Inuvo Inc (INUV) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FindWhat.com first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Michelle Craft, Vice President of Marketing. Ma'am, you may begin.

Thank you, operator. Good morning and welcome to FindWhat.com's conference call on first-quarter 2005 results. I would like to remind everyone that today's comments include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These results and uncertainties will be outlined at the end of this conference call and are also detailed in FindWhat.com's filings with the Securities and Exchange Commission.

To comply with the SEC guidance on fair and open disclosure, we have made this conference call publicly available via webcast at http://www.vcall.com/cepage.asp?id=91608. A replay of the conference call will be available at the same URL on the Company website for 90 days after the call.

I would now like to turn over the call to our Chairman and CEO Craig Pisaris-Henderson. Craig?

Thank you, Michelle. Good morning and thank you for joining FindWhat.com's 2005 Q1 conference call. As you will note from our earnings release, there are several issues to be covered today. Before getting to each issue, I would like to spend some time upfront on the broader context in which we are operating and why we haven taken some of the tough decisions we have in Q4 and subsequently.

In the Q4 we took steps to strengthen our advertiser relationships with the objective of improving conversion rates while insuring long-term value of our distribution network. We are encouraged that our first-quarter 2005 results were in line with our guidance, reflecting the benefits and wisdom of maintaining high standards.

We made progress in the first quarter on our plan to achieve long-term growth by developing a global integrated platform that delivers high-quality leads, maximizes monetization opportunities for our partners and empowers our advertisers with the visibility to measure ROI (technical difficulty) analytics. Delivering those results is a path to future growth for success of our Company.

Today I would like to underscore our ongoing commitments towards maintaining high-quality distribution partners who adhere to our distribution guidelines and whose users generate acceptable conversion rates for our advertisers. To that end, we are working hard to develop the tools and assemble the resources that enable us to identify and remove low quality sources of traffic.

Our definition of quality covers several elements including a), relevancy of the advertising to the search performed by an Internet user; b), whether the Internet user ultimately converts to a paying customer for our advertisers and c), the means by which an Internet user comes into contact with our advertiser's paid listings. Against that framework, we face difficult challenges presented by those who wish to exploit the evolving Pay-Per-Click industry.

From inception we have thought critically about and have taken proactive measures to develop processes that address a variety of the known challenges. Still we recognize there is more work to be done to ensure we stay ahead of those who have left an honorable intention. We are not alone in confronting these problems. Indeed, all paid search providers, if they are to thrive, must take similar stances and work diligently to overcome these issues.

In the last several days, we removed certain distribution partners and subaffiliates of those partners that had developed methods for obtaining users that did not adhere to our distribution guidelines. As indicated in our earnings release and guidance, the removal of these partners and their subaffiliates will reduce revenue going forward. However, we remain vigilant in our efforts to identify and remove additional sources of low quality traffic.

When a party signs up to become a distribution partner, each Internet property where that party proposes to display our paid listings is thoroughly reviewed to ensure compliance with our terms and conditions for partners status. The terms and conditions are contained within the contractual agreement we sign with each of our partners, and we do not provide our paid listings to any party until that prescreen process has been completed to our satisfaction.

Distribution partners and their subaffiliates are thereafter monitored and randomly scrutinized to ensure they continue to comply with our terms and conditions. In the event that we discover a partner has changed their content from what we had previously reviewed and approved, fails to comply with our terms and conditions or have resupplied our feed to a third party without our permission, then that partner or subaffiliate is subject to suspension or termination as we deem appropriate. Our recent removal of service partners and subaffiliates are indicative of our work resolve on these issues.

We remained focused on providing the most efficient and effective performance-based marketing network in the industry. Facilitating growth for our advertisers is our primary motivation in everything we do. It is a win-win. We only win in gross shareholder value by helping our customers to secure new leads, new business and new business growth.

Looking ahead we have continued to leverage our unique position as the leading independent player within a growing global market by offering an expanded portfolio of services to our trusted traffic partners. Unlike the other large companies which offer paid search, we don't compete with our distribution or private-label partners by promoting a branded portal. We believe this is a key difference between us and them. By putting our client's interest first, providing them with their own Pay-Per-Click service, their own branded tool bars and customized solutions that meet the specific needs of their sites and their users, we believe we have a competitive advantage like no other.

