InnerWorkings CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: InnerWorkings, Inc. (INWK)

InnerWorkings Inc. (NASDAQ:INWK)

Q3 2010 Earnings Call

November 4, 2010 05:30 pm ET

Executives

Joe Busky - CFO

Eric Belcher - President & CEO

Analysts

George Sutton - Craig-Hallum

Jeff Blaeser - Morgan Joseph

Yousseff Squali - Jefferies

Operator

Good day ladies and gentlemen and welcome to the InnerWorkings, Inc quarterly earnings call. (Operator Instructions).

I would now like to introduce your host for today’s conference, Joe Busky, Chief Financial Officer.

Joe Busky

Thanks John. Good afternoon, everyone and thank you for joining us on our third quarter 2010 earnings call. This is Joe Busky and I am the Chief Financial Officer at InnerWorkings. Joining me on the call today, as always, is our Chief Executive Officer, Eric Belcher.

Before we begin, I would 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. And listeners to the call are advised to review our SEC filings, including the risk factors contained in our most recently filed Form 10-K.

This call will discuss, among other financial performance measures, adjusted EBITDA and adjusted revenue, which are non-GAAP financial performance measures. Please refer to the company’s third quarter earnings release issued earlier today for reconciliations of the adjusted GAAP and adjusted revenue to the nearest comparable GAAP measures. And also please note that this call is intended for investors and analysts, and may not be reproduced in the media in whole or in part without prior consent.

And now at this time, I’ll spend a few minutes on our financial results, and then Eric will highlight third quarter achievements and update you on the progress of the company’s growth initiatives and then we'll conclude as always with your questions.

Third quarter 2010 revenues were $119.1 million, an increase of 21% compared with the third quarter of '09, and 50% higher compared with adjusted revenue in the year earlier period. This uptick on an adjusted basis was attributable to 12 million or 11% new account organic growth, as well as same customer growth of 5%.

As Eric and I have discussed, our expectation was that 2009 new enterprise wins, these are accounts such as Unilever, Scotts, IHG, SkyPark and others would deliver new revenue in 2010 of at least $50 million.

The 12 million of new account growth in Q3 combined with the 35 million earned in first half of the year highlights the extent to which these accounts are successfully ramping as plan and generating substantial revenues.

We are encouraged by these results and expect this trend to continue in the months and years ahead. Revenues for the first nine months of 2010 was 351.8 million, an increase of 59.2 million or 20% versus the same period in '09. This increase was primarily driven by the 47 million in new account growth previously mentioned.

In the third quarter, we maintain momentum in the enterprise business as we added five new enterprise clients to our customer base. This brings our total number of enterprise clients to a 190, a gain of 24 compared with the third quarter of '09. And based on our wins this year and account pipeline we're still confident in our ability deliver 15% revenue growth in 2011 through our enterprise account wins.

In terms of our two primary sales channels, we saw a continued shift mix towards enterprise sales in the third quarter. Enterprise sales represented 72% of total revenue and transactional sales representing 28% of total revenue. This compares to a 65 to 35 split of enterprise and transaction revenues on the prior year third quarter. And although we do not target a specific mix of enterprise versus transactional revenue, we do believe this continued increase in the enterprise revenue bodes well for the company’s future, as this revenue is typically both contractual and recurring in nature.

Gross profit for the quarter was $28.5 million and gross margin was 23.9% versus adjusted gross margin of $25.8 million and 24.8% in Q3 2009. This year-over-year and 90 basis point decline in gross margin reflects the mix impact of greater enterprise sales in the third quarter of this year versus the prior year.

Moving on to expenses, our SG&A was $23.1 million or 19.4% of revenues in the third quarter. Year-over-year SG&A is up $3 million and this increase is primarily attributable to three factors; first, increased sales commission on higher revenue; second, an increase in stock-based compensation over the prior year due to an '09 benefit from a forfeiture rate adjustment; and third, the investment in our growth initiatives. And remember 100% of the investment in our growth initiatives is going towards sales and marketing.

And on sequential basis, SG&A is up primarily due to the same investments in our growth initiatives.

Our diluted earnings per share for the quarter were $0.05 versus $0.04 in the third quarter of '09. The third quarter EPS figure includes approximately $0.01 of gain from the sale of Echo Global Logistics stock that we intend to continue to sell over time. And excluding the gain on the sale of Echo stock in the current quarter, operationally EPS was $0.04 which is slack compared to the prior year quarter. However it bears noting that the current year quarter EPS includes approximately $0.01 of investment in our growth initiatives and $0.01 increased in stock-based compensation versus the prior year quarter due to the forfeiture rate adjustment in '09. These two items correlate the $0.02 versus the prior year. Another important takeaway is that year-to-date EPS excluding Echo gains in both periods is up 63% over year-to-date 2009.

