Inuvo Inc (INUV) 2005 Q3 法說會逐字稿

Welcome to today's MIVA third-quarter 2005 financial results conference call. Today's call is being recorded. At this time for opening remarks and introductions I'd like to turn the call over to Mr. Peter Weinberg. Please go ahead, sir.

Good morning and welcome to MIVA's earnings conference call for third-quarter 2005 results. I'd 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 risks and uncertainties will be outlined at the end of this conference call and are also detailed in MIVA's filings with the Securities and Exchange Commission.

To comply with the SEC's guidance on fair and open disclosure we have made this conference call publicly available via our website and a replay of the conference call will be available at our website and on -- for 90 days after the call. I'd now like to turn the call over to our Chairman and CEO, Craig Pisaris-Henderson.

Thank you, Peter. Welcome to MIVA's third-quarter conference call. To begin, we are pleased with our accomplishments in the third quarter and believe it represents a foundation from which we intend to build. Over the last several quarters we acknowledged a number of challenges up front, taking what we believe to be necessary steps to resolve those challenges and to correct our course. We now believe we're on a path to growth and are modeling for growth expectations in 2006.

Not only have we put many of the issues to rest that others in the industry have yet to address, but today we feel confident in our future. We believe we have a strong foundation, we are seeing momentum on the new partner front and we have an experienced management team in place to execute on our plans for the remainder of this year and into 2006.

In recent months we added several seasoned executives to our management team including Will Seippel as CFO, Peter Corrao as COO, and Adam Poulter who has joined to lead our European division. Now in the fourth quarter we are poised to initiate the final step of our recovery plan, rationalizing our expense infrastructure against current revenue levels. At the same time we are committed to maintaining our investment strategy into innovative products we believe will bolster our revenue and production in the short-term as well as the long-term.

The bottom line is we believe that we have the right platform and the right positioning to be the strategic new media solution for publishers and advertisers. These beliefs are based on a number of important factors that many of our competitors simply cannot claim including our global scale, our access to certain essential core technologies such as our licensing agreement with Fast (ph) and Yahoo!, our independent position in the marketplace and our publisher focused strategy.

We believe innovation will be critical to our long-term success and we are executing against an active product development pipeline. But in the near-term we believe we have assembled the critical pieces that will enable us to realize greater opportunities as we move forward.

We believe that over the third quarter our mission for helping publishers to effectively compete for audience and media spend while protecting their brand, audience and content value has gained momentum. We are pleased with our progress to date and look forward to introducing a number of new products and services to further achieve our goals in the coming quarters.

For us the third quarter represents a foundation that reflects the impact of prior traffic quality initiatives. We continue to be focused on the process of replacing intentionally dropped distribution with higher quality traffic. Adding high quality publishers to our network will directly benefit our advertisers' ability to generate leads and improve their ROI while increasing the revenue streams we provide to the same partners.

We announced a number of distribution partner deals over the next several months and we are encouraged by the response to our solutions and positioning. That said, we will remain vigilant to ensure that our network continues to deliver convergence for our advertisers while traffic is generated in ways that meet our high standards.

We believe our positioning is resonating with publishers who have become increasingly weary of partnering with search providers who aggressively focus on aggregating end-users. In essence, threatening the business prospects for the very partners they claim to serve. We think newspaper publishers, media conglomerates and yellow page publishers have taken notice. To quote Rupert Murdoch on this very point, "Unless we awaken to these changes we will, as an industry, be relegated to the status of also-rans".

Our independence and publisher-focused strategy clearly differentiate MIVA from our consumer-focused competitors. Our mission is to help publishers effectively compete for audience and media spend by offering them a complete set of products and enabling the acquisition, retention and monetization of their online audiences.

We consider these factors key to positioning MIVA as their choice for publishers seeking access to an innovative new media platform. We think publishers are is beginning to appreciate our long-term strategic value. We understand the key to expanding our distribution is to continue to broaden the suite of customized solutions that enable monetization and user retention for our partners while highlighting the fact that we don't compete with the partners we strive to help.

We know MIVA requires partners for access to audience and ad impressions, but we also believe partners need MIVA to provide them with a competitive new media platform. Going forward we will concentrate on expanding our distribution network through quality of partnerships which we believe in turn drives high conversion traffic to our vast network of advertisers.

Looking further ahead, we have begun the process of extending our core page search capabilities from today's keyword-to-keyword matching to a platform that incorporates contextual, demographic and behavioral attributes. We believe this expanded platform is the next evolutionary step for our sector leading to higher relevancy, higher click through rates and convergence which clearly leads to higher monetization and retention potential for partners.