We have partnered with a number of the Web's and the world's largest companies including Verizon, Mitsui, Lycos, and we believe this is a function of both the service we provide and our independent status.

We also have plans to increase our communication efforts regarding our differentiated products through a large global marketing initiative which will be a focus for us in this quarter, Q2. We believe these steps will assist our efforts towards developing a full-service platform for our global client base, and we are confident in our ability to overcome industrywide challenges, and we will continue to deliver a valuable service to our trusted partners and advertisers.

On a different note, we also provided an update regarding the ongoing litigation with Overture. We're in the final phases of the trial being held in Orange County, California and will provide an update as soon as practicable.

The Company also announced that in January of 2005 our audit committee began the process of interviewing other accounting firms with a view towards replacing Ernst & Young as the Company's independent registered public accounting firm. The Company disclosed on Monday that E&Y would resign effective upon the filing of the Company's 10-Q for the quarter ended March 31, 2005.

And finally, we announced the acceptance of Brenda Agius' resignation as Chief Financial Officer. Brenda has been an integral part of our success over the years, and on behalf of the entire Company, we extend our appreciation for all of her efforts.

Simultaneously the Company announced that Ken Cragun, our VP of Finance will service as interim CFO as the Company conducts a formal search. Ken possesses 20 plus years of financial experience in roles ranging from a member of Deloitte & Touche to being the CFO of another publicly traded company. We look forward to Ken's ongoing contributions as we move through this process.

In conclusion we believe taking the proactive stances we are taking today exemplifies our commitment to leading the industry and the implementation of and adherence to best practices with respect to our global clients, and that doing so is the proper path for all companies in our sector if they are to continue to thrive.

At this point I will now turn the call over to Phillip to walk through financial and operational details. Phillip?

Thanks, Craig. In Q1 2005 FindWhat.com generated revenue of $58.2 million. This represents a 136% increase from Q1 2004 revenue of approximately $24.7 million. We recorded EBITDA of $8.4 million in Q1 2005 compared to EBITDA of $6.8 million in Q1 2004. GAAP net income was 3.2 million or $0.10 per diluted share in Q1 2005 compared to 3.8 million or $0.16 per diluted share for the same period in 2004.

We note that non-cash amortization expense in Q1 2005 was $2 million compared to $189,000 for the same period in 2004. The increase in non-cash amortization expense from Q1 2004 to Q1 2005 reflects amortization of intangible assets resulting from the five mergers and acquisitions we completed in 2004.

Adjusted EPS, which excludes tax-effected amortization expense, was $4.4 million or $0.14 per diluted share in Q1 2005 compared to $3.9 million or $0.16 per diluted share for the same period in 2004.

Our balance sheet remains strong. At March 31, 2005, our cash, cash equivalents and short-term investments totaled approximately $50 million with minimal long-term debt.

Now turning to our financial outlook. As previously reported in the first half of 2005, our EBITDA is being impacted by several factors, including new or expanded investments associated with our global marketing and Fast Search technology initiatives, rising legal fees resulting from our patent litigation with Overture, and significantly higher accounting fees associated with our audit, financial reviews and Sarbanes-Oxley Act compliance.

For example, our fees for the 2004 audit were approximately $2.5 million compared to $200,000 for our 2003 audit. We expect the impact of these factors to decline in the second half of the year.

As Craig detailed, we recently removed certain distribution partners and subaffiliates that had developed methods for obtaining traffic that did not adhere to our distribution guidelines. After taking into consideration our efforts with respect to the sourcing of our traffic and not including any potential impact of the outcome of the Overture litigation, the Company currently expects Q2 2005 revenue to be between $40 and $50 million, and anticipates full-year 2005 revenue to be between $175 and $200 million.

I will now turn the call back over to Craig.

(technical difficulty). Yes, thank you. Again, I would like to thank everyone for joining our Q1 2005 conference call and thank all of our global team members for their ongoing efforts. That is it. I will turn the call over to the operator.