EBITDA adjusted to exclude stock based compensation increased 29% from $4.9 million in Q3 last year to $6.3 million in Q3 of this year. And year-to-date adjusted EBITDA is 19.5 million, an increase of 5.6 million or 40% versus the same period last year. Adjusted EBITDA as a percentage of revenue also increased to 5.5% year-to-date 2010 as compared to 4.7% year-to-date 2009.

And finally year-to-date income from operations increased 4.4 million or 71% as compared to the same period in ‘09. Generally, the 2.1 million of operating cash flow of the third quarter which is slightly more than operating cash we are generating in the previously year third quarter of 2 million. And the end of the third quarter was 49 million of gross debt or a $100 million revolving credit facility offset by $11 million of cash and investments resulting in net debt of 38 million is one and a half times trailing 12 months adjusted EBITDA.

Now truly the outlook for the remainder of this year, we are narrowly enraging our final year 2010 revenue guidance of 465 to 475 million on the 440 to 470 million. And as communicated in the second quarter earnings call. final year 2010 earnings per share included the gains on sale of our Echo investment are expected at the lower end of the 24 to $0.29 range due to the investments to the wealth and issues.

Before I wrap up I want to reaffirm the strength of our business model, a focus on prudent cost management and our commitment to delivering value to our shareholders.

Now I’ll turn the call over to Eric.

Eric Belcher

Today I will provide an update on the progress of our new growth initiatives. I’ll also would talk about our enterprise wins and comment on the development of our channel partnerships. But first of all I want to share some good news that we've received you may have seen that Forbes recently announced its list of best small companies in America. Only 100 companies were named and InnerWorkings debuted at number 30 on the list which highlights the growing recognition of our low cost high service business model.

We were also named to the 2010 InformationWeek 500 list which recognizes the nation’s most innovative uses of business technology and we were recently named to the Deloitte’s Fast 500 which is a list of rapidly growing technology organization. Being recognized for innovation, for growth and for being one of the best companies in the country, all in the past few months is something our employees should take a lot of pride in.

Speaking of our team, InnerWorkings currently employs over 300 production managers with 95 of them working on site including the six that we just added this quarter. These professionals are among those knowledgeable and dedicated print procurement experts in the world.

And a word about our sales team. These individuals are working in a culture with an intense focus on new client acquisition that’s a high energy environment and this group thrives in driving our business forward. Although this public recognition combined with our recent results and momentum is a tribute to the people of InnerWorkings. And I'm grateful for their passion and their commitment to our goals.

Now regarding our enterprise sales results. As Joe mentioned, we secured five new enterprise contracts in the quarter. You may have noticed our announcement from this morning relating to one of the win signed during the third quarter which was a multi-year agreement with Realogy CENTURY 21. We'll be placing three of our people on-site to support this new business. In addition to this important new client, our other new third quarter enterprise contracts were signed with National Grid with Arthur J. Gallagher, Merial and Maui Jim.

Of particular note is the growing international aspect of our business. With National Grid, one of the largest UK based energy companies with over 22 billion in sales and 27,000 employees, we were able to secure simultaneous contracts in both the US and the UK, leveraging our global reach and top tier capabilities in both regions. This is the first at what we expect to be many opportunities leveraging our international platform which distinguishes our company in the market and will enable larger customer wins in future.

I’d like to thank our team in the UK in particular, for their role in leading the discussions with National Grid from the opportunity assessments, through to a signed contract. Our company has quickly gone from regional to national to international, and I see this win as an important milestone.

When I first joined InnerWorkings in 2005, nearly all of our revenues were derived from Illinois where our headquarters are located. Today, with the growth and geographic expansion of the business, only 10% of our revenues come from Illinois. Now, switching to international, if you look at our business today, about 90% of our revenues are based in the United States, but we expect this mix to shift in the years ahead as we meet the needs of our ever expanding global client base, again taking InnerWorkings from a regional to a national, to an international business.

Next, I will update you on how our new sales initiatives are ramping starting with our new transactional efforts, inside sales and Inkchaser. Our original inside sales class has now put up five consecutive months of solid growth in bookings, and new client acquisitions, and we expect this trajectory to continue in the months ahead.

We recently graduated our second class from an intensive month long training program and this group began prospecting last week. We continue to evolve the key aspects of this initiative; who we are bringing into the program, the sales prospects that we are targeting and how we are training and supporting out new sales professionals. We are now in the process of recruiting our third full sales class which we expect will start in the next 4 to 5 weeks as well as building out the sales management infrastructure to scale the business.

