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Ted Murphy – Founder, CEO

Ryan Schram – Chief Operating Officer

Analysts

Louie Toma - Craig-Hallum

IZEA, Inc. (OTCQB:IZEA) Q1 2014 Earnings Conference Call May 14, 2014 5:00 PM ET

Operator

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the IZEA, Inc. First Quarter 2014 Earnings 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) This conference is being recorded today, Wednesday, May 14, 2014.

I would now like to turn the conference over to our host, Mr. Ryan Schram. Please go ahead, sir.

Ryan Schram

Good evening, everyone and welcome to the IZEA Q1 investor update. I’m Ryan Schram, Chief Operating Officer at IZEA. Joining on the call this evening is IZEA’s founder and CEO, Ted Murphy. On behalf of our entire team we are very pleased to have you with us tonight.

As a reminder today’s call might contain forward-looking statements within the meaning of 21E of the Securities Exchange Act of 1934. These forward-looking statements are based largely on IZEA’s expectations and are subject to a number of risks and uncertainties, certain of which are beyond IZEA’s control.

Actual results could differ materially from these forward-looking statements as a result of, amongst other factors, competitive conditions in the (inaudible) advertising category in which IZEA operates, failure to popularize one or more of IZEA’s Marketplace platforms, and general economic conditions that are less favorable than expected. In a lot of these risks and uncertainties there can be no assurance the forward-looking information contained in this respect will in fact occur.

Now with the appropriate disclosures out of the way, we’ll hear from Ted and he’ll walk us through the business’ Q1 accomplishments. Following Ted’s comments we’ll open the line for your questions as time allows. Now it’s my pleasure to introduce Founder, Chairman, and Chief Executive Officer of IZEA, Ted Murphy. Ted?

Ted Murphy

Thank you, Ryan. Before I get started I want to thank you and the rest of IZEA’s team for another record-breaking quarter. I am honored to work with such an extraordinary group of talented creative individuals. You guys are what makes this Company so special and I appreciate all that you do.

Now let’s jump into the numbers starting with revenue. We had record Q1 revenue up 41% year-over-year of 1.96 million versus 1.62 million in Q1 of 2013. Our bookings reached the Q1 record of 1.7 million. This is the highest amount of Q1 bookings in the history of the Company. This number represents a 5% increase over Q1 of 2013 which is below what we had expected even though Q1 2013 was unseasonably high last year. This is largely impacted by the extreme weather in key markets throughout the first quarter, extending our time to close the deals.

However, these bookings were quickly recaptured in early April and bookings reached nearly $1 million at $966,000, up 230% from last year. A fast booking start for the quarter is important to sustaining revenue growth in Q2 and beyond. Revenue from book business is typically recognized within 90 days of the initial sale.

Overall, our team was incredibly active with clients in Q1. We generated new opportunity pipelines of $10.9 million in Q1 2014, up from 5.7 million in Q1 2013. There will always be a little bit of lumpiness on both bookings and revenue but we remain on track and on plan for the year. I’m optimistic for 2014 and beyond.

Our gross profit margin for the quarter was 67%, up from 58% during the same period in 2013. This was primarily attributable to an increase in advertisers using the Company’s managed services and the related marketplace efficiency derived from campaign execution expertise.

Our operating expenses for the quarter were approximately $2 million, compared to 1.67 million in the same period 2013, an increase of 20%. As I stated in our last call we’ve started to make investments in sales, marketing, and investor-related (inaudible). Outside of these expenses we also had an increase in non-cash stock compensation.

EBITDA for the quarter was negative $504,000, compared to negative $756,000 during the same period of last year, an improvement of 33%. This is primarily due to higher revenue, improved margins, and increased efficiencies.

Net loss for Q1 was negative $1.7 million compared to negative $883,000 in Q1 2013. This is primarily due to a $1 million change in the fair value of the Company’s derivatives associated with our financing activities. Basic and diluted loss per share was negative $0.05 for the quarter, compared to a diluted loss per share of negative $0.13 last year.

I’ll now pass it over to Ryan to speak a little bit about the client brands we partnered with in the first quarter of last year.

Ryan Schram

Thanks, Ted. Our business is built squarely upon lasting relationships with brands and agencies who work with team IZEA shoulder to shoulder using our marketplace technologies to fuel these innovative campaigns. During Q1 we were very privileged to serve a number of returning brands to the IZEA family including the Scotts Miracle-Gro Company, Hershey’s, Vicks, Marriott Corporation, (inaudible), Sargento Brand, (inaudible), and Sallie Mae amongst others. We also were happy to welcome new members to the IZEA family during the quarter including Birchbox, Kimberly Clark, American Greetings, P.F. Chang’s Restaurant, Chlorox, BMO Harris Bank, and American Kennel Club.

