Inuvo's (INUV) CEO Richard Howe on Q2 2016 Results - Earnings Call Transcript

| About: Inuvo, Inc (INUV)

Inuvo, Inc. (NYSEMKT:INUV)

Q2 2016 Earnings Conference Call

August 04, 2016 16:30 PM ET

Executives

Alan Sheinwald – Capital Markets Group, LLC

Richard Howe – Chairman and Chief Executive Officer

Wallace Ruiz – Chief Financial Officer

Analysts

Lisa Thompson – Zacks Investment Research

Mike Schellinger – MicroCapClub

Operator

Good day and welcome to Inuvo’s 2016 Second Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Alan Sheinwald, Capital Markets Group, LLC. Please go ahead.

Alan Sheinwald

Thank you, operator and good afternoon. I’d like to thank everyone for joining us today for the Inuvo second quarter 2016 shareholders update conference call. Today, Mr. Richard Howe, Chief Executive Officer; and Mr. Wally Ruiz, Chief Financial Officer of Inuvo will be your presenters on the call.

Before we begin, I’m going to review the company’s Safe Harbor statement. The statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events, and as such all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially.

When used in this call the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to Inuvo, Inc. are as such a forward-looking statement. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by Inuvo at this time. In addition, other risks are more fully described in Inuvo’s public filings with the U.S. Securities and Exchange Commission, which can be reviewed at www.sec.gov.

With that out of the way now, I’d like to turn the call over to Mr. Richard Howe, CEO of Inuvo. Rich, the floor is yours.

Richard Howe

Thank you, Alan and thanks everyone for joining us. We had an irregular second quarter but we feel like we have the issues identified. We experienced some disruption that was impart due to market demand associated with one of our advertising partners. However, late July and early August performance figures are now headed in the right direction, more on that a little later. On our first quarter call we messaged that we had expected first half growth year-over-year to be in the 15% to 20% range. We came in slightly below our low-end at 14% with total revenue over the first half of the year of $34.4 million, which was driven by a stronger than expected first quarter of $18.7 million and about lesser than expected second quarter with revenue of $15.6 million. On a GAAP basis, we had our first net income loss in some time at $575,000, resulted softness in ad revenues that we believe will be – in the backhalf of the year.

While I’m upset about the quarter, I’m not overly concerned about it when I consider the drivers of our income statement, our long-term plan and our overall improving sequential performance. As it relates to our income statement, we have messaged on previous calls that we do have expense items that hit our financials that are not necessarily representatives of the operating performance of the core business. When we adjusted these items, we did in fact remain positive in the second quarter with an adjusted EBITDA of $282,000. Now we also had cash on hand of almost $4 million and we remain bank debt free. Now we’ve always run our business based on the cash we generated, so positive adjusted EBITDA gives us the operating comfort to continue executing on our forward-looking plan. We’d like to put this quarter in perspective now by reinforcing our longer term financial objective.

We’re also providing some recent performance figures. As you all know, we have communicated a long-term financial plan for the business which we began presenting at conferences and on our calls in mid-2014. At that time, we indicated that we expected to be able to achieve on a run rate basis, $100 million in organically driven revenues by the fourth quarter of 2017. Stated another way, we anticipated that revenue in the fourth quarter of 2017 would be about $25 million. This would mean that on a compounded basis, we need to grow the company 27% year-over-year on average for the period in question, well above our industry and microcap peer groups.

Now we added that not only did we expect to grow at this rate, but that we also expect to do so profitably. And I’ll remind our shareholders that we believe we could accomplish these goals without any additional capital or dilution. Now, while we still have two quarters left on our original $100 million run rate goal, the outlook even with the temporary softness in Q2 and likely in Q3 as a result of July performance, remains positive for achieving that longer term plan. And so we feel no need to modify our goal at this time. As we indicated in our Q1 conference call, we have observed some irregularities in late Q1 and attributed the issue to unusually late seasonality which seemed sound based on stronger performance in May. Then in June and July, we saw some trends which were not seasonal and as adjusted we were receiving less revenue per at delivered than we expected based on the quality of the visitors we know were actually sending to our advertisers.

Now we diagnosed the problem and began putting in place optimization remedies which along with clarity about the future of our advertising partner are actually beginning to have a positive impact on business performance. The issue was for the most part related to demand changes occurring within the partner segment of our business. As it relates to the timeframes required to effective remedy, I’ll remind our shareholders that Inuvo is a vast network of websites and app that together generate 10s of millions of ad impressions monthly. When we do have to make a change to that network, as was the case recently, we do so cautiously. The average revenue of the last two weeks of July and the beginning of August have been about $85,000 per day and we have had a few days over that period in excess of $200,000 a day.