Our online printing business Inkchaser also has momentum. The number of weekly transactions and the average order value are both steadily increasing as our conversion rates in return customers. We recently added a feature for automated real-time and free file approving which is helping to drive additional traffic to the site. We are taking orders across 18 different product categories and expect to be adding new categories over the coming weeks. The team is working hard as evidenced by the fact that we can already provided instant quotes to customers our intent of thousands of customized variations for printing materials. We have high hopes for this initiative in 2011 and beyond.

As a development of our BPO practice remains on track and consisted with our expectations as we've shared with this group in the past our BPO effort has a long sale cycle given the sizing complexity of these opportunities. We continue to believe BPO were generating great results for InnerWorkings in time.

On the channel partnership front, we recognized that the leading consultant firms continue to seek innovative solutions for their clients to help remove excess costs from complex categories of indirect expense such as the print supply chain. Additionally these consulting organizations are cautious about the partners they recommend to their clients as their own reputations become linked with the companies they endorse. InnerWorkings is very unique in the marketplace given our reputation for seamless implementation of an outsourced solution.

Today our reputation is backed up by many major corporations that have now worked with us for a number of years and have the intimate knowledge of our approach, our people and our results. We are continuing to work closely with all of our previously announced consulting and BPO partners and are pleased to report that we have an outstanding track record of meeting or exceeding expectations of our channel partners and their clients.

In addition, the quality products, on time delivery and cost reductions, our consulting partner's value to detail quarterly financial reports our technology generates which provides tangible validation of the savings. This is further evidence of the impact we're having on our client's bottom-line and supports our consulting partner's decisions to recommend in our workings.

I'm pleased to report that during the quarter one of our new client wins was the result of the major global consultant firm that we had not worked with previously who recommended our solution and my strong sense is that this firm will be making additional introductions on our behalf to their clients in the months and years ahead.

To conclude, the performance results this year are indicative of the value of InnerWorkings' model and the steady acceleration of our business performance in 2010. InnerWorkings plays a vital role in helping companies respond today's cost challenges and we're uniquely positioned to capitalize on this trend as we've demonstrated with our recent results.

I continue to be impressed on a daily basis by the passion and commitment of our employees and I'd like to thank our shareholders for their sustained support as well as our clients, our channel partners and our suppliers for the opportunity to work together to deliver value on our marketplace.

So, with that operator, I’d like to open it up for questions please.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction). Your first question comes from George Sutton with Craig-Hallum.

George Sutton - Craig-Hallum

So, last quarter you mentioned hiring more people to help you in the upfront development of potential BPO opportunities, which gave us a sense that you are looking at a fair number of them. Can you give us an update in terms of any metrics that might be helpful for us to understand the opportunities you are looking at?

Eric Belcher

George, we can’t provide any specific detail metrics in terms of how many potential BPO clients we are talking to, beyond saying that we are in conversations right now. In terms of timing of when you might expect the first and second and the third announcement of a major BPO win, that’s impossible to predict. All we can say is we are quite confident that there will be announcements like that in our future.

George Sutton - Craig-Hallum

Okay. And let me just say, first, second and third at the same time would be really cool.

Eric Belcher

Yeah, I agree with you with you, it would be cool, but I wouldn’t…

George Sutton - Craig-Hallum

When do we begin to see benefits from the transactional initiatives? In other words, it is costing you money today. At what point would you anticipate it begins to actually earn you net EPS?

Joe Busky

Hi George, it’s Joe. I think we will be better prepared to talk about that in February when we do our Annual Investor Day and Analyst Day, we’ll talk about 2011 guidance.

George Sutton - Craig-Hallum

And then lastly if I could, you mentioned five new contracts. Help us understand what kind of ranges we should be looking for in terms of new enterprise contracts going forward. And also could you let off the gas a little bit on the enterprise side when you are pursuing these BPO deals or is it still sort of [posting] ahead there?

Eric Belcher

No we don’t let off the gas on the enterprise side. The enterprise pursuits are being led by the same number actually a larger number of people today than a year ago. And that’s a regional infrastructure in sales management team working on or bringing in new clients. In terms of expectations of how many wins we’ll have on a fourth quarter basis, off course we've said 6 to 8 historically this quarter we've delivered five, we are not managing the business to fall within the range of 6 to 8, we do expect 15% a year annual organic growth as a result of enterprise wins brought into a year prior and we're on track to deliver that in 2011 based on the wins that we've got thus far in 2010 and what we have in our pipeline right now.

Operator

Our next question comes from Jeff Blaeser with Morgan Joseph.

Jeff Blaeser - Morgan Joseph

You know, your customers are obviously expanding in terms of the order size, I actually look at the profit next if you take the transactional out of it. Is that going to put any pressure on gross margin and increase the operating cost leverage or the terms looking pretty similar to what you had in the past?