(OPERATOR INSTRUCTIONS). Richard Fetyko, Merriman Curhan Ford.

Where do you think the cleansing of the traffic ends? I mean you are doing more of it? It sounds like you did more of it this month already. I mean do you have any sense of how much more to go? How much left is in the distribution network? And also it is this impacting Espotting in anyway, and what were the European revenues or international revenues?

Yes, I will take the first part of that, and then I will pass it over to Phillip. In brief, we believe that the new revised numbers that we have put out reflects our efforts. We have been going through as you are well aware, and I believe everyone is pretty much aware of what is going on within the industry and how certain companies are either reacting or not reacting. We believe taking the leadership position so to speak or the proactive position that we are taking is the right position.

That being said, the answer to your question directly the ongoing or forward guidance we have given we believe reflects those efforts. Phillip, would you like to pick up the second portion of that question?

Yes and I would say that the effort that we are making is a global effort. So in terms of making sure that the highest quality traffic gets to our advertisers and that our partners are meeting our guidelines and our standards is something that we have, frankly, always done no matter what market we have been in. So it's an ongoing effort and separate that we do throughout every country that we are in.

In terms of the revenue, just to break it down between European revenue versus U.S. revenue. In the U.S. the revenue for the first quarter was approximately $27 million, and revenue in Europe was about 31 million -- I'm sorry $31 million, so 27 in the U.S. and 31 in Europe.

Youssef Squali, Jefferies.

A few questions. So how much of the traffic have you removed so far in the quarter? And I guess another way of looking at the P&L, you have given guidance for the topline, but can you sustain profitability at the $40 to $50 million revenue guidance that you were giving?

I will take the first part and pass it over to Phillip for the second. In terms of the traffic, what we have done is we have gone through our distribution network, and as mentioned in the release and on the prepared statement, we have taken some steps with partners now. We believe we have engaged I guess is the best way of characterizing it, we have engaged with some other partners and are making sure or at least confirming what we believe are our findings, if you will, that may result in the removal of those partners.

So that being said, we're going through that effort. What we have done in terms of the guidance that we have given is put in what we believe is a responsible number that affects in a conservative manner, quite frankly, or a responsible manner is a better way of putting that reflects the findings that we have. And again, we are going to continue to move forward. But we do believe the guidance we have given accurately reflects the efforts that we are taking.

In terms of your second question, I think we want to take a step back. We put out the guidance that we did in an effort to give a range of expectations that we think are reasonable given the steps we have taken and the moves we are making. I think we want to take a step back, have a chance to look through those efforts and then be able to provide more detailed guidance as we get a little bit deeper into it.

There is one added element on that, and again I believe we had this in our press release this morning. But we are literally in the final phases of the Overture litigation, and not knowing exactly what the impact if any is going to be, we did not feel it would be appropriate at this point to try to speculate any further than what is clear to us which again to echo Phillip's point is the topline guidance that we have given.

(OPERATOR INSTRUCTIONS). Christa Quarles, Thomas Weisel Partners.

The first question is on the guidance. Does it really reflect more of a U.S. slowdown? I mean it looks like Espotting was still up sequentially then if your international numbers were around 31 million.

And then in terms of the traffic itself, my understanding is does not go bad overnight, that this is something that progresses over time. As you look back, was it something that was a problem that you had recognized, or was it something that all of a sudden this information kind of started to bubble up and you started to recognize it.

And then beyond that, is a lot of it just related to click fraud detection, and how strong is your detection mechanism? Is it something that will improve over time as you continue to cleave off traffic?

I will tell you what, I'm going to answer in reverse order, taking the first or excuse me, the latter portion of your question.

I think the statement you just made, it does not go bad overnight. That is correct. What does happen, there are two different scenarios. One is, you just don't have the capabilities of understanding what kind of partners you're dealing with, which is the case in some companies. That is clearly not the case with us as we do go through a process of screening and understanding what distribution partners intend on doing with our advertisers' listings.

