InnerWorkings, Inc. (INWK) CEO Rich Stoddart on Q1 2019 Results - Earnings Call Transcript

May 12, 2019 3:21 AM ETInnerWorkings, Inc. (INWK)
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InnerWorkings, Inc. (NASDAQ:INWK) Q1 2019 Results Earnings Conference Call May 9, 2019 5:00 PM ET

Company Participants

Bridget Freas - VP, Finance and IR

Rich Stoddart - CEO

Don Pearson - CFO

Conference Call Participants

Adam Kelsey - Craig-Hallum

Tim Mulrooney - William Blair

Kevin Steinke - Barrington Research


Good day ladies and gentlemen. Thank you for standing by and welcome to InnerWorkings Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I would now like to turn the conference over to your host, Bridget Freas. You may begin.

Bridget Freas

Good afternoon. Welcome to our first quarter 2019 earnings call. Joining me on the call today are Rich Stoddart, our Chief Executive Officer; and Don Pearson, our Chief Financial Officer.

We issued a press release with additional information earlier today, which is available on our website, 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 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.

Additional information concerning these risks, uncertainties and assumptions is contained in our SEC filings, including the Risk Factors section contained in our most recent Form 10-K. Any forward-looking statements represent our views only as of today and should not be relied upon as of any subsequent date.

This call will discuss, among other financial performance measures, adjusted EBITDA, and non-GAAP diluted earnings per share. Please refer to the company's earnings release issued today for 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 full or in part without our prior consent.

I'll now turn it over to Rich.

Rich Stoddart

Good afternoon and thank you for joining us. The results we released today evidence a solid start to the year and confirmation that our 2019 operating plan is on track. On our last conference call, I told you that our three priorities for the year are managing and lowering our costs, operational excellence and profitable growth.

I'd like to share with you the progress we've made on each of these. Starting with managing and lowering our costs. Our SG&A is down $7 million sequentially in the first quarter even while our gross profit has increased. This improvement was achieved despite having to accrue a significant additional cost this year for employee bonus compensation.

As you may have seen in the compensation data shared in our 10-KA filing last week, our annual incentive comp paid out at zero in 2018. All of us at InnerWorkings have skin in this game, and we feel the pain our shareholders felt last year. Our teams across the globe are fully aligned and committed to driving better outcomes in 2019 and beyond.

One other comment I'd like to make on compensation is that while we fully believe in aligning incentives between employees and shareholders, we're also mindful of the share dilution caused by our compensation plans. I believe we've struck the right balance of motivating our employees to drive shareholder return without unnecessary dilution in our stock.

On to the second of our three priorities, operational excellence. To deliver the same quality of service our clients deserve, but at a lower all-in cost to us, we needed to change how we operate. Don will give you an update in a moment on our initiatives to eliminate redundancy and improve how we allocate our people's time.

But operational excellence is not just about people, it's also about the processes, systems, and tools they use. We needed to rethink how we invest in our technology platform to ensure we can provide differentiation, innovation and performance at scale.

Under the leadership of our newly joined Chief Technology Officer, we've already launched an initiative that will consolidate disparate tools. We are changing our enterprise architecture approach to move away from complex and inflexible, to a more automated and adaptable framework.

Many of these improvements are already happening in small ways that together are producing a significant impact. For example, within our VALO software, we integrated a tool that reduced the time to process shipping distribution files from eight hours to about 15 minutes.

We automated proof of shipment and made several other enhancements that eliminated manual steps. We've also leveraged the power of offshoring, moving certain development work to lower cost geographies. The best part, making our technology more efficient, more scalable and at a lower cost will cause no visible change to how our current clients interact with our software.

But what excites me the most about our performance so far this year is our ability to accelerate new business signings, while at the same time, making progress in improving our operations.

And that brings me to our third priority, profitable growth. We have signed approximately $75 million of new business year-to-date, as more than we signed over the first four months of any prior year.

But more importantly, the quality of our new business has also improved. At the start of the year, we revamped our business development review process, instituting more rigorous analysis and higher return thresholds.

