InnerWorkings, Inc. (NASDAQ:INWK)
Q4 2015 Results Earnings Conference Call
February 18, 2016 05:30 PM ET
Bridget Freas - VP, Investor Relations
Eric Belcher - Chief Executive Officer
Jeff Pritchett - Chief Financial Officer
George Sutton - Craig Hallum
Chris McGinnis - Sidoti & Company
Kevin Steinke - Barrington Research
Nate Brochmann - William Blair
Good day, ladies and gentlemen and thank you for your patience. You have joined the InnerWorkings Incorporated Fourth Quarter 2015 Quarterly Earnings 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] As a reminder, this conference maybe recorded.
I would now like to turn the call over to your host, the VP of Investor Relations, Bridget Freas. Ma’am you may begin.
Good afternoon, everyone. And welcome to our fourth quarter and full year 2015 earnings call. Joining me on the call today is Eric Belcher, Chief Executive Officer; and Jeff Pritchett, Chief Financial Officer. We issued a press release with additional information earlier today, which is available on our website, www.inwk.com.
Please note this call will include forward-looking statements, relating to future results that are made pursuant to the Safe Harbor provisions of the federal securities law. 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 of any subsequent date. Please 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 diluted earnings per share and constant currency. Please refer to the Company’s earnings release issued earlier today for a reconciliation of these non-GAAP measures to the most comparable GAAP measures. 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.
Eric will provide his comments on the business, and then Jeff will discuss our financial results. We will then open the call to your questions. Eric, please go ahead.
Okay, great. Thank you, Bridget.
Twelve months ago, I outlined our three priorities for 2015, the first was to deliver organic growth, both with new clients and by growing our relationships with existing clients. The second was to build out our capabilities and new categories. And the third was to increase our profit margins. A simple focused plan. Those of you who followed our business over the past year including the results we released today, can see that we delivered on all three fronts. Moving forward, our strategy remains unchanged. These straight forward objectives are core to business and vital to creating value for our clients and our shareholders.
Let’s look at our accomplishments against these three priorities in more detail.
We began 2016 coming off a very strong sales year. The total amount of annual contracted new revenue we were awarded in 2015 was approximately $135 million, far surpassing the amount of new organic business won in any previous calendar year in the Company’s history. The origination of this new business is a mix of new clients and incremental work being awarded to us from our existing client base. Most of this new business is still in the ramp up phase, giving us positive momentum as we enter 2016 and beyond.
The second priority I mentioned was to aggressively develop and market some of our newer capabilities. And I’ll focus here for a minute on two of our additional service offerings where we’re seeing particular traction. The first is our creative execution capabilities where we’re pioneering an in-house creative design studio linked to our broader marketing execution solution. For those of you less familiar with this offering, one potentially helpful way to think about the solution is to divide creative services in two distinct categories, the first category being high-end brand strategy and the second category being execution oriented task, such as versioning, file preparation, translation, copywriting, BNC creative, video production and numerous other related work streams. We believe the first category is the expertise of full service, brand strategy agencies of record and the second category is where InnerWorkings as a marketing execution agency excels.
We currently provide on-site creative execution services linked to our broader offering to clients such as L’Oreal, Intercontinental Hotels, [indiscernible] Stoli, McKasson [ph] and PNC Bank among others. And we’re in a number of exploratory discussions today to expand our client base for these services.
Product packaging is one of the faster growing capabilities for InnerWorkings. Clients using our managed packaging service see three main benefits. Number one is brand consistency, both on the shelf and tied in with other marketing programs that we’re handling on their behalf. The second is a reduction in the cost of packaging materials and the labor required secure them. And the third is shorter lead times which give marketing campaigns added flexibility for more timely and customized promotions.
As with our internal creative studios, we’re seeing a lot of interest in the marketplace to adopt this solution. Examples of the types of packaging we provide are shipping packages for e-commerce, luxury packaging for high-end products, branded bags and boxes for retail goods and secondary packaging. And today, we provide these services for clients such as [indiscernible] Walgreens Boots Alliance, L’Oreal, Stone Brewery, Groupon Goods and Louis Roederer Champagne to name a few.
Now, let’s turn to our third priority, expanding our margins. Our revenue growth in 2015 contributed to increasing our profit margins through operating leverage. A trend, we expect to see continue. We’ve also had success vertically integrating, our value-added services as well as providing raw materials directly to our supplier community. These are just a few of the ways our growing scale and influence are creating additional sources of value for our client base and for our shareholders.