We feel good about getting back on track throughout the backhalf of the year. I understand that our shareholders are concerned when they are at softness in our financial performance. I think it’s important at such times to be reminded of the strengths of the Inuvo business. As you know, we typically do not discuss what we believe to be competitive secrets, and we consider our client list to be among those secrets. With that said, I’d like to share with you a sampling of the kinds of brands that whom our networks visitors - every day so you can appreciate the value of the business we’ve created in the marketplace we serve. We are routinely sending high quality visitors to companies like Chevrolet, Target, [indiscernible], Honda, Amazon, Yellow Pages, Home Depot, Verizon, Alibaba, AT&T, Kiplinger, Disney, MGM and hundreds of others. We build our reputation in our industry and with our ad partners based on being with companies that does things right, and ultimately, delivering quality visitors to advertisers.

We are definitely providing value to many of the world top brands which makes for a good segway to the recent news about the acquisition of Yahoo by Verizon. From our perspective, given the value we provide, we view the go forward plan as business as usual. In fact, we expect the announcement to actually help our business in short-term and the uncertainty about Yahoo’s future is now over and advertisers who might have been waiting on the sidelines because of that uncertainty are likely to return to our marketplace. And so far the operating units are concerned, within the partner network, we continue to see encouraging signs with the adoption of SearchLinks. Q2 revenue from SearchLinks was up over 60% quarter-over-quarter, with progress across existing clients and a steady on-boarding of new clients.

If you’d like to see how we are doing with SearchLinks, check out the ad by SearchLinks logo on the Reuters page. We continue to make investments within SearchLinks in areas of analytics, account management and targeting technologies necessary to scale the product and improve performance outside the verticals associated with our original go-to-market plan in health and finance. The core partner ad business remains steady and we are seeing some success here with helping app owners monetize, having experienced growth in the focus area for this product line quarter-over-quarter. Earlier I had mentioned some of the brands we do business with, and I will echo that message by telling you that within this product line for example, we are sending Ford, one of the many advertisers we indirectly serve, about 100 interested car shoppers per hour.

We see some declines in the partner segment and we’ve described on past calls how some partners’ website have been acquired and how that revenue and perhaps more importantly, the growth associated with that revenue and now shifted to the ONL business. With that said, we’ve also been clear that our core strategy and focus in this business unit is the advancement of SearchLinks, and so we had expected some declines in the partner ad business as we offset those declines with growth in SearchLinks business. The owned and operated network continues to advance a number of our strategic initiatives, including direct relationships with advertisers and SearchLinks’ development enhancements.

While revenue from direct advertisers remains small, we continue to develop relationships here that can be leveraged across the business. We had twice as many relationships this quarter as we did last. We’re currently testing on our own sites, the use of retargeting information within SearchLinks. To-date, SearchLinks has targeted at principally based on the content of the website on which it resides. Shortly, it will have the ability to complement that contextual targeting with historical information collected from our own network and other third party. This feature enhancement should continue to improve the overall performance of SearchLinks alongside analytical enhancements always ongoing by allowing higher paying ads that are the result of information that suggests the visitor and had prior interest in that higher paying category. This in turn leads to improved revenue and margins.

While still in its early launch, our first attempt at building a website with a highly targeted audience has started to gain some traction. The visitors to this website are almost exclusively organic, Earn, Spend, Live which you can visit at earnspendlive.com and its companion and similarly named to YouTube channel, our Inuvo created content targeted specifically at professional 20-somethings learning how to climb the career ladder. In this regard, it’s a community website. With both these new sites and ALOT website, we’ve also been very busy developing and deploying video content across the property.

We are seeing strong engagement with these videos and as a result, we’ve also experienced a number of inbound requests from advertisers who would like to be associated with those videos and the site. We plan to continue our efforts to build a library of proprietary video content. We also launched our first podcast which was called Eavesdropping which is now available on iTunes. And we also launched our first e-mail newsletters to the living, health, travel and finance sites and our push into the ONL business into social and mobile business is showing great progress and improvements both in revenue and margin.

With that, I’d like to turn the call over to Wally.

Wallace Ruiz

Thank you, Rich. Good afternoon everyone. We reported today the results of the second quarter. Inuvo reported revenue of $15.6 million for the quarter that ended June 30, 2016, a decrease of 6.5% from the $16.7 million reported in the same quarter last year. For the six months ended June 30, 2016, Inuvo reported revenue of $34.4 million or 14% increase over the same six month period last year, attributable to the strong first quarter we experienced this year. Inuvo reported a net loss of $575,000 or $0.02 net loss per share in the quarter ended June 30, 2016. In the same quarter last year, we reported a net income of $445,000 or $0.02 per diluted share. The partner network delivers advertisements to our partners’ websites and applications.