That said, while it's not a process that happens overnight to your point, it is something that can go forward in a relatively quick manner. I have pointed out in the prepared remarks that we have discovered that a couple of our partners had developed so to speak some capabilities of being able to get additional traffic that just simply don't adhere to our standards.

So the point being is, no, it does not happen overnight, but it does or can infect a network rather quickly if you don't have guidelines in place and policies in place and screening processes in place to be able to detect those issues.

In terms of your ongoing question on the point, is it going to get better going forward as far as the screening process? I don't think there is a big argument or any confusion regarding FindWhat.com's practices and screening processes versus anyone else in the industry. Part of that is due to our commitment from day one back in 1999 of actually having screening processes and constantly evolving them as new issues or challenges have identified themselves across the industry. We have been updating that screening if you will. But in terms of our manual processes that we walked through, we are told on a pretty regular basis that we are probably the toughest one of the toughest if not the toughest companies so to speak that goes through a rigorous process of evaluating a partner.

So that being said, we're very confident that the practices that we have in place are very effective and in making sure that we do not have partners that start up if you will with a negative or a less than honorable intention if you will.

That being said, there are ways for companies to actually develop these methods as I believe you are referring to, and that is why we go through an ongoing process to constantly go back and randomly scrutinize our partners. We are 100% committed to remaining in that lead position of taking steps to make sure that we are not bringing those partners into our fold, and quite frankly, if one of them develops those processes, we will take the adequate steps to make sure that does not continue to happen.

Phillip, would you like to pick up on the second portion?

Yes, I think the question was with respect to geographically what is the impact. And again, I think the efforts that Craig and I have been talking about have been really in recent days or the last couple of weeks, and so in Q1 I think that the numbers were the numbers in terms of the U.S. performance and the international performance.

In terms of the steps that we are taking, as I said, these are steps that we are taking around the globe. There was traffic and we do have partners who do provide traffic to us not just from one country but for multiple countries. So as we take steps it will impact more than just the U.S.

Roxanne Prevati (ph), Susquehanna.

Can you tell me if the Espotting technology is part of the Overture suit and whether you might be able to transfer to that if you have a negative outcome?

And secondly, in the past, you have enjoyed really favorable upgrades. As you improve the quality of your network, will you be seeing those go up?

To take the first portion of your question, the Espotting Network or anything outside of the U.S. is not part of the suit. The patent has only been issued in the U.S. So that is what we are dealing with directly.

In regards to any potential outcomes, you know, quite frankly, we still remain very confident in our position and have not changed our position that we do not infringe on any valid or enforceable patent or IP, and we take that very seriously and had that position for several years now since first launching this litigation. But nevertheless we cannot discuss any potential scenarios with regards to the outcome. And again, the outcome will literally be coming to us in the very mere future.

The second portion of that question, Phillip, I will turn it over to you.

And I think our average -- the average revenue share that we pay out to partners has actually been fairly consistent over time on the U.S. side. It had dropped pretty quickly on the Espotting side through 2004, and then it's sort of reached kind of a steady level over the last couple of quarters.

But those averages are averages. It is a combination of certain partners in certain kinds of traffic and certain brand names. You know, of course, the revenue share may be higher than the average; other partners it may be lower. I think there has always been kind of a trade-off as we consider any particular deal in terms of the benefits of that partner, the quantity of the traffic they provide, the brand-name they may have in the marketplace.

So I think we continue as we have. I think our network will continue to be a mix of traffic from not just hundreds but literally thousands of different partners. And so I don't think it is something we can say with any certainty today that for us to move forward or for us to build traffic in the future we need to necessarily take just one approach or the other in terms of what that revenue share will be. Again, I think as we develop -- as the Overture litigation comes to some resolution here and as we develop sort of more detailed guidance, I think we can provide that at that time.

Jordan Rohan, RBC Capital Markets.

The Company's 8-K released on May 2 or this week, it says that E&Y advises the Company of six material weaknesses in the Company's system of internal controls and financial reporting. Would you mind stepping through the six that are listed? Tell us what your position was with the key issues, where E&Y came out and why you believe that there is such a difference of opinion? Thank you.