We assume this would limit the amount of new business that gets the green light, but our business development professionals have met the challenge, going to great lengths to ensure that we secure the right economics in our client contracts. We're being smarter about which leads to pursue in the massive addressable market available to us, with a focus on clients for whom we can add the most value.

We're seeing larger, more comprehensive deals, both in our pipeline and in our latest signings. Of the seven clients we've landed or expanded so far this year, five of them are in the Fortune 500. We continue to hone in on large global brands that see the value of a wide-ranging relationship with one marketing execution partner.

To wrap-up, I'm very encouraged by the early signs I'm seeing of the stronger, more efficient, more profitable InnerWorkings. This will become more evident to you as the results of our efforts materialize in our financial performance in the coming quarters.

The caliber of our employees and the commitment I'm witnessing from our teams across the globe to drive profitable growth and operational excellence give me confidence in our ability to execute this year's plan.

I will now turn it over to Don.

Don Pearson

Thanks Rich. Hello everyone. Our first quarter gross revenue was $267.2 million, a decrease of 3% over the first quarter of 2018 and excluding currency impact, revenue increased 1%.

Our gross profit or net revenue was $61.2 million in the first quarter compared to $66.1 million in the same period of last year. Our gross profit was negatively impacted by inventory and other write-offs totaling $800,000 related to the previous exit of certain clients as discussed on the fourth quarter conference call.

Excluding these non-recurring items, our gross margin would have been 23.2% for the quarter. We are projecting improved gross margins as we move through 2019 due to a more favorable revenue mix, with growth in the retail environments category and from supply chain initiatives.

Our first quarter GAAP net loss was $2.5 million compared to a loss of $1.7 million a year ago. First quarter non-GAAP diluted earnings per share was $0.02 compared to a loss of $0.02 in the first quarter of last year.

The largest difference between our GAAP and non-GAAP diluted earnings per share stems from an after-tax restructuring charge totaling $3 million related to our cost-reduction plan announced in August 2018.

First quarter adjusted EBITDA was $6.6 million compared to $7.4 million in the first quarter of last year. Excluding the write-offs and currency impact, our EBITDA would have increased 5%. We expect to demonstrate significant EBITDA improvement as we move through 2019 and realize more of the benefits of our cost reduction plan.

In addition, profit enhancements are still to come from our second phase of cost reductions, which we announced in March. In partnership with third-party consultants, we have completed a thorough mapping of all client accounts with standardized processes and roles.

From this, we have created a roadmap to implement these improvement plans in the second half of 2019. By increasing the efficiency of the workflow, removing redundancies and improving employee utilization, we are on track to significantly reduce our cost to serve.

We continue to expect these actions to generate $15 million of sustainable profit improvement, including $3 million of benefit to be realized in the second half of this year.

Turning to the cash flow statement and the balance sheet. Cash provided by operating activities was $5.5 million in the first quarter. We expect cost reductions and profit enhancement initiatives will drive continued improvement in our operating cash flow going forward.

Our top capital allocation priority is to use excess cash to pay down debt. Our net debt position was $113.6 million as of March 31st. We are in the final stages of refinancing our credit facility as discussed in the last call.

This new long-term structure will provide us sufficient liquidity and improved flexibility at a similar cost of capital over the term. We remain on track to complete this transaction during the second quarter.

Now, turning to the outlook for 2019. We are maintaining our full year guidance for gross revenue in the range of $1.15 billion to $1.18 billion, adjusted EBITDA in the range of $42 million to $46 million and non-GAAP diluted earnings per share in the range of $0.20 to $0.24.

And now, we will be glad to answer your questions.

Question-and-Answer Session


[Operator Instructions]

And our first question coming from the line of George Sutton from Craig-Hallum. Your line is open.

Adam Kelsey

Good afternoon. This is Adam on for George. Rich, you mentioned in your remarks that despite moving up the standards for new business, you've limited yourself in terms of opportunity. I was hoping you could peel back the onion and then provide a little more detail?

