge opportunity for us and that was really the focus of our meeting a couple of weeks ago.

George Sutton - Craig-Hallum

Got you. Lastly, for me, relative to just the competitive landscape, if you look at some of these recent deals that you won and may be deals that you haven't, are you seeing different people in the RFP processes, are you seeing RFPs, anything that's changed it would be helpful?

Eric Belcher

No, George, nothing has really changed meaningfully. There are the same set of characters that are in the marketplace, the printers that we encounter. The are RFPs that are being run and there are discussions that happen directly with senior executives at corporations. Nothing has really meaningfully changed. We still, for the most part, are competing against the status quo incumbent set of procurement folks and agencies and things of that nature.

George Sutton - Craig-Hallum

Perfect. Thanks, guys.

Eric Belcher

All right. Thank you, George.

Operator

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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