It is our goal that our new product offerings will extend beyond page search and provide effective ways for publishers to compete directly with our -- their competitors. I will now turn the call over to Will to walk through our Q3 financial results.

Thank you, Craig. Before I detail our results let's review how we measure our financial performance. In addition to GAAP measurements the Company utilizes certain profitability based metrics to evaluate our period-to-period and year-over-year performance. They are EBITDA, adjusted EPS and adjusted net income. The Company defines EBITDA as net income before interest, income taxes, depreciation and amortization. EBIT defines adjusted net income and adjusted EPS as net income and net income per share before tax adjusted amortization expense related to acquired intangible assets and capitalized and purchased software.

With that said, let's discuss our results and expectations. I would like to begin by reviewing several nonrecurring events that occurred during the quarter and affected our financial results. For the three months ended September 30, 2005 the Company recognized as revenue approximately 1.5 million for resolution of disputes with certain European distribution partners and also recognized a one-time gain of approximately $600,000 related to the sale of Espotting Scandinavia AB assets to Eniro AB.

Additionally, the Company recorded a non-cash impairment charge related to goodwill and long lived assets in the amount of $4.3 million during the third quarter. In Q3 MIVA achieved revenues of $44.7 million. As previously mentioned, Q3 includes approximately 1.5 million in nonrecurring revenue that the Company recognized during the quarter for resolution of disputes with certain European distribution partners. Q3 2005 revenue represents a 23% decrease from Q3 2004 revenue of approximately $58 million. On a sequential basis revenue was down $4 million or approximately 8% from Q2 to Q3.

As we previously announced, starting in late April we began to remove certain distribution partners and/or their sub affiliates that had developed methods that did not adhere to our distribution guidelines. Q3 2005 revenue reflects the full impact of that effort that began in late April unlike Q2 where the month of April was mostly unaffected. The effect of these changes has been a reduction in our overall click through revenue. We recorded 206 million paid click throughs in Q3 compared to 217 million in Q2.

Q4 revenue will be less than the revenue recorded in the year ago period as events that commenced in the second quarter will continue to impact our results in the fourth quarter. Revenue in Q3 decreased from Q2 primarily as the result of the removal of certain partners and traffic sources and the reduction in traffic from our current sources. We have seen positive traffic trends in the U.S. over October and into November, although it is still too early to say conclusively that is more than a seasonal trend.

Notably, we believe the actions taken that resulted in reduced traffic were largely complete in the U.S. as of Q3 2005 and we believe we are far along in our European quality efforts. Having spent much of my time in Europe recently, I can tell you that we have made progress in that market too, and at this point we do not anticipate removing substantial sources of traffic that would have a material impact on our revenue going forward. Having said that, I want to remind you maintaining traffic quality is an ongoing challenge and we will continue to actively monitor the quality and sources of our current and new distribution partners.

Normalized operating expenses, excluding the impairment charge and the one-time gain of approximately $600,000 were $22 million in Q3 2005 compared to 19.7 million for the same period in 2004. On a sequential basis, after adjusting for the 1.5 million in nonrecurring revenue, cost of sales as a percent of total revenue were flat from Q2 2005 to Q3 2005. Amortization expense in Q3 2005 was 2.2 million and flat compared to the same period in 2004. Amortization expense included 1.6 million for acquired intangible assets and 600,000 for capitalized and purchased software. Amortization expense in Q3 2004 included 2.1 million for acquired intangible assets and $700,000 for capitalized and purchased software.

During the third quarter the Company updated its cash flow projections for acquired businesses resulting in further indicators of goodwill impairment at MIVA's small-business division. As a result the Company recorded a non-cash impairment charge related to goodwill and long-lived assets in the amount of $4.3 million or $0.14 per share diluted. As a result of the impairment charge MIVA's small-business has no remaining goodwill and no associated long-lived assets.

After recording the impairment the Company's intangible assets decreased with the balance of goodwill being approximately 74.6 million. Additionally, the Company finalizing the estimated non-cash impairment charge taken in Q2 2005 and did not record any subsequent increase or decrease in to the 119 million estimated charge made in Q2 2005. We do not anticipate an additional impairment charge in the fourth quarter.

We recorded a GAAP net loss of 3.5 million or $0.11 per share diluted in Q3 2005 which includes a pretax 4.3 million non-cash impairment charge taken for MIVA's small business. GAAP net loss excluding the estimated impairment charge was $34,000 or breakeven per diluted share compared to GAAP net income of 4.8 million or 15% per diluted share for the same period in 2004.