Sure. Actually I believe we have addressed those at a high level, and that is available publicly. If you would like to address those on a step by step basis, that obviously will take some time to walk through and go through each one of the steps. So, Jordan, give us a call at the office and we can do a one-on-one and walk through, but again I think they pretty much had been answered with the information that has been filed publicly. But nevertheless if you would like more details on each of those responses and positions, give us a call and we will walk you through that process.

I also think it is important to note, Jordan, that the internal control report is a report that the Company generated. Ernst & Young, as they do with their audit, passes judgment and passes -- does a review of both our financial statements, and now with the new Sarbanes-Oxley provisions, they do a review of our internal control report. So I think you may have -- I'm not sure if you mischaracterized the way you phrased that question, but the material weaknesses that we reported and, as Craig said, there is a fair amount of detail in the amended 10-K that we filed on Monday. So I think the 8-K is probably the summary version of some of those weaknesses. I think if you want the full description, you need to go to the internal control report, which is a Item 9-A in the amended 10-K that we filed on Monday. And again, that is a report that every public company is required to file now as part of the new 404 rules within the Sarbanes-Oxley act.

And again, that is a report that is generated by the Company. Ernst & Young has reviewed that report, just as they have reviewed our financial statements, and I believe they have no issues with the report as presented in the 10-K and just as they have no issue with the financial statements as presented in the 10-K.

Colin Gillis, Adams Harkness.

I was wondering if you could give us a little update on some of the JVs and the partnerships? So comments and Mitsui. What exactly is happening in those areas?

Yes, actually we don't break any of those relationships out, primarily due to contractual obligations. But in terms of ongoing operations we continue to have operations, ongoing operations, with each of our private-label partners and continue to build out those initiatives. But as mentioned contractually, we don't go into details on any of those partnerships, but are enjoying the relationship.

At this , I would like to turn the floor back over to Mr. Craig Pisaris-Henderson.

Well, again, I would like to thank everyone for joining our Q1 conference call, and as previously mentioned, clearly we have a number of items that we're working through, but we feel confident that the positions we have continued to take are taking a leadership position in the industry. We believe that all the companies in our industry are going to follow suit so to speak to continue to thrive as the industry continues to evolve.

I would also like to again thank all of our global team members for your 100% in efforts and your ongoing continued efforts in building our Company. Thank you.

Thank you. At this time, I would like to hand the floor back over to Michelle Craft.

Thank you, operator. This conference call contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words or expressions such as plan, intend, believe, expect or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. Key risks are described in FindWhat.com report filed with the U.S. Securities and Exchange Commission, including the Form 10-KA for fiscal 2004.

In addition, past performance cannot be relied upon as guide to future performance. The following factors among others could cause actual results to differ materially from those described in the forward-looking statements. Potential that the information and estimates used to predict anticipated revenues and expenses were not accurate. The risks associated with the fact that we have material weaknesses in our internal control over financial reporting that may prevent us from being able to accurately report our financial results or prevent fraud. Potential that demand for our services will decrease. The risk that we will not be able to continue to enter into new online marketing relationships to drive qualified traffic to our advertisers. The risk that our distribution partners will use unacceptable means to obtain users. Risk associated with our ability to compete with competitors and increased competition for distribution partners. Political and global economic risks attendant to our business. Risk associated with legal and cultural pressures on certain of our advertisers' service and/or product offerings. Other economic, business and competitive factors generally affecting our business. The risk that the operation of our business model infringes upon intellectual property rights held by others. Our reliance on distribution partners for revenue generating traffic. Risk associated with our expanding international presence. Difficulties executing integration strategies or achieving planned synergies With acquired businesses and private-label initiatives. The risk that we will not be able to effectively manage our growth. The risk that new technologies could emerge which could limit the effectiveness of our products and services. Risk associated with the operation of our technical systems including system interruption, security breaches and damage. Risk associated with Internet security, including security breaches which if they were to occur could damage our reputation and expose us to loss or litigation. And finally, risk relating to regulatory and legal uncertainties both domestically and internationally.

This concludes our call for today. Thank you for listening.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.