The partner network reported $4.7 million in the second quarter of this year compared to $9.3 million in the same quarter last year. As mentioned at the end of the first quarter, we started to experience lower average revenue per ad delivered. We deployed various solutions to mitigate what initially we thought was a belated seasonal change in demand. As the quarter progressed, it became obvious that the weakness in demand was more than seasonal and we adjusted our solutions to address it. The tactics deployed started to show improvement by the end of July. In addition, the uncertainty revolving around our advertising partner in this business segment, the partner network, Yahoo was resolved this week with the announcement of its sale to Verizon. As a result, we expect the steady increase in demand.

Revenue from SearchLinks was up 60% in the second quarter over the first quarter of this year and we expect it to continue to grow throughout the year. We mentioned in a previous teleconference that the 2015 acquisition of our partner’s web properties and the reporting of those revenues as owned and operated rather than partner network revenue was no longer a factor in the year-over-year comparative going forward. More relevant comparison is sequential quarters. The first quarter partner network revenue of $5.3 million was forecasted. The lower second quarter revenue was due to the weaker demand that was mentioned. The trend since the last half of July has been higher. The owned and operated network has made up a collection of websites and apps we own and where income is derived from advertisement.

The owned and operated network represented 70% of the company’s total revenue in the second quarter this year. The owned and operated network reported $10.9 million of revenue in the second quarter of 2016, a 46% increase over the same quarter last year. As we mentioned in our last quarterly teleconference, we expected the soft second quarter. We believe we have the solutions in place to address the change in our markets and we are now trending positively. Gross profit in the second quarter of 2016 was $11.7 million compared to $9.6 million last year, a 21% improvement. Gross profit as a percent of revenue or gross margin was 75% in the second quarter of 2016 compared to 58% in the same quarter last year. The increase in the percentage is largely due to the mix between partner and owned and operated segment’s revenue shifting more towards the higher margin owned and operated network.

Partner network gross profit in the second quarter of 2016 was approximately $797,000 compared to $2.2 million last year. The lower gross profit in this year’s quarter was due to lower revenue and to lower RPCs, revenue per clip, this year compared to the same period last year, again associated with weakness in demand as we noted earlier. Gross profit in the owned and operated segment in the second quarter of 2016 was $10.9 million compared to $7.4 million last year. The higher gross profit in this year’s quarter compared to last year is due to higher revenue. Operating expense which is comprised of marketing costs, compensation expense and selling and general and administration expense was $12.3 million in the second quarter of 2016; that is compared to $9.1 million in the same quarter last year.

Marketing costs are the primary costs associated with the owned and operated network where dollars are spent to build an audience for the various sites and apps that we own. Marketing costs were $9.4 million in the second quarter of 2016, a $2.8 million increase from the same quarter in the prior year. The higher marketing costs were a driver of the 46% increase in owned and operated network revenue. Compensation expense increased by $237,000 to $1.6 million in the second quarter of 2016 compared to the same quarter in the prior year. The higher expense in the current quarter is primarily due to higher payroll cost associated with higher input - additional hiring. At June 30, 2016, we had 72 full and part-time employees, a year earlier we had 56 full and part-time employees. SG&A or selling, general and administrative expense was $1.3 million in the second quarter of 2016 compared to $1.2 million in the same quarter in the prior year.

The higher SG&A expense this year was due primarily to $89,000 of higher depreciation and amortization expense and $40,000 higher facility costs. We expect marketing cost to increase in coming quarters commensurate with the growth we expect in the owned and operated network revenue. We expect compensation expense to increase modestly to support the roll out of SearchLinks, and we expect SG&A expense to remain basically flat. Net interest expense was $22,000 in the second quarter of 2016, $15,000 less than last year’s second quarter expense. This year’s lower expense is due to the lower use of the revolving credit facility.

The company reported a net loss in the second quarter of 2016 of $575,000 or $0.02 net loss per share compared to a net income of $445,900 or $0.02 net income per diluted share in the second quarter of last year. EBITDA adjusted for stock-based compensation was approximately $282,000 in the quarter that ended June 30, 2016 or $0.01 per diluted share compared to an adjusted EBITDA of $1.1 million or $0.04 in the same quarter last year. Our adjusted EBITDA for the first six months of 2016 was $1.6 million or $0.06 per diluted share compared to $1.8 million or $0.07 per diluted share for the first six months last year. Positive adjusted EBITDA demonstrated the strength of our business model to weather a soft quarter. At June 30, 2016, we had cash and cash equivalents of $4 million and no bank debt. The current ratio improved to 0.95 at June 30, 2016 from 0.88 at December 31, 2015.