Separately, I would like to provide some insight on the progression of our team organizationally that occurred throughout the quarter. We added eight new (inaudible) sales people in Q1, bringing our full time total team to 58 people. After some adjustments within the quarter, our sales team now stood at 23 individuals by quarter’s end. We are currently actively recruiting for additional outside sales positions in key advertising markets including New York, Los Angeles, and Chicago. My target is to be at about a 40-person sales team by the end of this fiscal year with a majority of those team members being inside sales people based out of our headquarters in Suburban Orlando.

This aggressive growth strategy will largely impact our fiscal year ’15 as we recruit, on-board, and train these individuals as we assume a six-month ramping period for new hires as they get acquainted with the Company, the space, and develop pipeline that converts into new revenue for the Company.

Back to you Ted. Ted, you might be muted.

Ted Murphy

We launched our new platform, the IZEA Exchange, into public beta on March 17th. And this technology is really the future of the Company. It’s going to eventually replace all of our Legacy platforms and it’s going to allow us to serve a wider group of creators, streamline our operations, and deliver new tools to advertisers.

As of quarter-end, we had 50,000 registered users in the IZEA Exchange, reaching an aggregate audience of 392 million fans and followers. Our goal was to have 12 partners by the end of fiscal year ’14. At the end of Q1 we had already signed nine IZEA Exchange white label partners and two IZEA Exchange certified resellers. There’s been some really strong interest in working with us on this platform, ultimately we believe that we are solving a real problem for our partners. We’re not aware of other solutions out there on the market that competes with what we’re offering. We are closing deals with major players in the publishing, broadcasting, and social media space.

With those partner wins comes some additional requirements. There is demand for product enhancements, there are service level agreements, enhancements that we need to make to customer support, and we have secured the Director of the Exchange Ecosystem to help build the infrastructure and ensure proper care of those partners.

Q1 bookings and revenue are almost entirely from the Legacy platform. We are ramping this very slowly with our Exchange clients and our partners. We’re on-boarding them, we’re training them, we’re testing them, and that’s going to continue to happen over Q2 and Q3. We want to make sure that this is a great experience for our customers. We’re going to make the full transition when we’re assured that there will be no impact to our core business.

You may have also noticed an increase in marketing and investor relations activities. We’re really doing our best to raise awareness of the Company and really heighten our profile. This is being done through a combination of traditional media placements and activation through our own platforms and through our partners. Moving forward you’re going to see us at more events, on television, and in trade publications. This effort has already started to impact the inbound increase for the Company and the overall stature of our organization. If any of you happen to be at the upcoming LD Micro Conference, I’d be happy to sit down and speak with you further.

Thank you so much for your time today and your continued support of IZEA. I’d like now to turn the call over to the Operator to take any questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session. (Operator Instructions) One moment for our first question.

Our first question comes from the line of Louie Toma with Craig-Hallum Capital Group.

Louie Toma - Craig-Hallum

Hi, Ted, how are you doing?

Ted Murphy

I’m great. How are you?

Louie Toma - Craig-Hallum

I’m good, thanks. Nice quarter, nice to see the improvement in the margins. I just had a couple of questions. First of all just to dig a little bit deeper into the gross margin improvement. Wondering if you could give us a little more detail on the drivers to that and what your expectations are going forward? Is it up a lot, is it a result of lumpiness, or is this a trend that we can expect to climb higher? What would be a target for you in the medium to longer term?

Ted Murphy

I think that long term—I’ve said this a couple of times—I believe that our target should be in the mid-50. What you’re seeing is really a result of more managed clients and we have a higher margin on those campaigns. But as we bring more partners into the fold and there is more self-served revenue that is coming through the platform, I expect that you will see a decline in that and we’re targeting that mid-50 number.

Louie Toma - Craig-Hallum

Got it, okay. Related to your sales and marketing expense, you’ve added eight people and you’re going to be adding more. What do you expect the 161,000 to increase to by the end of the year?

Ted Murphy

I don’t have that number in front of me but I could circle back with you on that at a later time.

Louie Toma - Craig-Hallum

Okay, that would be great. Could you just give us a sense for what the average quotas are, target quotas for your typical quota-carrying sales.

Ted Murphy

Yes, that is actually a formula and there’s a sheet that we use that kind of manages that process and it’s based on a quota multiplier. So our sales people start as low as a $22,500 a year salary, up into the low six figures, and their quota is going to be a multiple between 12 and 18 times what their base salary is.

Louie Toma - Craig-Hallum

Okay, perfect. Thanks very much.

Operator

(Operator Instructions) Our next question comes from the line of Jim Fantozzi, a Private Investor.