We recorded EBITDA excluding the impairment charge of $4 million in Q3 2005 compared to EBITDA of 11.2 million for the same period in 2004. Normalized EBITDA, excluding the 1.5 million nonrecurring revenue and the 600,000 one-time gain and the impairment charge, was 1.9 million in Q3 2005.

We recorded adjusted net income excluding the estimated impairment charge of $0.04 per diluted share in Q3 2005 compared to adjusted net income of $0.19 per diluted share for the same period in 2004. Adjusted net income excludes tax adjusted amortization expense related to acquired intangible assets, capitalized and purchased software. We expect our Q4 adjusted net income will include non-cash compensation expenses of approximately $600,000.

Our cash, cash equivalents and short-term investments at September 30, 2005 totaled approximately $42 million which reflects the $8 million patent settlement made to Yahoo! during the third quarter. This compares to approximately $50 million at June 30, 2005. Although with the exception of Yahoo! our cash was flat quarter-to-quarter, I want to point out that it would have been lower on the quarter due to the payment of approximately $2 million in certain earnouts. However, those earnout payments were offset by 1.5 million nonrecurring revenue and the onetime gain mentioned previously. We expect additional earnouts to be paid in Q4 totaling approximately $2.7 million and such earnouts are factored into our guidance.

Over the fourth quarter we anticipate maintaining investments into technology initiatives, expanding our suite of performance marketing solutions. We have transitioned to an R&D focus and in Q3 2005 our product development totaled 7% of revenue compared to 3% for the same period in 2004. We have an active global product development pipeline and plans to introduce additional innovative publisher and advertising solutions over the next several quarters.

While we are committed to making investments into innovative products, we recognize that we must take a balanced approach and intend to deploy capital into initiatives we believe will bolster our revenue production over the fourth quarter and into 2006. To that end we expect to initiate our cost realignment plan during the fourth quarter. With revenue now at a lower base level we have to work to realign our cost structure. We continue to believe there is leverage in our model.

Before giving effect to any potential adjustments to current cost structure we expect neutral to positive EBITDA margins in Q4 2005. As we told you previously, we are providing detailed guidance for the fourth quarter and the full year along with today's earnings release. Q4 2005 EBITDA, adjusted EPS and GAAP EPS guidance includes approximately $600,000 in the non-cash restricted stock related compensation expense.

Our expectations for revenue in Q4 are 41 to 44 million and for the fiscal year 192 to 196 million, earnings per share in Q4 of minus $0.08 to minus $0.04 on 30.8 million common shares outstanding; for the fiscal year minus $4.16 to minus $0.12, again with the same outstanding share base. Adjusted EPS in Q4 of breakeven to minus $0.04 on 30.8 million shares and for the fiscal year adjusted EPS of $0.21 to $0.25 positive on 34 million fully diluted shares, EBITDA Q4 expectations of breakeven to 1.5 million and for the fiscal year $14 to $16 million.

Regarding our 2006 expectations, it is our goal to provide detailed guidance either when or before we report our full-year 2005 results in the early part of next year. At that time we also expect to detail our cost realignment plan. I can tell you that in 2006 we are forecasting quarter-over-quarter growth and we expect ongoing operations to generate positive EBITDA for the full year.

Last quarter we asked you to focus on our initiatives for signs of progress. Since then we have announced several major product releases for advertisers and publishers. We also announced several distribution deals. In addition at this point we do not anticipate removing substantial sources of traffic that would have a material impact on our revenue going forward and we believe current U.S. trends are moving in the right direction.

We believe these are all strong indications of progress and we look forward to building off our Q3 base, managing costs, delivering new products and signing new deals over the coming quarters. Thank you. This concludes my review of our Q3 2005 financial results and FY 2005 outlook. I will now turn the call back to Craig.

Thank you, Will. Given all of the challenges we've faced over the last several quarters, our remarkable progress on advertiser and publisher solutions may have been overshadowed. We have expanded our suite of solutions and over the past six months alone MIVA has introduced more products and tools and increased functionality than at any point in our history.

To this point, just this morning we announced MIVA Match and new campaign management tools. We've also recently announced and deployed configurable algorithmic Web search in France, Germany, the UK, Spain and Italy. We've introduced Pay-Per-Call into the UK; we've introduce MIVA Mail into Europe. We've refined our innovative banner paid listings product and we've also implemented private branded toolbars, allowing our publisher partners to interact with their audience throughout the Web browsing experience rather than just while the end-user is on our partner's site.

This work, this investment is not just about offering a better service to our partners, it is the path we believe will lead to a definable, defensible sustainable position in a rapidly growing market and will lead us back to a revenue growth -- quarter-over-quarter revenue growth in 2006. In summary we believe we're forging ahead on the right path and we are focused on the opportunities that will most effectively leverage our independent position and publisher focused strategy to achieve long-term growth and profitability. Thank you again for joining our Q3 conference call. I will now turn the call to the operator for questions.