I’ll leave it to Jeff to go through the specifics of our financial performance in a moment. But I want to stress that we’re seeing success beyond growing our revenues and increasing our margins. Managing our working capital, generating cash flow and increasing our return on invested capital have become key focal points for the Company, all while we continue to invest in the future.
Specifically, we expect to make investments in two key areas. The first is our proprietary technology, which is revolutionize the marketing supply chain, and it’s become a key differentiator for us in the marketplace. To-date, more than 0.5 million discrete client locations are using our technology and well over half of all of our orders placed are transacted in a fully automated fashion.
We’ll continue to develop our global technology platform to enable more of our clients toward smarter class plus brand, departments and borders. This is a core component of our global service offering and makes us a more strategic and integrated partner with our clients. And we also plan to invest in our sales engine by bringing on-board additional business development professionals over the next year to fuel our proven organic growth strategy.
Even with the impressive track record of client wins in the last year, we believe we barley penetrated the market opportunity for our solution. Our global platform has the scale and breadth of capabilities to bring substantial value to a growing list of large companies who haven’t even heard of us yet. We believe investing in our sales efforts represents one of if not the highest return use of our capital.
To wrap up, our list of enterprise clients has rapidly grown to include many of the world’s most well-known and respected companies. To-date, a quarter of our employees sit inside of our clients’ offices full time. We’re a true B2B partner, deeply involved with many of the most famous global brands, giving us the stability, the buying power and the opportunity to grow in the future. We pioneered this market and we fully expect to dominate it.
By staying focused on our core business I’m confident that we can continue to grow rapidly and profitably as we capitalize on the growing demand for our capabilities from large, successful marketing intensive corporations around the world.
I’ll now turn the call over to Jeff to take us through our financials. Jeff?
Thanks, Eric. Hello everybody. We had a very strong fourth quarter and full year for both the top and bottom-line, exceeding our adjusted EBITDA guidance for the year and we expect to continue this positive momentum in 2016.
We generated revenue of $270.3 million in the fourth quarter on a reported basis. Excluding the $13.5 million foreign currency impact, our revenues grew 15.1%. This impressive growth was driven in part by the acceleration of certain orders that we had originally expected to ship in early 2016 but instead shipped in late Q4 2015. For the full year, our revenue was $1.03 billion on a reported basis and $1.09 billion in constant currency, representing 9.3% growth over 2014. This growth was all organic. Excluding currency impacts, approximately two-thirds of our revenue growth for this year came from new clients on-boarded during 2015 and one-third came from the expansion of scope with our existing clients.
Our gross margin was 23.1% during the quarter, down from 23.9% year ago. Gross margin was 23.3% for the full year, up from 22.9% in 2014. On a constant currency basis, our gross profit dollars increased $7 million or 11.9% for the fourth quarter and $27.3 million or 11.9% for the full year. We expect 2016 gross margin to be in the 23% to 23.5% range, higher than our previous outlook driven by a host of initiatives, including those Eric discussed earlier.
Non-GAAP diluted earnings per share for the quarter were $0.08 as reported and $0.09 in constant currency, up from $0.07 in the prior year period. For the full year, non-GAAP diluted earnings per share were $0.25 as reported, constant currency non-GAAP diluted earnings per share were $0.31, up 55% from $0.20 in 2014.
During the quarter, we incurred some primarily non-cash charges that I’d like to walk you through. Our GAAP net loss was $39.9 million and GAAP loss per share was $0.75 for the quarter. The largest component of the difference between our GAAP and non-GAAP earnings per share was for the fourth quarter and full year was a non-cash goodwill impairment charge in the amount of $37.5 million or $0.70 per share. The non-cash charge was related to the performance of a portion of our business in Continental and Europe. Related to this, we previously announced in December realignment strategy to drive stronger integration of our global platform and improve our annual profitability by $5 million to $6 million with at least $3 million expected to be realized during 2016.
We developed this program together with some of our largest international clients and prospects. In connection with the realignment plan, we also incurred during the fourth quarter an after tax non-cash charge of $5.9 million for reserves against tax loss carry forwards and other assets and $1.5 million to re-measure our dormant Venezuelan net assets to the most appropriate exchange rate. We also incurred an after-tax restructuring charge related to the realignment of $900,000, mainly for employee severance and contract termination costs. By taking these actions, we entered 2016 financially stronger and better equipped to improve profitability and returns on invested capital going forward.