Jim Fantozzi

Yes, hi. I’m a shareholder and I’ve bought stock of your company for quite a while now and because of the powerful lineup of the Board of Directors on your board and what I’m curious about is why they haven’t bought any stock in the open market of the Company at these prices if they’re really into the Company. Also are you planning on reverse splitting the stock? I’m hoping not. Thank you.

Ted Murphy

So to answer your question about the investors, they may not have bought in the open market but if you look at the last two financing that the company has done there has been some significant investment. I believe Brian Brady has invested upwards of $2 million and Lindsay Gardner in this last round invested $200,000. So, they’re definitely supportive of the Company and are putting their money behind it.

In terms of what the stock does moving forward I can’t really predict that. I will say that we would ultimately like to get to the NASDAQ and we don’t currently qualify for that and we haven’t made any decisions in terms of timing or when that might happen.

Jim Fantozzi

Okay, thank you. I didn’t know about the other boards that spent their money in stock. I appreciate you letting me know. Thank you very much.

Ted Murphy

You’re welcome.

Operator

Our next question comes from the line of George Kafkarkou, a Private Investor.

George Kafkarkou

Good afternoon, everybody. Thank you for the opportunity. I have just three questions. Of the $1 million number in April, which sounds very impressive, how much of that is carryover from Q1? That’s the first question. The second question is I’m seeing a trend towards breakeven at least. What does the plan look like for breakeven or even cash flow positive? And the third one is what are the drivers of the new platform? You mentioned earlier on between Q2 and Q3.

Ted Murphy

Okay. Let me try to address those one at a time. In terms of the carryover from Q1 to Q2, I would say that it was a couple hundred—I’m sorry, Q1 into April, I would say that it was a couple hundred thousand dollars that we’re talking about. Bookings are always interesting when we’re looking at them because a day or a week can dramatically impact what those numbers look like for the quarter or for the month. I think that really what we’re trying to demonstrate there is not to say “Hey, we want to set an expectation that every month is going to be a million dollar month” but what we’re saying is that we are capturing that revenue—or we are capturing those sales and really the results that we had in Q1 were just because of some client delays as it related specifically to weather and clients being able to go to work.

George Kafkarkou

Okay, thank you.

Ted Murphy

In terms of—I’m sorry, what was the second question?

George Kafkarkou

The second question was breakeven trend, getting to profitability, cash flow positive.

Ted Murphy

Right now—and I’ve addressed this on previous calls—we are going to be investing ahead of the revenue and what that likely means in the next couple quarters is that you will see that there will actually be more spending and there’s going to be a bit more of a loss but that is really to get the people on board so that we can really have a significant impact in 2015. The people that Ryan is alluding to on the sales side and essentially doubling that organization, those people take six months to ramp so when we hire a sales person we don’t expect them to be revenue generating from day one so we’re going to make some of those investments ahead of that production.

George Kafkarkou

Very good, makes perfect sense. The final question was the new platform which I’m very excited about. What are the criteria for launching it? You mentioned between Q2 and Q3. Can you talk to that a little bit more please?

Ted Murphy

The way that we’re looking at it is there’s kind of two aspects. One is what we need to be able to service our existing business and two is what we need to be able to fulfill all of our partner requirements. So we have some large partners that we have either assigned or are working through the process with right now that have some specific functional requirements that were on our timeline but not planned to be implemented this quickly so we are shuffling things around a bit and adjusting our priorities so that we can get those people on board and that we can get the revenue going through the system. I think that in terms of making that cutover, it’s going to be a gradual process for us and then when our team can say “Yes, we can do this without impacting our core business at all,” and it’s actually going to be additive, then we’ll make that switch. But I’m not going to put an artificial timeline on it or artificial date really going to be driven by that team.

George Kafkarkou

I understand that but I guess I’m looking for your confidence level, that it will be this year and it will be certainly by the end of Q3.

Ted Murphy

Yes, I would be very surprised if it was not done by the end of Q3. We’re shooting for sooner but I will say that as we start working with these larger and larger partners they’re throwing us a couple of curve balls that are good curve balls to have but it’s switching up our timing a little bit.

George Kafkarkou

Okay. I appreciate the opportunity, good quarter guys, and keep up the good work. Thank you.

Ted Murphy

Thank you.

Operator

(Operator Instructions) Mr. Murphy and Mr. Schram we have no additional questions. Please continue.

Ted Murphy

We’d like to thank everybody for dialing in this evening and hearing about the accomplishments. We’re very excited about the trajectory of the business and if you’d like more information at any time, please visit the Investors Section of our corporate website, that’s corp.izea.com. Thanks again and we’ll talk to you again next quarter.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.

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