(OPERATOR INSTRUCTIONS). Eric Martinuzzi, Craig-Hallum.

My question has to do with your comment. I wanted to make sure I understood quarter-over-quarter growth. Is that to say -- to suggest that this current -- the Q4 guidance would represent -- at least at the midpoint would represent a trough in the revenue and that thereafter on a sequential quarter basis we should expect growth? Or is that to say that year-over-year we should expect growth?

Specifically, Eric, what I was referencing is the investments that we're making we are modeling for growth, quarter-over-quarter growth going into 2006. So that was specifically tied to the way we're seeing 2006 play out. We are still going through that '06 budgeting process and have some work to do, but nevertheless we are budgeting and, quite frankly, modeled for quarter-over-quarter growth going forward.

Christa Quarles, Thomas Weisel Partners.

I was wondering if you could sort of characterize what your publisher base looks like now. Obviously you've cut out at least a quarter of your initial guidance from the beginning of 2005. As we look at some of the other competitors in the independent space, if you will, like a Kanoodle or an IndustryBrains -- I know IndustryBrains for example is focusing on the top 200 to 250 publishers. Is that also where you're focusing your energy? And I guess and you look at your publisher base, could you sort of characterize the revenue coming from those top publishers that may be more wary of working with a Google or Yahoo! for example?

Sure. Obviously our network is -- multiples larger than any of those referenced. Actually I would say in terms of comparison, probably the rest of the sector aggregated together still doesn't come close to the size of our network so -- I know you know that part of it. So in terms of size, clearly large. But in terms of the specific partners, we don't go into detail, Christa. It's kind of a long-standing "let's not map out what a good strategy looks like for others" type of internal strategy.

But nevertheless, we are focused on a lot of large names. In fact, there are several proposals in-house right now for deals that are coming up with others because either they're not being serviced appropriately or they're looking for a strategic alternatives to possibly some larger names. So those are things we'll look at, but in staying with our history, we're not willing to do deals that aren't beneficial or win-win both sides.

So point being is, while we're focused for the larger companies, we won't do a deal that's not win-win and, like I said, clearly we intend on continuing to manage to a multiple or larger network, if you will, of quite frankly all the others segregated together.

Youseff Squali, Jefferies & Co.

I guess my question has to do with pricing. If you were to normalize your revenues for the $1.5 million and one-time revenue that recognized -- I'm kind of puzzled by pricing actually going down by some 7%. I would have thought it would have actually gone up as you eliminate low converting lower CPC traffic. Thanks.

Great point, Youseff. Actually that is the net effect. When you do take out lower conversions obviously you see advertisers respond in kind. That's not exactly the effect that you get immediately. Actually I think we've discussed this point on calls past. When you take out the first initiative, if you will, from an advertiser standpoint, when you're removing traffic it's to lower you ad budget, not necessarily stimulate the bidding process.

But nevertheless, good point but the first reaction as mentioned is typically there's not as much budget or, excuse me, there's not as much inventory available, not as much budget gets allocated in the beginning. Obviously they start looking at conversions and the return on their investment. Then you see that process actually get stimulated, the bid amount for the pricing gets stimulated specifically. In fact, as Will stated in his prepared remarks, we're actually seeing some of that on the U.S. side as we go into Q4.

Colin Gillis, Adams, Harkness.

Can you just talk a little bit about efforts to expand the U.S. publisher base and give us a sense of a breakdown between the number of active publishers in North America versus in Europe?

Actually I'll tell you what, I'll take the first part of that and may go into the second part in terms of a breakdown between U.S. and Europe. But in terms of our efforts, we're going after pretty much all across the board. In other words we're going to continue to service the thousands of small publishers that we do service today. I believe the latest count it somewhere around 8,000 different publishers.

Now not all of those 8,000 are meaningful publishers; there may be a click a month coming from some of the smaller guys. But nevertheless, that truly shows that we can work with the smallest of the publishers in a margin meaningful way, if you will. In other words, it actually makes sense for us to still continue to work with such small publishers as well as focusing on some of the larger publishers out there.

And when I say publishers, that's an all encompassing word. That's everything from search providers, localized or national, that has obviously contextual our content base companies that, let's face it, the large content companies right now are being a commoditized by the primary search engines so they're clearly looking for strategic alternatives to deploy their content in the marketplace. So we're going after pretty much the entire range.

In terms of a breakdown, we didn't get into a revenue breakdown on both from the U.S. and European side, but we don't go into publisher breakdown, if you will.