Continuing with our financial results, adjusted EBITDA was $14.7 million for the fourth quarter, up 17.5% from $12.5 million in the prior year period on a reported basis and up 22.8% to $15.4 million on a constant currency basis. Adjusted EBITDA margin was 5.4% for the quarter, representing a 30 basis-point improvement over the prior year period.
For the full year, adjusted EBITDA was $51.9 million, above our guidance and up 21.1% compared to 2014. On a constant currency basis, adjusted EBITDA was $55.7 million, an increase of 30% from the prior year.
Full year adjusted EBITDA margin was 5%, up a full 70 basis points from 2014, reflecting our focus on margin expansion and the operating leverage. While we’re pleased with the margin improvement, we continue to believe there are additional opportunities to increase our margins in 2016 and beyond.
Our GAAP tax expense in the fourth quarter was $6.7 million. Excluding the reserves against tax loss carry forwards and other charges mentioned earlier, our effective tax rate was 40% for the full year. I am disappointed with our tax rate and believe there are ways to optimize our business in the future. Over time, we expect our effective tax rate to return to below 30% range.
Now, turning our attention to cash flow and the balance sheet. We generated cash from operating activities of $50.7 million for the quarter compared to only $3.5 million in prior year period. Full year cash provided by operating activities was $43.4 million, compared to net cash used in operating activities of $12.5 million in the prior year, a $55.9 million improvement.
Increased earnings and lower working capital contributed to the increase in cash generated during the fourth quarter. And I continue to believe there is potential to better manage our working capital during 2016 and beyond. I would like to stress that we generated more cash during the fourth quarter than in any prior quarter in the Company’s history.
As our business model matures, we expect to continue to generate significant operating cash flow. Capital expenditures were $2.9 million in the fourth quarter and $15 million for the full year compared to $3.2 million in the fourth quarter of 2014 and $14.1 million for the full year of 2014. The majority of our capital expenditures related to our technology, primarily for software developments. We believe these investments to work any other company’s technology investment in our space and continue to set us further and further apart from our competition.
We made no earn-out payments related to previous acquisitions during the fourth quarter, $8 million in cash earn-out payments were made during 2015. At year-end, the contingent consideration and due to seller balances totaled $22.6 million on our balance sheet and we expect to complete all earn-out payments by the end of 2017. The total amount drawn on our revolving credit facility was $99.3 million as of December 31st, and our cash balance was $30.8 million, yielding a net debt balance of $68.5 million.
In 2016, we expect revenue of $1.06 to $1.08 billion which represents 6% to 8% growth on a constant currency basis while excluding two small operations we’re exiting.
Let me provide some additional color that connects the ramp of $135 million of annual new business we were awarded during 2015 to our 2016 revenue guidance. There are four factors that need to be considered. First, the continued strengthening of U.S. dollar against many major currencies; second, our exit of two small markets, one in Latin America and one in Europe; third, a portion of $135 million in new wins was already recognized as revenue during 2015; and lastly, another portion of these new client wins will not be fully ramped until the first half of 2017.
We expect 2016 adjusted EBITDA to be in the range of $58 million to $62 million, which represents 12% to 19% growth over 2015 on a reported basis and 15% to 23% growth on a constant currency basis. Finally, we expect non-GAAP diluted earnings per shares to be $0.30 to $0.33, an increase of 20% to 32% compared to 2015 on a reported basis and 30% to 43% on a constant currency basis. This outlook excludes the non-recurring expenses related to the realignment that will be completed in 2016, as mentioned in our December announcement. Our guidance assumes that foreign currency rates remain in line with early February levels through the remainder of 2016.
Now, we’d be glad to answer your questions.
Thank you, sir. [Operator Instructions] Our first question comes from the line George Sutton with Craig Hallum. Your line is open.
Thank you, nice job guys. So, Eric, relative to the pipeline, we discussed this time last year and you were quite enthusiastic about the opportunities and that did prove out obviously with the notes [ph ]of who you ended up signing. Could you just give us an update at this point this year?
Sure, George. I feel the same the way, as I did a year ago. A lot of focus on our organic growth efforts. And if anything, I’m a little more optimistic about our ability to offer additional services and enter new geographies with some of our existing clients where we’ve demonstrated, in some cases over many years our ability to add a lot of value to their business and their brands. And there are number of discussions going on right now regarding expanding our capabilities inside of their organizations. So, overall, feeling very good about the pipeline, George.
Now, relative to that, you mentioned the packaging side in particular. I wondered if there were other services you’d really suggest could be big winners for you this year?