Rich Stoddart

Sure. So, as we've gone through the last sort of year plus, I think we've seen a very robust pipeline. And we have been focused over that period of time on continually pushing ourselves on the quality of the revenue that we're bringing in. We implemented a new process early this year to full vet all the components early on of a deal to ensure that the economics are right.

And I think we have a very clear sense of what value-creation looks like for our clients. Again, bigger, more global, more comprehensive, more service lines involved. And that's the kind of a profile that we are seeing driving the success that we've had so far in the annual new contract signings.

Adam Kelsey

Great. Thank you. And then just reflecting back to last year, we're speaking about the move towards centralized marketing functions. I was wondering if you can give some update on that as well.

Rich Stoddart

Yes. So, that's a part of the mapping that we've done that Don referred to with our third party cost consultants. Clearly, there is -- we're not going to fully centralize everything. That would be crazy. Our large part of the value that we bring is being on-site with our clients.

So, it's looking at standardizing roles and responsibilities, maximizing utilization, centralizing where it makes sense, and frankly, just reducing the number of handoffs and duplication that we have in workflow.

Adam Kelsey

Great. Thank you.


And our next question coming from the line of Tim Mulrooney with William Blair. Your line is open.

Tim Mulrooney

Good afternoon.

Rich Stoddart

Hi Tim.

Tim Mulrooney

I want to start at the top gross revenue. For gross revenue, the midpoint of your guide implies on average of about 6% gross revenue growth for the remainder of the year. That's versus down about 3% for the first quarter. New contract wins are great, but I know they take time to layer in and probably won't have a major impact on this year.

So, can you just talk to us a little bit about what you're seeing? What gives you confidence that you'll see an acceleration in the gross revenue line?

Rich Stoddart

Yes, I'd say a couple of things and then maybe Don wants to jump in too. So, clearly, what we're looking at is where we're tracking versus the plan and the way we face the plan.

Remember that Q1 is, for sure, our lightest quarter, and we accelerate as we go through the year. And actually, we are seeing in that crop of new contract signings material impact of those new signings that we've talked about in today's call in this calendar year.

The other thing I'd point you to is, certainly we had some currency impact in the quarter. So, we've looked at this as we look at our plan, our progress versus plan, and have a high degree of confidence as we model the year that reaffirmation of our guidance is appropriate.

Don Pearson

I think the only thing I'd add to that Rich, in Q1 we did have some sales that we had expected to ship in Q1, and will now ship in Q2. So, there was some timing difference in some of those -- some of the revenues, and that was mainly in North America.

Tim Mulrooney

Okay. Those are all good points. That's really helpful. And I suppose -- I guess, you have easier comps in the back half of the year too, so that probably also helps?

Rich Stoddart

Yes. Also, correct.

Tim Mulrooney

Okay. Can I ask a few questions on your new contract wins. I mean, how much of the new contract wins were new customers versus existing customers? Did you say that you had seven wins?

Rich Stoddart

Yes. That's correct. And it's split in terms of numbers of customers, about 50-50, but in absolute revenue terms, it's probably 75% new customers. And we pointed in the release two primary new customers are consumer discretionary products, marketer and a home-improvement products marketer and those are two of the big drivers.

Tim Mulrooney

Where either of those Rich -- either of those very large or would you call -- consider them to be outsized wins relative to the normal range of what you typically see?

Rich Stoddart

I would consider them in the large relative to what we normally see. I wouldn't call them outsized or abnormally large, if that's what you're asking.

Tim Mulrooney

Yes, that's what I'm asking. Okay. And lastly, on the new contract wins, can you give us an indication on how much of these new wins are print brokerage versus your other offerings, like merchandise and environments and packaging and the like?

Rich Stoddart

Yes. I would say these wins are not primarily print. Print would be a small percentage of these wins in aggregate. There is some print as a component. And print is a good business for us, but we're able to -- that economically works for us. But I would say it's not -- none of this is dependent or highly dependent on print. It is much more diversified than that.