With that, I’d like to turn the call back over to Rich for closing remarks.

Richard Howe

Thanks, Wally. With the second quarter now behind us, we remain focused on the future. Recent performance suggests we’ve isolated the causes of the Q2 challenges and that should mean that we return to sequential growth for Q3 and Q4. We’ve made some great progress both on the technology and with the accounts we signed up for SearchLinks and we’ve introduced some new, exciting and more engaging video and podcast content choices for our owned and operated business, while also building a number of direct advertiser relationships in the process. In closing, while Q2 was a challenge, we remain tremendously optimistic about our business prospect and our ability to deliver on the opportunities available to us.

And with that, I’d like to turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from Lisa Thompson with Zacks Investment Research.

Lisa Thompson

Good afternoon guys.

Richard Howe

Hello.

Wallace Ruiz

Hi, Lisa.

Lisa Thompson

Hi, there. I actually wanted to clarify a little bit on what you said on the future, the first question is one of the things you said what happened in the quarter was to a lower revenue per ad, is that still down or has that recovered at all?

Richard Howe

- recovered, yeah, well it hasn’t recovered in total Lisa, but the trend since about mid-July has been a pretty nice return back to the prior levels.

Lisa Thompson

And when this – occurred, [indiscernible] how does that work?

Richard Howe

Lisa, I wonder if you could re-ask the question because you were breaking up on a little bit there, we didn’t hear…

Lisa Thompson

[indiscernible]

Operator

Sorry, Lisa, we’re still having troubles with your phone.

Richard Howe

Yeah. Is that us operator or is that the caller?

Operator

That’s the caller. I think she has…

Lisa Thompson

Is that better?

Operator

Yes, it is now. Go ahead and try again. We’re not hearing anything now, Lisa.

Richard Howe

May be we should go on to a different caller and Lisa - we can come back to Lisa.

Operator

Okay. [Operator Instructions]. We don’t have any questions in the queue so we’ll give Lisa another minute to get her problems cleared up and queue up again.

Richard Howe

Okay.

Operator

We have a question from Mike Schellinger with MicroCapClub

Richard Howe

Hey, Mike.

Operator

Mike, your line is open, if you could check your mute function.

Mike Schellinger

Sorry, can you hear me now.

Richard Howe

Yes, we can Mike.

Mike Schellinger

I was wondering if you could tell me what was the absolute level of revenue for SearchLinks? I know you said it grew by considerable amount.

Richard Howe

Yeah, Mike we don’t provide sub-segment reporting in the two segments that we have, but what we said on the call it stands. The product line has been growing very nicely for us. We’ve been signing up lots of new customers, we in fact mentioned in my call script that we’re sitting on the homepage of Reuters which is a really nice milestone to be associated with a brand like that. So we’re signing new clients, we’re growing existing clients, we’re converting frankly other publishing clients that we have to SearchLinks. And I think when you think about the partner segment of our business, it’s important to think about it in the context that that partner segment will over time become SearchLinks. Everything we’re doing including converting existing partners that we have in this segment to SearchLinks is suggesting that that’s the place we’re headed.

Mike Schellinger

Okay, great. And may be one other thing, can you -- our margins on SearchLinks revenue basically similar to that of what you’ve done in the past or are they different?

Richard Howe

We’ve discussed this I guess once before and I guess my message will be the same, you’ll probably go back and check Mike but here’s the way we’ve positioned it. Look when you launch new products in the ad tech world, typically you’re trying to win market share, so margins would typically be less than the say more mature products than you might have had in the segment in the early phases of the product. But the technology that supports that product, the way we’re doing the targeting and the analytics and the data analysis capability that we’ve built around that product, it’s far superior to anything else that we’ve ever built. So we would expect over time that the SearchLinks margins would be at least as good as the partner segment margins have been historically and better.

Mike Schellinger

Okay, great. I don’t have any further questions.

Richard Howe

Alright. Thanks, Mike.

Operator

And we do have Lisa back.

Richard Howe

Great. Hi, Lisa.

Lisa Thompson

Hi. Alright, can you hear me now?

Richard Howe

Much better.

Lisa Thompson

Okay, so I’m sitting next to the microcell so this has got to work. So my question initially was about Yahoo, did that disruption -- did you not figure it out because it affected the whole industry or was it just people said we don’t want to put ads with Yahoo right now?