The ones that we are having the most dialog about, involve our creative execution service offering, our packaging, our permanent retail display textures, technology in and of itself is an offering that’s increasingly being adopted by our clients, and there are others as well. So, really all across the marketing execution, supply chain, we are seeing interest and we are having very interesting dialogs right now with our existing client base.
Now, Jeff, your cash flow is awesome this quarter, and I wonder if you could discuss that, some of the drivers and just explain the accounts payable process that you might have gone through this quarter because that did have a big contribution?
Sure, George. First off, the increase in earnings and operating leverage flow through was driver of our operating cash flow as well as better management of working capital were the two main drivers of our strong operating cash flow performance in Q4 and 2015 overall. Accounts payable increased in line in part with the growth in revenue is a big driver of the increase.
Okay, alright. Thanks guys. I appreciate it.
Thank you. Our next question comes from Chris McGinnis of Sidoti & Company. Your line is open.
Good afternoon. Thanks for taking my questions and nice quarter and just nice presentation all around.
Just quickly a follow-up on the last question on capital. Maybe just, can you just remind us of capital allocation going forward and with the strong cash flow, is there any changes in your thoughts there?
Hi Chris, it’s Jeff. No changes in capital allocation. As Eric mentioned, first priority is investing back into the business, in technology and in the development. And we will continue to be opportunistic under the share repurchase program that the board authorized, repurchase back $4.9 million worth of shares in 2015 under the $20 million share repurchase authorization.
Great. And then, Eric, maybe can you just highlight some of the wins in the quarter itself? You mentioned I guess four new ones would be in. Can you maybe just dig into -- I don’t remember hearing it or maybe I missed it in your prepared remarks?
You didn’t miss it, we didn’t mention by name anybody other than being as in some cases our new clients that were in the process of on-boarding haven’t fully communicated to their existing incumbent supply chain or some other impacted employees the news. So, there is a cadence to making those announcements. And so, we can’t talk about these companies in detail, but I can say in aggregate, it was another stellar quarter bringing in new clients, headline in size by being [indiscernible] they’ve adopted a very broad palette of our solution and capabilities and geographic footprint, really embracing the model as it’s developed to be today. So, more to come on some of these other new clients, but the great brands and we’re really proud to be taking off with them.
Great. Just two I guess follow-ups. One, just on the gross margin, Jeff mentioned a higher range and I missed your comment there.
Sure, Chris. We’re expecting in 2016 gross profit margins to be between 23% and 23.5% above our previous guidance. Several of the initiatives that Eric laid out during his prepared remarks as well as mix of category growth and expansion we’re seeing is driving that increase that we’re now comfortable forecasting going forward at higher level.
Perfect, alright. Thank you very much. And again, nice quarter.
Thank you. Our next question comes from the line of Kevin Steinke with Barrington Research. Your line is open.
Good afternoon, everyone. I just want to start off by just clarifying on the revenue guidance. You said it excludes the exit from Venezuela and a smaller European market. So, is that just excluding those markets from 2016 or area you also backing those out of 2015 number to get to that growth rate?
It’s backing them out of 2015 number, Kevin, to get to growth rates. It’s not -- they’re not material; one of them is Venezuela and one small market in Europe.
Okay. And how do you see your enterprise organic growth being driven in 2016? You mentioned the mix of new contracts versus expansion of existing in 2015. How do you see that mix playing out this year?
We haven’t set a goal. And in 2014, you’ll recall, it was about 50-50, this past year about two-thirds of our growth came from new clients as we really had an explosion of new brands adopting our solution. In 2016, it will be a blend and how that’s used, we’re not entirely sure. I will say, as I mentioned earlier, we’ve got a lot more focus on reintroducing ourselves to some of our long-term clients with our newer capabilities that we’ve developed over the year. So, I do expect us to see some meaningful growth coming from our existing client base. But in terms of what percentage that might end up being for the year, Kevin, we’re not quite sure.
Okay, okay. Fair enough. Jeff, in terms of just how you see 2016 playing out in terms of the pace of revenue and earnings throughout the year in light of the contract ramp-ups that are going on, implementation costs, the realignment plan in Europe, what sort of pacing kind of from a high level are you expecting for revenue and EPS throughout the year, based on those factors?
Thanks, Kevin. We’re expecting seasonality very similar in 2016 with 2015, given the ramps that we were experiencing during 2015 and now ramping into 2016 as well as the realignment, very similar seasonality.