Tim Mulrooney

Okay. Thanks. Can I fit one more in Don, on the cost cuts. That $4 million of restructuring costs that you incurred in the quarter, were those related to Phase 1 of your cost cutting plan? In other words, have you begun executing on Phase 2 or are you still in the planning stages? Thank you guys for the time.

Don Pearson

Yes, we're just in the final stages of the planning. So, execution will start around the second half of the year.

Tim Mulrooney

Got it. Thank you.

Rich Stoddart

Thanks Tim.


And our next question coming from the line of Kevin Steinke with Barrington Research. Your line is now open.

Kevin Steinke

Hello. So, you talked about the $75 million of new business in the first four months of the year being the largest in the company's history. I mean, it's always seemed to me that the company has had a large pipeline of opportunities.

I mean, is there anything you can point to that you're now doing internally that was different in the past that might have accelerated the rate of closings? Or is this kind of a timing issue? I'm just trying to get a handle on if we can see this momentum continue throughout the year.

Rich Stoddart

Well, Kevin, the first thing I'd say is that it is not the case that we just had a sort of a random timing where a bunch of things converted and there is nothing else in the pipe at highly developed level. That is not the case, right? So there are the pipeline -- on a go-forward basis it looks the way it historically looks with some things that are further out and some things that are near in the frame.

I think our business development team has done a fantastic job. I think some of the traction that we've had with newer, larger relationships in the past, sort of 24 months, have gotten some people's attention. And I also think we've got some new players in the management team who have been successful in leveraging their connections and helping us drive the pipeline.

Kevin Steinke

Okay. And I think you talked about last quarter you added an executive dedicated specifically to expanding existing relationships. Are you starting to see any benefit from that or is that still early on in the development phase?

Rich Stoddart

Yes, I think we're starting to see some benefit from that. I think we're also seeing just a broader focus on expanding existing relationships across the account teams, especially in the North American operations as we think about both renewing relationships and building up a platform to expand as we head toward renewal. So, I would characterize that as just a general increased focus across the business. If not, it needs to be that, it can't be just one person's job.

Kevin Steinke

Right. Okay. And with the strong start to the year in terms of new business, should we be thinking about accelerated implementation costs? I mean, is that baked into your guidance? What's the story there?

Rich Stoddart

Yes. So, as we built our planned this year, we did built into the plan an assumption based on what was coming into view relative to the pipeline assumption relative to implementation.

There could be some acceleration of that if the pipeline develops faster than we thought or new business develops faster than we thought. But I would say at this point, it's factored into our guidance and contained in the plan.

Kevin Steinke

Okay. And I think you may have discussed in the past to potentially trying to just recover some of the implementation costs, essentially charge for the implementation that maybe offset some of the losses you typically see upfront during implementation. Are you still contemplating that or is that moving forward at all?

Rich Stoddart

We are doing that in some cases. But we really are looking at the economics in our deal review in an extremely holistic way. Technology implementation, on-site staffing. It's really a very disciplined look at how all the pieces work together and where recoupment of implementation cost is necessary to make the economics work for us and that is a lever we are pulling.

Kevin Steinke

Got it. And when you talk about the quality of new business, quality of new revenue, how are payment terms tying into that when you're negotiating these new contracts?

Rich Stoddart

Yes, I'd said that scenario that will probably take a little bit more time to make substantial improvement. I'd say the payment terms that we're seeing today are similar and in some cases, better than the past.

Kevin Steinke

Okay, great. And then when you talked about improved gross margin throughout the year, you mentioned mix, but you also mentioned supply chain initiatives. Can you give us any more detail on what you're doing on the supply chain side to improve the margin profile?

Don Pearson

Yes. Look, I would say there are number of factors that drive us through the year. Yes, there is mix. Yes, there is just driving better economics on the new business that is coming in. A key driver of this also is the retail environments business and the growth of the retail environments business, which has nice profitability. So, it's a blend of all those factors that really drive this.

Kevin Steinke

Okay. I will leave it at that. Thanks for taking the questions.

Rich Stoddart

You got it.


Thank you. And at this time, I am showing no further questions. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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