Richard Howe

That’s a good question but I’ll just caveat that I don’t feel comfortable nor am I qualified to speak specifically about Yahoo business, so I can answer it from our perspective Lisa. Interestingly, we saw demand issues and demand issues for us really means sort of the advertiser mix that we see and that’s a complicated issue for a company like Inuvo because we’re dealing with hundreds of thousands of advertisers through the app relationships. The reason why it looked very much to us like it was a late seasonality issue which impart was true because we always do have seasonality because the seasonality issue is exactly the same problem, it becomes a demand issue.

And I’ll caveat to describe it as follows, at the beginning of the year in Q1, marketing budgets usually drop that means advertisers come in and out of the marketplace that means the demand drops. And that’s sort of exactly the same problem we saw that wasn’t related to seasonality which is now you could maybe understand why we saw some confusion here, is this seasonality or is this not seasonality, what is this? It’s something different. Now whether or not that’s related to all of the things that were going on with Yahoo’s process is not for me to comment on. The good news, as I said, in the last at least two weeks we’ve seen pretty nice improvements associated with that demand and so we feel like the problem is behind us at this point and we should be moving forward from here.

Lisa Thompson

Okay. And so I just want to also clarify what you said about reaching the $100 million revenue run rate, you said it was doable. Did you mean in Q4 you could do $25 million or did you… Okay. Go ahead.

Richard Howe

Yeah, Q4 of 2017, so just to be specific about this because we’ve put this out as a milestone, but when you take the first quarter of 2014 which is what we were originally looking at when we set that goal for ourselves and project that out, we said that we could get to $100 million run rate the implication is that in the fourth quarter of 2017, we would be at $25 million quarterly run rate. And as I said on the call script, that’s a pretty significant compounded annual growth rate it’s around 26% or 27% so when we set that goal for ourselves, we knew we were setting a goal that was pretty aggressive. But I did point, we still feel great about that. Now we’re obviously over exceeded that goal up until the first quarter and now we have the softness in the quarter but we feel like things are back on track. So we see no need to modify our plans, we still believe that that’s an achievable goal for our company.

Lisa Thompson

Okay. And then one other thing was I know we had a conversation while back about you hiring may be somebody from the competition or something to sell SearchLinks or headed up or something. Did that get put on hold with this quarter or what happened there?

Richard Howe

I don’t recall that conversation Lisa but we continue to hire in the SearchLinks team across the sales account management and tech functions. To-date I don’t believe we’ve hired anybody specifically out of the competition, doesn’t mean we won’t. I mean it’s usually a pretty good way of getting the knowledge capital perhaps we didn’t have. We don’t feel like we’re missing anything, I don’t think we need on the sales side specifically that the product itself is not a difficult product to sell. So we don’t feel like we need any special skills other than just great hunting skills to sell the product because the product performs well and there’s a good – of clients now who are using it so the sales process has reference that will account to point to. So that’s kind of what we are doing.

Lisa Thompson

Okay. And then…

Wallace Ruiz

Lisa I don’t think this quarter, the softness this quarter didn’t slow us down at all on the SearchLinks side. We are hiring – in fact you can see it on our website, we are hiring on the account management side and the sale side specifically for the SearchLinks.

Lisa Thompson

Okay. Alright. So given that it’s already August 04, do you have a feel for what this quarter’s going to look like revenue wise? Can you get back where you were in the first quarter?

Richard Howe

We don’t provide guidance but I think we’ve given information for people to kind of do their own calculations on that and I’ll give you my view of it based on what we said in the call script. But if you look at the second quarter, the average revenue for the company was around $170,000 a day, give or take, I think we’ve said over the last few weeks, we’ve been averaging about $185,000 a day. I will tell you that the first few day of August averaged about $191,000 and we’ve said that we had $200,000 a day. So from our perspective we’re headed back in the right direction, just to give you a benchmark for that is to give you some more data may be. Last year at the beginning of August, we were doing about $203,000. So we’re a little bit behind August where we were last year but not terribly behind and we’re wrapping back up because we only started to get the issues fully resolved and the network back up here in the late part of July and early August.

Lisa Thompson

Okay, great. Thank you. Sorry about the telephone issues.

Richard Howe

No worries, Lisa.

Operator

This does conclude our question-and-answer session. As we have no further questions, I’d like to turn the call back over to Richard Howe for any closing comments.

Richard Howe

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

Operator

Thank you very much. And that does conclude our conference for today. I’d like to thank everyone for your participation.

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