Okay, perfect. And lastly, Eric mentioned upfront about continuing to invest in the business in terms of technology and business development people, what sort of long-term investment spending I guess you would say is baked into your 2016 outlook and how does that factor into the profitability?
Sure, Kevin. It’s Jeff. We baked in some incremental business development team -- investments as well as technology investments and those are fully reflected in our guidance for 2016.
Thank you. Our next question comes from Nate Brochmann of William Blair. Your line is open.
Good evening, evening. And I would like echo the comments on the nice quarter. So, a couple of things to follow up on Kevin’s question in terms of talking about the investment. Are these incremental upgrades on technology or is it new full-blown capability that customers are looking for or is it add-ons in terms of being able to build out these broader services, could you give us a little bit more color on that?
It’s a little bit of all three of those, Nate. With every customer situation that we encounter, there are idiosyncratic needs that require custom development. And in one case, it might be the ability to upload direct mail lists into our platform, so an automated direct mailbox launch might exist or another could be the customized preapproved marketing shelves for individual locations. And everybody has a different MIS platform that we need to integrate our payment tool with. And so there is development that takes place really with each new additional large scale clients that we bring on board. Now, we’re also building out a new functionality as we think, down the road toward what the market -- we believe the market is looking for and anticipating with respect to a marketing resource management software tool like this. So, it’s a combination of specific customized capabilities for clients that we’ve contracted with around specific need as well as development to stay ahead of the market.
Okay, that makes sense. And then, in terms of two -- I mean obviously we’re continuing always that sales people in terms of that being a big part of your growth engine. Could you talk about part of the investment maybe being or if there is a need to do this in terms of hiring more creative type talent within the organization, as you kind of move from just kind of doing procurement and into these other more creative services? Are you having to add a little bit of a higher talent level in terms of bringing in that creative function?
Well, we are. I mean, for all our different capabilities, we’re adding different technical and creative skills to the team. So, we have packaging experts and retail environment experts and creative experts and really a much broader base of marketing execution professionals with the organization. So, there is no doubt that today we’ve got a much larger group of creative studio onsite internal, creative studio talented leaders in our organization will be brining many more on I would imagine here in 2016.
Okay. And then along the lines with the packaging, I assume that you’re just helping design and order the packaging right, you’re not trying to do any of the extra supply chain work in terms of actually doing the packaging or outsourcing that, correct?
We’re outsourcing it. No, we’re not doing any of the manufacturing. So, it’s -- I would think of it as a QR, [ph] our original print management solution with the exception of taking the word printout and inserting the word packaging where we are the experts sitting on-site, advising on substrates and design and sourcing across a very broad platform, utilizing our technology, overseeing the production management the ultimate delivery, signing up for KPIs and savings and all sorts of things in that manner. So, it’s a massive marketplace and it’s as fragmented with as much price discrimination and secrecy and things of that nature that we’ve seen in the commercial print sector. So, it’s a very similar and very natural extension of our model.
I would think too in terms of -- I mean the branding is obviously natural part, but I know that a lot of companies are struggling with just like shipping weights and shipping sizes and what not, so they try to get those down. I know that’s something that everybody is trying to push on and obviously I would assume there is lot of traction there for that type of service.
A lot, as you can imagine, it’s a very data intensive analytical calculation to optimize the total landed cost and we are knee deep in that world including with the emerging world of ecommerce packaging, product packaging being shipped through the mail from online orders. And so, it’s a world that we’re very, very deeply immersed in right now. We see a lot of growth potential for us.
Great. And then just one last quick question just kind of on economic front. Obviously you guys are doing a great job in terms of penetration, winning new customers and what not. Could you talk it all about the cadence of your existing customers in terms of like existing service spend, so not like additional services but do see any packets of any weakness or any issues with any of your customers in terms of that kind of same product spend at all or is everything pretty stable?
I would say, it’s relatively stable. There is variance if we look at markets like Brazil and some other markets that you’ve read about that are having their challenges. And we’re seeing that in the marketing budgets related to our clients in those geographies. But overall, from a global standpoint, as we look across print and packaging and retail environments, and creative services and our whole suite of offerings, we see -- I would say the headline would be we see stability.
Okay, great. Thanks for the time. I appreciate it.
Alright, thanks Nate.
Thank you. As we have reached the end of our allotted Q&A time. That does conclude the Q&A session for today’s call as well as the call itself. We thank you for your participation. That does conclude InnerWorkings Incorporated fourth quarter 2015 quarterly earnings call. Have a great day.
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