Richard Fetyko, Merriman & Co.

Maybe if you could finish off on that thought of between -- the comment between the revenue breakdown between the European and the U.S. division. But also, I was wondering, Craig, if you could give us an idea how many of your distribution partners at this point or percentage of traffic belongs to or comes from publishers that have multiple products with you or have taken some additional new products that you've launched in terms of the -- that include the search product that they've launched, the toolbar that you've launched and so forth -- the private-label toolbar and so forth? Just an idea of percentage of publishers or traffic that comes from publishers that have multiple product I suppose.

In the U.S. our revenue was 47% of total and in EU it's obviously then 53% for the quarter -- just to fill that in.

Okay. And so that's obviously wrapping up on the revenue breakdown on the U.S. and EU. In terms of percentage of distribution partners that have multiple products, I believe that was the question, Richard. It's not a large number today. In fact, just deploying a customized toolbar in marketplace a couple months ago would clearly not lead to massive adoption across the board. In fact, we're being pretty careful with the types of people we want to deploy that product with. We want to make sure they're obviously very reputable, high integrity, good download and deployment practices that we're helping them define.

We have recently announced Dennis Publishing which has the Maxim magazine and a series of other magazine titles under their belts. We've just pushed that out with those folks. But at any rate, there aren't a tremendous amount of companies that are using the search components and the banner component, MIVA Mail component, the contextual component altogether. This is quite frankly what we've been very focused on this year making sure that we have that product suite out there or, excuse me, at least available to be sold out into the marketplace and that's the initiative that we're undertaking now.

Stewart Barry, ThinkEquity.

Craig, could you elaborate a little bit on your Pay-Per-Call effort and how that's going. If that's contributing to revenue meaningfully at this stage?

Sure. It is not contributing meaningfully to revenue at this stage. Let's break this out; it's actually a tale of two stories right now. On the U.S. side there has not been widespread adoption. And quite frankly, I'll make this statement which I hope this will make all of you sit down and model out something on Pay-Per-Call exclusively. If it grows as fast as Pay-Per-Click I will be very happy. Keep in mind, we've been doing Pay-Per-Click business since 1999; it wasn't until in 2001/2002 that people said it was a legitimate business.

But nevertheless, Pay-Per-Call has not had widespread adoption at this point on the U.S. side. A tale of the different story, so to speak, as we have announced the launch in the UK we've had very good adoption. Can't tell you really that the call-through rate is this or the impression rate is that yet, but in terms of adoption totally different marketplace. It's amazing that you've got a marketplace that's clearly mobile oriented and call oriented that quite frankly most of the rest of the world and not so much on the U.S. side, but nevertheless is definitely a tale of two different stories right now.

Marianne Wolk, Susquehanna.

I had a couple of questions. First of all, on the private-label side, any way you could give us a sense of how large that is now? Is it at least 10% of revenue and some of the growth drivers you've seen there, are there any contracts coming up for renewal we should be aware of? Thanks very much.

We really haven't gotten into the detail in the past on the private-label revenue and that's something that we're still not going to do. Craig can speak to anything in the pipeline.

Sure, I'll pick up on that. Actually it's contractually based, we can't speak to anything. So, I would actually urge you to look at what Verizon talks about. Verizon is pretty open in terms of their disclosure about this initiative. So I would have to push it that way, but contractually we don't break anything out, we can't break anything out. In terms of the pipeline, yes, there are a few. We made a comment, I believe it was Q1 of this year, that we felt Europe was going to have some opportunities.

In fact we've announced that we have launched the private-label initiative with Eniro in Scandinavia and the Scandinavian countries. And I will tell you there are private-label opportunities in the pipeline currently within the European marketplace, not saying that there aren't in the U.S., but Europe is really the area that we're looking for right now.

I will make one comment on that. Europe is not like the U.S., it's not one market, it's multiple small markets that make up one large market. So with that being said, when you have a primary player or a primary company in Germany or France or Spain or what have you, they typically are trying to protect a territory of German, France or Spain, not their Pan European footprint.

So unlike the U.S., those folks over there represent a little bit of a different opportunity. So we really are focusing our efforts on the European marketplace right now.

(OPERATOR INSTRUCTIONS). It appears we have no further questions at this time. So I'd like to turn the call back over to you, gentlemen.

Fantastic. Well again, I'd like to thank everyone for joining our Q3 conference call. I'd also like to thank all of the MIVA team members for your dedication and work and your 100% effort. Thank you very much, folks.

That does conclude our conference. Thank you for your participation.

This conference call contains certain forward-looking statements (SAFE HARBOR STATEMENT READ).