Joe Busky

I should say first that the enterprise deals that we're signing now has virtually the same economics as we've been signing over the last couple of years. There is really no change there. As our enterprise sales continue to grow absent growth in the transactional settlement. You would see continued mix impacts on gross margins. But we fully expect that these growth initiatives that we have in place or that are progressing will give us the growth in the transactional segment as well. So, it’s too early again to say what 2011 growth is going to be in either segment but hopefully going forward we'll see some mitigation of that gross margin mix impact we've seen earlier this year.

Jeff Blaeser - Morgan Joseph

And then on the 5% existing customer order growth, is that coming from any of the new customers you signed in 2009 or you've in 2008? Are you been able to expand those revenues recently or is that kind of a near term three year and then go from there?

Joe Busky

The 5% same customer growth that we saw in Q3, which is slightly up from the previous quarters this year, that’s across the board of the same customer spend increase. I really can't attribute it to '09 or '08 wins and across the board I think its spread pretty evenly across existing customers.

Jeff Blaeser - Morgan Joseph

Okay and then I guess that the big picture industry. Potential customers that you target, are they coming with the same sense of urgency in terms of looking to cut cost that there was last year or is it becoming more of a just an old fashioned selling on the benefits of your offerings versus the need to cut cost, does that make sense?

Joe Busky

No, it makes sense. The urgency is there within a portion of segment of corporate America. There are those customer prospects of ours that lack a bit in energy, we put most of our selling effort against companies that we see are forward thinking, their innovative, they are willing to adopt a new and better business model and we certainly have a number of discussions going on with companies that meet that profile. So, I think the memories of the great recession or whatever we want to call it, are going to be long, and outsource solution in an indirect category of spend that’s very, very difficult for a client to get their hands around and put accountability in the place with a partner like us. I think that we’ve got a long runway in front of us with our value proposition, and we intend to full capitalize on that.

Operator

Our next question comes from Yousseff Squali from Jefferies.

Yousseff Squali - Jefferies

Just a couple of quick questions. Joe, I apologize, I think I might have missed this, but out of the 21% year-on-year growth rate that you reported, there is 5% coming from kind of same-store growth type of numbers. So, those are existing customers that you’ve had for at least 12 months I guess. So, is the other 16% growth all coming from new accounts that you’ve landed this year or how does that breakout between that and potentially acquisitions that was made maybe earlier this year or at the end of last year?

Joe Busky

The 11% new account growth or 12 million, that’s from the 2009 accounts that we signed last year. So, (inaudible)1:36-16th the 103.9 which is the adjusted revenue from last year plus that new account growth, plus the same customer growth, that’s how you get to 119.1.

Yousseff Squali - Jefferies

And then, so year-to-date you’ve generated about46.3 million from new accounts? And I think if my memory serves me right, you guys gave talked about roughly 50 million of revenues from new accounts throughout 2010. Is there seasonality to the business in the fourth quarter that would cause you to quote unquote can we add about $4 million of new account revenues or that is just out of conservatism or what are you seeing that’s not kind of compelling it maybe to change that $50 million.

Joe Busky

One thing I want to note and this is a comment that I’ve made probably back on the Q1 earnings call is that the new accounts that we added back in 2009 as big accounts that we've referred to IHG and (Inaudible), Unilever and (Inaudible). Several of those accounts were front end loaded in the year so there is some seasonality. So that’s why you’ve seen more account growth in the third half of the year as opposed to second half. But we are fully confident that we can exceed that $50 million number that we talked about all years to growth from your accounts when you get to the end of this year.

Yousseff Squali - Jefferies

Historically Q4 showed a propensity to drive transaction revenues higher than the rest of them in the prior quarters and with it improve gross margins. Is that something that we should expect again this year or is the increase emphasis on enterprise likely to mitigate that trend. Thank you.

Eric Belcher

I think the analysis you are doing maybe looking back a few years. There was something of a use it or loose it budget mentality within some portions of corporate America that has largely been eliminated with the economic environment to last year and a half or so. So we have not built into our expectations, any sort of a jump in additional last minute ordering in Q4 that we have seen historically.

Yousseff Squali - Jefferies

Joe, can you talk maybe about deferred revenue growth maybe this quarter versus the prior quarter.

Joe Busky

Yes. That unbilled revenue line on the balance sheet, it’s up to 25 million this quarter which is about 21% of revenue, and that’s higher than where its been the first two quarters of this year but its in line with where the unbilled revenue as a percent of revenue was in third quarter last year, and that’s totally due to the seasonality of campaigns and programs with some of our larger enterprise clients which caused that to happened. That was expected.

Operator

And at this time I'm showing no further questions and I'd like to turn over to our speakers for any closing remarks.

Eric Belcher

Thank you everybody for participating on the call today, we appreciate it.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may all disconnect. Everyone have a great day.

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